The beginning of the second millennium coincided with fundamental changes in the structure of the world diamond market. On July 12, 2000, De Beers officially announced its new marketing strategy, dubbed Supplier of Choice (SoC). However, the changes in De Beers’ strategy were not limited to marketing. Some may consider, and with good reason, that although in the long run SoC stimulated customer demand for diamonds by forcing the sightholders to increase their marketing, this was not at all the main component of the new strategy. Of much more importance was De Beers’ withdrawal from regulating diamond supply in the world market and, consequently, from forming the market prices for rough diamonds. De Beers’ obvious intention was to begin a grim competitive struggle against large independent producers of diamonds such as Rio Tinto and BHP Billion for world market share. The keystone to success in that struggle was to escalate De Beers’ production levels. Below we shall see what happened to market prices for rough diamonds after De Beers refused to continue supporting them.
Development of the new strategy had apparently begun long before the official statements, and various components were put in place before any official announcement. De Beers began with pricing. In 1999, the group started getting rid of its stockpile of rough diamonds, which was traditionally its main tool to regulate the volume of diamonds on the world market. The stockpile was formed basically as a result of buying up “surpluses” of rough stones on the open market, which otherwise could have depressed prices. The scheme was simple. De Beers’ purchasing offices offered to buy the stones for amounts based on the price lists for rough diamonds (probably with some discounts and extra charges). Thus, the market always had a buyer establishing a threshold, below which prices were not able to fall. The deliberate reduction of the stockpile was a vivid illustration of De Beers’ rejection of its traditional policy of commodity interference and regulation of market prices. In 1999 and 2000, De Beers reduced its stockpile by $859 million and $892 million worth of goods, respectively. In that time, De Beers’ sales increased by 57 percent and 8 percent, respectively, to $5.24 billion and $5.67 billion a year. From 2001 to 2003, reduction of the stockpile proceeded, though at a slightly slower pace: from $300 million to $600 million annually. From 1999 to 2003, De Beers earned some $3 billion by selling off its stockpile of rough diamonds. In the same period, De Beers’ sales totaled $13.8 billion.
What were the dynamics of the rough diamond market in the new conditions? As an indicator of prices, we used the price index of Almazuvelirexport (AUE), which is based on world market prices for representative run-of-mine assortments. After calculating mid-year values for the index, it is possible to get a general picture of price behavior, which proves that the much-discussed rise in rough prices began to become apparent in 2003, and in 2006, prices went down.
Table 1. Index AUE – Average annual prices for rough diamonds
However, this general picture conceals a number of interesting features. From September to November 2006, market prices for rough diamonds rose 30 percent. Prices were characterized by high volatility, i.e. the tendency to vary over rather wide limits (4 to 6 percent) over short intervals of time (one month). As a rule, such price ranges have an oscillatory character, i.e. a decrease is followed by an increase. At the same time, several underlying price trends could be observed. To reveal these, we used a trend indicator widely applied in technical economic analyses—exponential moving averages (EMA). One is a “fast” three month average, and a second is a “slow” six month average.
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