By Charles WyndhamNovember 1st, 2015
I don’t think anyone can argue that the industry is not in a real pickle, so given that common ground, the next question where is it going to go to now?
Personally, I think focusing on consumer demand, what is or may be happening in China, or what the season might be is pretty irrelevant.
Irrelevant in that I doubt, barring some bolt from the blue, that it will be spectacularly good or bad.
Just as in the early 80’s as the market plummeted the depths and then suddenly resurrected itself, consumer demand did not alter that much, or certainly not anything like as much as the gyrations within the industry.
The extreme discomfort of what has happened within the industry is the result of actions or inactions of the industry itself.
Within that framework I think you can think in terms of long term issues and then short term.
In the long term, the industry has clearly failed to modernise itself, it has clung to a broken business model, it has failed to promote its product….
In fact, one can make quite a long list of what has gone wrong for a very long time and it is perhaps best encapsulated by simply saying that the industry has done everything it possibly could to shoot itself in the foot, which, on the positive side, is actually testament to the enduring strength of our product.
In the short term, generally weaker consumer markets, the strength of the dollar, tightening credit (though to a large part due to the long term failures of the industry) …. and so on.
Underlying this, I believe lies the fundamental issue of the relationship between rough and polished prices.
Our industry is not an efficient market and whilst it is inevitable that there can be substantial differences between rough and polished prices, what has happened over the past few years of rough dramatically outperforming polished has come home to roost.
Producers have benefitted or some might argue been able to take advantage of the market inefficiencies to their benefit at the expense of the mid stream.
It has been blatantly apparent that for at least a couple of years capital has been sucked out of the mid stream, some of which self induced, a fact the producers or especially those that use the old sightholder system or variants upon it have seemingly refused to accept.
One reason why they have refused to accept this is that like lemmings, customers came back for more pain as if in some weird masochistic danse macabre.
Again, two issues arise from this, how to get things back onto an even keel now and secondly how to keep things on a relatively even keel.
I won’t discuss the second point, I think my views for anyone reading this and who may have read previous drones of mine will know my point of view.
But what to do now, where to go?
The situation to me is a bit like 2008/9 regarding the banks.
Suddenly, the world woke up to the fact that the banks were bankrupt and however distasteful and no matter where the blame lay, were going to have to be bailed out, or as Gordon Brown at the time said, ‘recapitalised’.
Recapitalisation meant giving the banks taxpayers’ money.
I think that producers and in particular De Beers as the dominant price fixer has got to accept reality in that the mid stream has got to be recapitalised, allowed to make money, indeed, has to make money.
This in effect is what happened from 1981 through to the 1985.
How this is done is critical and the methodology chosen by some so far is simply going to make matters worse.
De Beers is under extreme pressure from its parent Anglo, whose situation even makes that of a sightholder look reasonable given just how parlous it’s own health has become, to generate cash at all costs.
Allowing companies to ‘defer’ 100% of a sight is in my opinion laughable.
Who is trying to kid who?
Putting such things into the public domain only does damage to the whole industry.
Selling effectively at different prices apart from reasonable allowances for those buying in bulk, only prolongs and deepens the pain.
Even thinking that a company can set prices when everyone knows it is a forced seller, is simply nuts or shows an overdose of hubris.
Presumably, De Beers thought at the outset of the last sight that people would buy most of what was offered at their prices. That they got it so wrong is all the proof anyone and in particular they should need to realise that they simply do not know.
Maybe if De Beers had lowered prices sharply at the very latest at the beginning of this year the worst of the mess may have been averted, instead we were told that this was going to be a bumper year and even other producers were talking about prices increasing over the year.
Again, another demonstration that being a producer does not give you some special insight into the future.
Anyway, they didn’t and we are where we are.
It is those who can buy who must be allowed to set prices in a competitive environment in such a way that no one is undermining the other, and whatever that price level, as determined by the buyers, is, that is what the market can handle, not what some producers might think the market can or should handle.
The decision that the producers have to make is how much to offer so when people are pricing they know how much is going to be around.
The more they offer the lower the prices and the slower the recovery, even if they might get a bit more total cash….in the short term.
Even if the right calls are made it is certainly going to take time to flush out enough inventory for a pick up to gather momentum.
So to answer the question of where are we going ... not very far just yet.