RAPAPORT...In an exclusive interview with Martin Rapaport, Varda Shine, managing director, Diamond Trading Company (DTC), discussed rough diamond pricing, sight boxes and beneficiation.
Martin Rapaport: What is De Beers doing about beneficiation?Varda Shine: We are doing lots of things. The first thing that we’re actually looking at is skills transfer. It’s not something new. What we are doing now is the next phase of beneficiation and that is to bring the skills of sales and marketing to the African countries. Sales and marketing skills are also transferable. They are not just skills that can be applied to rough diamonds. A person can actually take them and use them with commercialism in a lot of other businesses, so we’re enhancing the capabilities in those countries.
Then there are the partnerships we have with Namibia and Botswana that are facilitating the sales of goods in the local market, which are basically going to be creating employment. In Botswana, we’re talking about 3,000 jobs, and in Namibia, by the end of 2008, we believe there’s going to be something in the region of 1,500 jobs purely from diamond cutting and polishing. Those numbers are meaningful because in those countries, the unemployment level is so high, it actually starts making a difference. Each one of these people has a lot of other people dependent upon them and you are widening the net.
MR: You are creating the basic seeds of economic expansion in these countries. How many sorters are going to work in Botswana?
VS: Probably something in the region of 550.
MR: What will be sorted in Botswana? Will it only be Botswana’s production or will it be South Africa’s production as well?
VS: Botswana is going to sort only Botswana’s production, which is about 35 million carats a year, so it’s not “only.” Namibia is going to sort Namibian production; South Africa is going to sort the South African production. Then, once everything is sorted into the final selling assortments, the goods will go into DTC International in Botswana. It is an office that will be wholly owned by us, in which we are going to aggregate those goods and prepare the boxes. From there, we are actually going to ship the boxes into the right countries, so some boxes will go to Namibia, some boxes will go to South Africa, some boxes will remain in Botswana and some boxes will go to London. That is how the sight system is going to take place.
MR: Will there still be sights in London for those goods, or will they go straight to Hong Kong or Israel?VS: We have been looking at that and based on the feedback we’re getting from customers, they want the opportunity to come and meet regularly at sights. So we are going to continue having sights in London.
MR: How are rough prices set today by De Beers?VS: Rough prices are set by a long and complex process. First, we build models for each one of the 12,000 price points that we have and figure out how our rough prices translate into polished prices. Then, we look at the actual polished price at which the goods are trading on the market. In building our models, we take into account the labor costs, other expenses and economic factors like interest and box quotes. After putting all of these things together, we decide upon the price, and then we have another check that looks at relativity. For example, white is more expensive than yellow or brown. But suddenly, if we are seeing that, based on all the information we have, brown is coming out more expensive than white, we go back and check it.
We are looking for our clients to make money, because there’s very little point in our clients not making money; 2006 is still very fresh in our minds. The whole process of pricing takes all of those factors into account and makes sure that we actually are trying to get to a price that is a sustainable market price.
MR: Will the Namibians and Botswanans and the South Africans be working at the same De Beers price or will they be setting different prices?
VS: The selling price would be the same in all countries.
MR: Do these prices change frequently or infrequently, or are there any schedules for how these prices change?
VS: It really depends on the market. In 2007, we had quite a few changes, but in 2006 we didn’t have that many.
MR: Do you still announce price changes the way you used to?VS: We do announce changes when it’s an overall price (book) change; but obviously, with the market now, it doesn’t happen like that. We did have a couple of adjustments in 2007 where certain boxes were out of balance, but that wasn’t announced. When we have a price increase over the whole book, then we do announce it.
MR: Do they change assortments a lot?VS: No, not at all. It’s a very important point that now that we have the ITO (Intention to Offer), we are committing to give consistent assortment for the ITO period. If we want to change an assortment, it will have to happen only at the beginning of a new ITO period. Now that we are going into the three-year contract period, it will be difficult to change boxes completely within that period because people will be impacted by that. We need to find the best way of doing it, but it doesn’t really change that frequently.
Article from the Rapaport Magazine - January 2008. To subscribe click here.