Who Will Benefit? (Fixed Price Forward Contracts)

Even when the market is tough, De Beers is piloting an innovative marketing tool, which would surely help widen its buyers’ base and clear smaller, unprofitable stones from its inventory.

In a new pilot, De Beers for the first time has offered Fixed Price Forward Contracts (FPFC) via its auction Sales business division, to enable its registered buyers to bid and secure guaranteed supply contracts for delivery in one, two and three months at a fixed price per carat.

Fixed Price Forward Contracts
These Fixed Price Forward Contracts offered through remote online auctions are an addition to the spot sales auctions and the term supply contracts offered by Global sight holder sales. De Beers Auction Sales, the company’s wholly-owned auction division, headquartered in Singapore, runs the business of Spot and Forward contracts, to sell approximately 10 per cent, by value, of De Beers’ rough diamond production.

“In this new experiment, each fixed Fixed Price Forward Contracts will offer buyers the flexibility to control the volume of each product they require at a known price. This offering, especially in conjunction with our spot sales, will allow our customers to construct their own bespoke supply contracts for immediate and future delivery with price certainty,” said Neil Ventura, Executive Vice President of Auction Sales for the De Beers Group of Companies. The company has already sold more than 350 bespoke supply contracts till date, since December 2013.

The FPFC auctions are different from the floating price auctions run by the company, wherein customers bid a percentage premium or discount on the future (unknown) spot price prevailing at the time of contract maturity. These auctions will allow the buyer to make a bid over the minimum reserve price.

Says Ventura, “As in spot sales, the price will be market determined by auction participants. With the new Fixed Price Forward Contracts, customers will know immediately the final price per carat for the rough diamond contracts they have secured for delivery over the next quarter.”

Auction Customers
Any business registered with De Beers as an Auction Sales customer can bid for the Fixed Price Forward Contracts. The company has registered 850 customers, ranging from rough diamond traders, to manufacturers and sellers of polished diamonds, to jewellery manufacturers and retailers, since December 2013, when it launched forward contract sales on a floating price basis. The present list of customers includes sightholders and non-sightholders, with some businesses that are both sightholders as well as auction sales customers.

“Any business that has previously registered as an Auction Sales customer with De Beers can bid in these auctions. Sightholders need to apply to become auction sales customers,” informs Ventura. The Fixed Price ForwardContract auction, that shall bring together the company’s registered auction sales customers shall sell from De Beers own roughs production, and not third party goods. The first auction on February 16, 2017, shall only cover the smaller stones, the grainers, small and near-gem categories of rough diamonds with the initial agreements to run for three months.

This format of fixed purchase prices may eventually be expected to benefit small and medium sized businesses by bringing in the element of price certainty that could help buyers lock prices over the next quarter.

“Small businesses, that cannot access a regular or consistent supply of roughs and are sensitive to price changes, will be helped as Fixed Price Forward Contracts could help to lock in a consistent supply at a known fixed price, enabling customers to calculate costs, accurately predict polished costs and even help polished sales,” states Ventura.“It shall also be the spot test to assess customer demand for short term supply at a fixed price,” he adds.

Sure. But is this an experiment designed to help the company clear its inventory of smaller, unprofitable stones and test market demand, or offer short term supply price certainty to impact manufacturers’profitability. Consider this. At the initial event on February 16, 2017, De Beers sales shall focus entirely on diamond roughs under half a carat in weight, which shall be sold in lots, with a reserve price established for each lot. How will the company fix a reserve price in a volatile and liquid roughs market?
Even selection of smaller sized roughs, debuted at the first Fixed Price Forward Contracts auction, seems a deliberate choice to test the market for the new format as price variation over the short term are marginal in the smallest diamond category. As the trade knows and acknowledges, diamond prices rise considerably beyond the half-carat benchmark. It is the bigger sized stones more than 4 carats, that report the highest price variation over time while the under half carat size categories report only marginal change.(Pricescope).

De Beers neither disclosed the price variations in this category of smalls, grainers and near gem quality diamonds, as it is commercially sensitive information, nor whether the limited price variation in this smallest diamond category was a consideration for inclusion in its first pilot.

However, the company is ready to include other diamond categories in subsequent auctions, based on the response to its first auction offering Fixed Price Forward Contracts. “Depending on customer response to the event, we may look to run similar auction events for other categories of rough diamonds in future,” Ventura committed.

As the industry leader, De Beers has always led innovation, to protect its position and rough prices. Other producers have inevitably followed. Even diamond auctions, unheard of a decade ago, have more players today with more than 20 per cent of all rough production worldwide, being sold through some form of auction sales, as per an official De Beers statement in 2012. Today, auctions have become a key price driver in the roughs market.

“In 2008 we pioneered the industry’s first successful sales of rough diamonds using online auctions, offering customers fixed carat supplies. We gradually evolved to selling greater product volumes with our multiple-unit auction innovation in 2011 and in 2013 offered a highly flexible security of supply proposition for our customers with the launch of Forward Contract Sales. Indeed, the changes we pioneered have acted as a catalyst for change in rough sales practices,” admits Ventura.

Indeed, whatever the underlying purpose, these new format auctions offering Fixed Price Forward Contracts, could provide a reliable sourcing option at known prices for small manufacturers.

”We will see how demand for the new Fixed Price Forward Contracts develops as we run the programme – we do not have any particular expectations in advance of the first event, but our Auction Sales business is always looking to innovate, test and learn,” Ventura said.

As always, if the design works, other producers are bound to follow. After all, nearly a decade ago, producers quickly perceived the benefits and adopted the global online auction sales. Whether the De Beers Fixed Price Forward Contracts experiment is the precursor for adoption by producers, only time will tell.