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 The group, in which Anglo American has an 85 percent stake, has seen
its market share fall from over 80 percent in the 1980s to about a
third now, losing it control of supply and unleashing price
volatility.
Its challenges are compounded by competition from synthetic diamonds
and uncertain demand from customers in the "millennial" generation,
aged roughly 18 to 34.
Anglo has cut the value of De Beers assets in its books each year
since 2012, after it had paid $5.1 billion for a 40 percent stake.
But it remains the largest diamond producer by value ahead of
Russia's Alrosa, securing access to top mines through close ties to
countries such as Namibia, with which signed a 10-year sales deal
this week, and Botswana.
It repeatedly points to growing wealth in China and India drawing in
ever more consumers while output gradually declines from 2020.
This is the basis of Anglo American's case for retaining De Beers in
a drastic overhaul. Bernstein Securities analyst Paul Gait says
Anglo is seeking to make itself attractive to a buyer, although De
Beers' ties with states and joint ventures could make any sale
complex.
"Most mining companies like diamonds," he said. "The basic reason
why they've not been able to get bigger diamond positions speaks to
the fundamental attractiveness of the industry."
SPECIAL "SIGHT" SALES
Anglo has steadily increased its disclosures on De Beers since its
consolidation in 2012, with earlier annual report entries giving a
broad overview of the business while the 2015 report offers greater
detail on financials and its performance in different countries. It
also now publishes the results of its periodic diamond sales.
Even so, diamonds are not traded on an open exchange and are
vulnerable to consumer whim.
De Beers offers boxes of rough, or unpolished, diamonds to around 80
selected "sightholders" at sales known as "sights" -- but that cozy
relationship loosened last year.
Global demand for diamond jewelry hit a high of $81 billion in 2014,
but production jumped too, leaving the market flooded by 2015 just
as Chinese retailers, such as Chow Tai Fook <1929.HK>, stopped
expanding.
"Sightholders couldn't make a profit and they gradually started
refusing," said Christopher Gemerchak, editor of The Diamond Loupe
in Antwerp, where largely Jewish and Indian dealers clustered on
three traffic-free streets represent the heart of the global diamond
trade.
SYNTHETICS UNDERMINE
De Beers sees subdued prices in 2016, but production is likely to
peak in 2017 after two Canadian mines come on stream.
However, diamonds are only scarce if you ignore laboratory-grown
stones. Used largely in cutting tools, their share of diamond gem
sales, though just 2-3 percent now, is growing.
"Producers can say a million times that it's not the same thing.
That may have been so before, but it's not true any more. It's a
diamond, full stop," said Chaim Even-Zohar, editor of Diamond
Intelligence, who believes synthetics will erode the power of
producers.
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Lab-grown diamonds, such as those made by California's Diamond
Foundry with Leonardo Di Caprio as a backer, typically trade at a
modest discount to natural stones.
De Beers head of strategy, Gareth Mostyn, told Reuters De Beers was
not ignoring the competition from synthetics but was clear on
consumer preferences.
"If they have a choice between a diamond that was created three
billion years ago by nature and one grown in a factory last week,
customers want the real thing," he said.
75 MILLION NEW INDIAN BUYERS
De Beers says some 75 million new Indian households will see their
incomes rise to $5,000-$6,000 per year in the next decade, a level
at which they may start buying diamonds.
However, it needs to persuade them and younger "millennial" shoppers
in the United States, the largest market, to buy.
De Beers used to pump $150-$200 million a year into generic diamond
marketing, telling consumers a diamond was forever and making them
the must-have gem for engagements.
"The diamond sector cannot take the demand curve for granted," said
Anish Aggarwal, partner at consultancy Gemdax. Diamonds "are
competing with holidays, gadgets, handbags, even cars" to tap the
spending power of the millennials.
"There has been underinvestment in category advertising but the
sector is working harder on this now," he added.
Seven major producers banded together a year ago to promote natural
stones, albeit with an initial budget of just $6 million. Now though
the group plans to target the 'millennials' in Las Vegas in early
June with a slogan to replace "diamonds are forever".
Investec analyst Marc Elliott says diamond demand will logically
grow as a late in the development cycle of economies such as China
and India.
"Synthetics have a role to play... If they grow consumption in
diamonds anywhere near what they did in other commodities, there
won't be nearly enough diamonds from the ground to support that
demand."
(Additional reporting by Barbara Lewis; Editing by Ruth Pitchford)
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