|*While it is too early to judge the full implications of the changes in the distribution model announced by DTC recently, it is certainly going to impact a market already experimenting with new distribution systems, rising prices and growing shortages of rough, contraction of demand and other challenges.{{ Stephen Rego}} takes a closer look.*|%% When the Diamond Trading Company (DTC) announced many months ago that it was extending the Supplier of Choice contracts with existing clients for a year, it did not take too many people by surprise. $$ The diamond industry, after all, was just about beginning to see the end of what must have been one of the worst ever crises it had faced in recent times, brought on by the global financial crisis that had unexpectedly exploded in September 2008. Giving the sightholders a chance to recover and get their businesses back on track seemed like the natural thing to do in the circumstances. It also gave the DTC time to assess which of them would return to their earlier levels of equilibrium, and whether any would fail to recover from the downturn.$$ The mid August announcement regarding changes to SoC, contracts, and the entire rough distribution system of the DTC, however was much more unexpected and was clearly not an immediate fallout of the economic crisis. $$ How should the diamond industry view the proposed changes? Are they minor reforms, course corrections meant to revitalise the SoC? Are they a natural evolution of the system that has been central to the DTC’s functioning over the first decade of the new millennium? Or are they just the first steps, and there are more changes on the anvil?$$ At present, the industry can only guess and speculate on this, but one cannot escape the fact that while there is some continuity in the proposed system, some of the proposals are a sharp departure from the past. Moreover by suggesting that the change is a ‘pilot’, by partially breaking down the walls that have separated Sightholders from Diamdel clients, and both of these categories from other diamantaires, it seems likely that there is more to come over the next few months.

{{The DTC Rationale}}%5 Change and evolution have recently become important keywords in DTC communications. The press note from De Beers Group that announced the changes was issued with a covering letter that explained, “We continually evolve our distribution model. Diamdel has been building auction experience for nearly three years and Supplier of Choice has been adapted since its inception.”$$ This set the context for the proposed changes, including Sightholders being allowed to participate in Diamdel auctions, simplification of the Sightholder profile and application process, the possibility of adding new Sightholders to the list even midway through the next contract process and others.

The release itself however stressed, “De Beers will continue to focus on SoC as the primary method for distributing De Beers’ rough diamonds, and will be proposing enhancements to the Diamond Trading Company’s (DTC) Intention to Offer (ITO) process.” $$ In concrete terms this means that DTC will be streamlining the SoC application process for the 2012-15 contract period, to make it simpler, quicker and more efficient for all participants. One of the key changes now requires applicants to fill in just one simplified Contract Proposal Questionnaire (CPQ) to cover multiple categories of goods. In addition, during the new 3-year SoC contract period the DTC will be replanning future ITO allocations to better reflect individual Sightholder demand in the preceding ITO period. Practically this is going to have an impact on the distribution and allocation processes.$$ A more significant change, and one with greater potential impact on the market is the move to allow sightholders to participate in the Diamdel auction process. $$ According to DTC, “Following the success of its rough diamond auction platform over the past 2½ years, Diamdel will continue to transfer more of its allocation into the auction format whilst seeking to provide wider market access. While Diamdel auctions will continue to represent a relatively small proportion of De Beers’ overall sales of rough diamonds, existing Diamdel customers, DTC Sightholders and, over time, the wider market, will all be able to participate in the Diamdel auctions.” $$ The ability for DTC Sightholders to participate in Diamdel auctions will commence in October 2010 and will be extended to further qualifying diamantaires (in addition to existing Diamdel customers1 and DTC Sightholders) from April 2011. This will not impact on DTC Sightholders’ ITO allocations.$$ As part of the innovations anticipated in the new 2012 - 15 SoC contract period, it is envisaged that Diamdel clients who demonstrate consistently strong demand for certain categories of rough at the Diamdel auctions will, subject to availability, have the opportunity to compete for an ITO for those goods during the course of the 2012 - 2015 SoC contract period by being invited to submit a mid contract CPQ. $$ These pilot plans constitute part of the continued evolution of De Beers’ rough diamond distribution model and are subject to ongoing assessment by De Beers and stakeholder feedback.$$ The changes we propose demonstrate De Beers' commitment to increasing dynamism in its supply arrangements. They will also enable De Beers to respond more effectively to prevailing economic circumstances, maximise its distribution efficiencies and, in turn, manage its distribution risk.

Some further pointers to the DTC approach could perhaps be extrapolated from the annual Business Excellence Seminar held in London alongside the August sight. The seminar, entitled ‘Operating in the New Normal’ was hosted by DTC CEO, Varda Shine and addressed by her and outgoing CEO Gareth Penny, among others, and seemed to be focused on the need to evolve, and respond to the changes in the situation. $$ In her opening remarks, Shine set the tone, stressing on the need to change the ways of doing business and encourage evolution of the Supplier of Choice system. She introduced the concept of the ‘New Normal” saying that “it reflects not only the new economic realities that are being imposed on our businesses, but also the increasing opportunities that are afforded us by seeking to adapt quickly to the developing landscape.” She went on to stress that companies who adopt evolution as their watchword are the ones who will succeed, adding that it was in this spirit that DTC introduced the latest evolution to its Supplier of Choice distribution policy “so we can respond to the different world in which we now live.” $$ Penny then took the audience back to the beginning of Supplier of Choice and talked about how the challenges faced then have been addressed over the past ten years but cautioned that there “are challenges ahead”. $$ {{The Manufacturer’s View}}%% Two key issues that seem to be emerging are related to the question of auction sales and the existence and role of the secondary market, both in turn a part of the larger churning that the diamond industry has been going through ever since the breakdown of the single channel system, and the De Beers decision to formally move away from a supply driven model to a demand driven one. $$ An organisation like International Diamond Manufacturers’ Association (IDMA) have for long being emphasising that the new system that producers are developing, needs to strike a balance on many fronts. While recognising that producers have been trying to discover the optimal way to sell rough diamonds in positive and adverse economic market conditions, and have all tried ‘experimenting’ with “price discovery’ mechanisms like auctions or tenders, it also urged the producers that it is in the best interest of the producers themselves to have a stable, solid, and dependable manufacturing sector which ensures the development of polished demand in the consumer markets. $$ The organisation has always maintained that no manufacturer can efficiently manage a diamond plant employing hundreds or thousands of workers, if he had to wonder every month whether he will be able to find the specific kinds of rough needed for his production and able to meet the polished supply agreements with clients. IDMA President Moti Ganz, at the recent Moscow World Diamond Congress, has urged producers to balance their short term needs for market price feedback and revenue optimization, with the need to ensure long-term sector stability and enable the market to grow.

Even World Federation of Diamond Bourses (WFDB) has often expressed strong reservations about the sale of rough through auctions and tenders. $$ WFDB Honorary President Shmuel Schnitzer has often said that the diamond trade is like a pyramid with the large concerns at the top, while the overwhelming majority of medium, small sized firms and individual operators form the broad base on which the system rests. He has argued that the diamond business is strong due to that broad base, and that auctions and tenders tend to weaken that base because the financially stronger large firms as a rule of thumb always will be able to outbid the SME's. $$ WFDB President Avi Paz too has pointed out that the organisation is opposed to tenders and auctions which he describes as being against the interest of the bourses, limiting trade and upsetting the balance. $$ While it is no one’s case that the DTC plans to increase the volume of goods it distributes via auction, the permission granted to sightholders, and possibly later to other diamantaires to compete with players in the secondary market via Diamdel auctions, certainly has the potential to weaken the broad base on which the industry pyramid rests. Unfortunately Diamond World could not get direct feedback from WFDB officials regarding the changes announced by DTC. $$ In a response to an email interview, IDMA Secretary General Ronnie VanderLinden presented the organisation’s viewpoint, saying, “For DTC sightholders to participate in Diamdel auctions may be useful for complementing occasional gaps in one's rough purchase programmes, and, as such, for DTC sightholders to have an additional rough acquisition option is only to be welcomed." $$ “It is our understanding,” he added, that "in recent years De Beers has been unable to sell all Diamdel's diamonds [i.e. about 10% of the DTC worldwide sales] and allowing sightholders participation is definitely a win-win situation." $$ However, Vanderlinden also said that this does not contradict IDMA's strong belief that the producers – including De Beers – must maintain the needed supply balance in allocation systems… Long term market stability and long-term consumer market growth require the preservation of the current balance where some 80%-90% of the main supplier’s rough sales are on a contractual basis with diamond manufacturers. IDMA President Moti Ganz expresses confidence that De Beers understands this and there is no need to doubt the De Beers commitment to their own Supplier of Choice mechanism, which remains the pillar and backbone of its marketing strategy and philosophy. $$ In this fluid situation, the pilot project of this new distribution model begins to get implemented from October. Where it will lead may not be immediately clear. Meanwhile the season of change that began with the rather sudden announcement about the stepping down of Gareth Penny as CEO of De Beers is far from over.

|*“Diamdel is focused on providing more opportunity for customers to buy more goods, more frequently at prices they determine”*|{{Neil Ventura, CEO, Diamdel}}%% {{1. Are all Sightholders eligible to participate in the auctions or are there any pre-conditions?}}$$ |*Yes. For the first time, all current DTC Sightholders will be able to participate in the auction pilot alongside existing Diamdel customers.*|%% {{2. How will DTC determine which “non Sightholder, non-Diamdel customer” diamantaires will be eligible to participate in the auctions? }}$$ |*This is for Diamdel to determine, not DTC. Any business which had not already registered with Diamdel on or before the 22.08.2010 will only now be able to register with Diamdel from April 2011 onwards.*| %% {{3. What are the criteria for selection? Is there a defined application process? }}$$ |*Yes there is a defined process to become a registered business with Diamdel. Successful completion of this registration process, to the specified standards, is a pre-requisite to becoming a registered customer. *|%% {{4. When do you estimate that this phase will be launched?}}$$ |*Stage I of the pilot will be launched next month and will continue till March 2011. If successful, this will be extended from April 2011 to include other diamantaires. *|%% {{5. What percentage of overall supply to the secondary market does goods auctioned by Diamdel constitute?}}$$ |*It’s relatively small. Diamdel’s sales model is based partly on placed sales and partly on auctions. We anticipate that the amount Diamdel auctions during the pilot is going to be broadly in line with the amount DTC makes available to Diamdel (see below), meaning that Diamdel’s focus will inevitably continue to move away from placed sales. *|%% {{6. What percentage of overall DTC rough sales does it constitute? }}$$ |*DTC has available to sell to Diamdel is approximately 10% of the DTC annual sales. *|%% {{7. What will be the impact of this change on the Secondary Market?}}$$ |*We believe this latest evolution of the De Beers’ distribution model offers real benefits for the secondary market. Diamdel auctions have been running for two and a half years now and we believe now is the opportune time to pilot extended participation. Subject to a successful pilot, diamantaires who have performed strongly at the auctions, may be invited to submit a CPQ (Contract Proposal Questionnaire) to compete for an ITO (Intention to Offer) at yearly intervals during the 2012-2015 Supplier of Choice contract period, subject of course to availability. In other words they have the opportunity to become DTC Sightholders. More immediately, Diamdel is focused on providing more opportunity for customers to buy more goods, more frequently at prices they determine.*|

|*While it is too early to judge the full implications of the changes in the distribution model announced by DTC recently, it is certainly going to impact a market already experimenting with new distribution systems, rising prices and growing shortages of rough, contraction of demand and other challenges.{{ Stephen Rego}} takes a closer look.*|%% When the Diamond Trading Company (DTC) announced many months ago that it was extending the Supplier of Choice contracts with existing clients for a year, it did not take too many people by surprise. $$ The diamond industry, after all, was just about beginning to see the end of what must have been one of the worst ever crises it had faced in recent times, brought on by the global financial crisis that had unexpectedly exploded in September 2008. Giving the sightholders a chance to recover and get their businesses back on track seemed like the natural thing to do in the circumstances. It also gave the DTC time to assess which of them would return to their earlier levels of equilibrium, and whether any would fail to recover from the downturn.$$ The mid August announcement regarding changes to SoC, contracts, and the entire rough distribution system of the DTC, however was much more unexpected and was clearly not an immediate fallout of the economic crisis. $$ How should the diamond industry view the proposed changes? Are they minor reforms, course corrections meant to revitalise the SoC? Are they a natural evolution of the system that has been central to the DTC’s functioning over the first decade of the new millennium? Or are they just the first steps, and there are more changes on the anvil?$$ At present, the industry can only guess and speculate on this, but one cannot escape the fact that while there is some continuity in the proposed system, some of the proposals are a sharp departure from the past. Moreover by suggesting that the change is a ‘pilot’, by partially breaking down the walls that have separated Sightholders from Diamdel clients, and both of these categories from other diamantaires, it seems likely that there is more to come over the next few months.

{{The DTC Rationale}}%5 Change and evolution have recently become important keywords in DTC communications. The press note from De Beers Group that announced the changes was issued with a covering letter that explained, “We continually evolve our distribution model. Diamdel has been building auction experience for nearly three years and Supplier of Choice has been adapted since its inception.”$$ This set the context for the proposed changes, including Sightholders being allowed to participate in Diamdel auctions, simplification of the Sightholder profile and application process, the possibility of adding new Sightholders to the list even midway through the next contract process and others.

The release itself however stressed, “De Beers will continue to focus on SoC as the primary method for distributing De Beers’ rough diamonds, and will be proposing enhancements to the Diamond Trading Company’s (DTC) Intention to Offer (ITO) process.” $$ In concrete terms this means that DTC will be streamlining the SoC application process for the 2012-15 contract period, to make it simpler, quicker and more efficient for all participants. One of the key changes now requires applicants to fill in just one simplified Contract Proposal Questionnaire (CPQ) to cover multiple categories of goods. In addition, during the new 3-year SoC contract period the DTC will be replanning future ITO allocations to better reflect individual Sightholder demand in the preceding ITO period. Practically this is going to have an impact on the distribution and allocation processes.$$ A more significant change, and one with greater potential impact on the market is the move to allow sightholders to participate in the Diamdel auction process. $$ According to DTC, “Following the success of its rough diamond auction platform over the past 2½ years, Diamdel will continue to transfer more of its allocation into the auction format whilst seeking to provide wider market access. While Diamdel auctions will continue to represent a relatively small proportion of De Beers’ overall sales of rough diamonds, existing Diamdel customers, DTC Sightholders and, over time, the wider market, will all be able to participate in the Diamdel auctions.” $$ The ability for DTC Sightholders to participate in Diamdel auctions will commence in October 2010 and will be extended to further qualifying diamantaires (in addition to existing Diamdel customers1 and DTC Sightholders) from April 2011. This will not impact on DTC Sightholders’ ITO allocations.$$ As part of the innovations anticipated in the new 2012 - 15 SoC contract period, it is envisaged that Diamdel clients who demonstrate consistently strong demand for certain categories of rough at the Diamdel auctions will, subject to availability, have the opportunity to compete for an ITO for those goods during the course of the 2012 - 2015 SoC contract period by being invited to submit a mid contract CPQ. $$ These pilot plans constitute part of the continued evolution of De Beers’ rough diamond distribution model and are subject to ongoing assessment by De Beers and stakeholder feedback.$$ The changes we propose demonstrate De Beers' commitment to increasing dynamism in its supply arrangements. They will also enable De Beers to respond more effectively to prevailing economic circumstances, maximise its distribution efficiencies and, in turn, manage its distribution risk.

Some further pointers to the DTC approach could perhaps be extrapolated from the annual Business Excellence Seminar held in London alongside the August sight. The seminar, entitled ‘Operating in the New Normal’ was hosted by DTC CEO, Varda Shine and addressed by her and outgoing CEO Gareth Penny, among others, and seemed to be focused on the need to evolve, and respond to the changes in the situation. $$ In her opening remarks, Shine set the tone, stressing on the need to change the ways of doing business and encourage evolution of the Supplier of Choice system. She introduced the concept of the ‘New Normal” saying that “it reflects not only the new economic realities that are being imposed on our businesses, but also the increasing opportunities that are afforded us by seeking to adapt quickly to the developing landscape.” She went on to stress that companies who adopt evolution as their watchword are the ones who will succeed, adding that it was in this spirit that DTC introduced the latest evolution to its Supplier of Choice distribution policy “so we can respond to the different world in which we now live.” $$ Penny then took the audience back to the beginning of Supplier of Choice and talked about how the challenges faced then have been addressed over the past ten years but cautioned that there “are challenges ahead”. $$ {{The Manufacturer’s View}}%% Two key issues that seem to be emerging are related to the question of auction sales and the existence and role of the secondary market, both in turn a part of the larger churning that the diamond industry has been going through ever since the breakdown of the single channel system, and the De Beers decision to formally move away from a supply driven model to a demand driven one. $$ An organisation like International Diamond Manufacturers’ Association (IDMA) have for long being emphasising that the new system that producers are developing, needs to strike a balance on many fronts. While recognising that producers have been trying to discover the optimal way to sell rough diamonds in positive and adverse economic market conditions, and have all tried ‘experimenting’ with “price discovery’ mechanisms like auctions or tenders, it also urged the producers that it is in the best interest of the producers themselves to have a stable, solid, and dependable manufacturing sector which ensures the development of polished demand in the consumer markets. $$ The organisation has always maintained that no manufacturer can efficiently manage a diamond plant employing hundreds or thousands of workers, if he had to wonder every month whether he will be able to find the specific kinds of rough needed for his production and able to meet the polished supply agreements with clients. IDMA President Moti Ganz, at the recent Moscow World Diamond Congress, has urged producers to balance their short term needs for market price feedback and revenue optimization, with the need to ensure long-term sector stability and enable the market to grow.

Even World Federation of Diamond Bourses (WFDB) has often expressed strong reservations about the sale of rough through auctions and tenders. $$ WFDB Honorary President Shmuel Schnitzer has often said that the diamond trade is like a pyramid with the large concerns at the top, while the overwhelming majority of medium, small sized firms and individual operators form the broad base on which the system rests. He has argued that the diamond business is strong due to that broad base, and that auctions and tenders tend to weaken that base because the financially stronger large firms as a rule of thumb always will be able to outbid the SME's. $$ WFDB President Avi Paz too has pointed out that the organisation is opposed to tenders and auctions which he describes as being against the interest of the bourses, limiting trade and upsetting the balance. $$ While it is no one’s case that the DTC plans to increase the volume of goods it distributes via auction, the permission granted to sightholders, and possibly later to other diamantaires to compete with players in the secondary market via Diamdel auctions, certainly has the potential to weaken the broad base on which the industry pyramid rests. Unfortunately Diamond World could not get direct feedback from WFDB officials regarding the changes announced by DTC. $$ In a response to an email interview, IDMA Secretary General Ronnie VanderLinden presented the organisation’s viewpoint, saying, “For DTC sightholders to participate in Diamdel auctions may be useful for complementing occasional gaps in one's rough purchase programmes, and, as such, for DTC sightholders to have an additional rough acquisition option is only to be welcomed." $$ “It is our understanding,” he added, that "in recent years De Beers has been unable to sell all Diamdel's diamonds [i.e. about 10% of the DTC worldwide sales] and allowing sightholders participation is definitely a win-win situation." $$ However, Vanderlinden also said that this does not contradict IDMA's strong belief that the producers – including De Beers – must maintain the needed supply balance in allocation systems… Long term market stability and long-term consumer market growth require the preservation of the current balance where some 80%-90% of the main supplier’s rough sales are on a contractual basis with diamond manufacturers. IDMA President Moti Ganz expresses confidence that De Beers understands this and there is no need to doubt the De Beers commitment to their own Supplier of Choice mechanism, which remains the pillar and backbone of its marketing strategy and philosophy. $$ In this fluid situation, the pilot project of this new distribution model begins to get implemented from October. Where it will lead may not be immediately clear. Meanwhile the season of change that began with the rather sudden announcement about the stepping down of Gareth Penny as CEO of De Beers is far from over.

|*“Diamdel is focused on providing more opportunity for customers to buy more goods, more frequently at prices they determine”*|{{Neil Ventura, CEO, Diamdel}}%% {{1. Are all Sightholders eligible to participate in the auctions or are there any pre-conditions?}}$$ |*Yes. For the first time, all current DTC Sightholders will be able to participate in the auction pilot alongside existing Diamdel customers.*|%% {{2. How will DTC determine which “non Sightholder, non-Diamdel customer” diamantaires will be eligible to participate in the auctions? }}$$ |*This is for Diamdel to determine, not DTC. Any business which had not already registered with Diamdel on or before the 22.08.2010 will only now be able to register with Diamdel from April 2011 onwards.*| %% {{3. What are the criteria for selection? Is there a defined application process? }}$$ |*Yes there is a defined process to become a registered business with Diamdel. Successful completion of this registration process, to the specified standards, is a pre-requisite to becoming a registered customer. *|%% {{4. When do you estimate that this phase will be launched?}}$$ |*Stage I of the pilot will be launched next month and will continue till March 2011. If successful, this will be extended from April 2011 to include other diamantaires. *|%% {{5. What percentage of overall supply to the secondary market does goods auctioned by Diamdel constitute?}}$$ |*It’s relatively small. Diamdel’s sales model is based partly on placed sales and partly on auctions. We anticipate that the amount Diamdel auctions during the pilot is going to be broadly in line with the amount DTC makes available to Diamdel (see below), meaning that Diamdel’s focus will inevitably continue to move away from placed sales. *|%% {{6. What percentage of overall DTC rough sales does it constitute? }}$$ |*DTC has available to sell to Diamdel is approximately 10% of the DTC annual sales. *|%% {{7. What will be the impact of this change on the Secondary Market?}}$$ |*We believe this latest evolution of the De Beers’ distribution model offers real benefits for the secondary market. Diamdel auctions have been running for two and a half years now and we believe now is the opportune time to pilot extended participation. Subject to a successful pilot, diamantaires who have performed strongly at the auctions, may be invited to submit a CPQ (Contract Proposal Questionnaire) to compete for an ITO (Intention to Offer) at yearly intervals during the 2012-2015 Supplier of Choice contract period, subject of course to availability. In other words they have the opportunity to become DTC Sightholders. More immediately, Diamdel is focused on providing more opportunity for customers to buy more goods, more frequently at prices they determine.*|

|*While it is too early to judge the full implications of the changes in the distribution model announced by DTC recently, it is certainly going to impact a market already experimenting with new distribution systems, rising prices and growing shortages of rough, contraction of demand and other challenges.{{ Stephen Rego}} takes a closer look.*|%% When the Diamond Trading Company (DTC) announced many months ago that it was extending the Supplier of Choice contracts with existing clients for a year, it did not take too many people by surprise. $$ The diamond industry, after all, was just about beginning to see the end of what must have been one of the worst ever crises it had faced in recent times, brought on by the global financial crisis that had unexpectedly exploded in September 2008. Giving the sightholders a chance to recover and get their businesses back on track seemed like the natural thing to do in the circumstances. It also gave the DTC time to assess which of them would return to their earlier levels of equilibrium, and whether any would fail to recover from the downturn.$$ The mid August announcement regarding changes to SoC, contracts, and the entire rough distribution system of the DTC, however was much more unexpected and was clearly not an immediate fallout of the economic crisis. $$ How should the diamond industry view the proposed changes? Are they minor reforms, course corrections meant to revitalise the SoC? Are they a natural evolution of the system that has been central to the DTC’s functioning over the first decade of the new millennium? Or are they just the first steps, and there are more changes on the anvil?$$ At present, the industry can only guess and speculate on this, but one cannot escape the fact that while there is some continuity in the proposed system, some of the proposals are a sharp departure from the past. Moreover by suggesting that the change is a ‘pilot’, by partially breaking down the walls that have separated Sightholders from Diamdel clients, and both of these categories from other diamantaires, it seems likely that there is more to come over the next few months.

{{The DTC Rationale}}%5 Change and evolution have recently become important keywords in DTC communications. The press note from De Beers Group that announced the changes was issued with a covering letter that explained, “We continually evolve our distribution model. Diamdel has been building auction experience for nearly three years and Supplier of Choice has been adapted since its inception.”$$ This set the context for the proposed changes, including Sightholders being allowed to participate in Diamdel auctions, simplification of the Sightholder profile and application process, the possibility of adding new Sightholders to the list even midway through the next contract process and others.

The release itself however stressed, “De Beers will continue to focus on SoC as the primary method for distributing De Beers’ rough diamonds, and will be proposing enhancements to the Diamond Trading Company’s (DTC) Intention to Offer (ITO) process.” $$ In concrete terms this means that DTC will be streamlining the SoC application process for the 2012-15 contract period, to make it simpler, quicker and more efficient for all participants. One of the key changes now requires applicants to fill in just one simplified Contract Proposal Questionnaire (CPQ) to cover multiple categories of goods. In addition, during the new 3-year SoC contract period the DTC will be replanning future ITO allocations to better reflect individual Sightholder demand in the preceding ITO period. Practically this is going to have an impact on the distribution and allocation processes.$$ A more significant change, and one with greater potential impact on the market is the move to allow sightholders to participate in the Diamdel auction process. $$ According to DTC, “Following the success of its rough diamond auction platform over the past 2½ years, Diamdel will continue to transfer more of its allocation into the auction format whilst seeking to provide wider market access. While Diamdel auctions will continue to represent a relatively small proportion of De Beers’ overall sales of rough diamonds, existing Diamdel customers, DTC Sightholders and, over time, the wider market, will all be able to participate in the Diamdel auctions.” $$ The ability for DTC Sightholders to participate in Diamdel auctions will commence in October 2010 and will be extended to further qualifying diamantaires (in addition to existing Diamdel customers1 and DTC Sightholders) from April 2011. This will not impact on DTC Sightholders’ ITO allocations.$$ As part of the innovations anticipated in the new 2012 - 15 SoC contract period, it is envisaged that Diamdel clients who demonstrate consistently strong demand for certain categories of rough at the Diamdel auctions will, subject to availability, have the opportunity to compete for an ITO for those goods during the course of the 2012 - 2015 SoC contract period by being invited to submit a mid contract CPQ. $$ These pilot plans constitute part of the continued evolution of De Beers’ rough diamond distribution model and are subject to ongoing assessment by De Beers and stakeholder feedback.$$ The changes we propose demonstrate De Beers' commitment to increasing dynamism in its supply arrangements. They will also enable De Beers to respond more effectively to prevailing economic circumstances, maximise its distribution efficiencies and, in turn, manage its distribution risk.

Some further pointers to the DTC approach could perhaps be extrapolated from the annual Business Excellence Seminar held in London alongside the August sight. The seminar, entitled ‘Operating in the New Normal’ was hosted by DTC CEO, Varda Shine and addressed by her and outgoing CEO Gareth Penny, among others, and seemed to be focused on the need to evolve, and respond to the changes in the situation. $$ In her opening remarks, Shine set the tone, stressing on the need to change the ways of doing business and encourage evolution of the Supplier of Choice system. She introduced the concept of the ‘New Normal” saying that “it reflects not only the new economic realities that are being imposed on our businesses, but also the increasing opportunities that are afforded us by seeking to adapt quickly to the developing landscape.” She went on to stress that companies who adopt evolution as their watchword are the ones who will succeed, adding that it was in this spirit that DTC introduced the latest evolution to its Supplier of Choice distribution policy “so we can respond to the different world in which we now live.” $$ Penny then took the audience back to the beginning of Supplier of Choice and talked about how the challenges faced then have been addressed over the past ten years but cautioned that there “are challenges ahead”. $$ {{The Manufacturer’s View}}%% Two key issues that seem to be emerging are related to the question of auction sales and the existence and role of the secondary market, both in turn a part of the larger churning that the diamond industry has been going through ever since the breakdown of the single channel system, and the De Beers decision to formally move away from a supply driven model to a demand driven one. $$ An organisation like International Diamond Manufacturers’ Association (IDMA) have for long being emphasising that the new system that producers are developing, needs to strike a balance on many fronts. While recognising that producers have been trying to discover the optimal way to sell rough diamonds in positive and adverse economic market conditions, and have all tried ‘experimenting’ with “price discovery’ mechanisms like auctions or tenders, it also urged the producers that it is in the best interest of the producers themselves to have a stable, solid, and dependable manufacturing sector which ensures the development of polished demand in the consumer markets. $$ The organisation has always maintained that no manufacturer can efficiently manage a diamond plant employing hundreds or thousands of workers, if he had to wonder every month whether he will be able to find the specific kinds of rough needed for his production and able to meet the polished supply agreements with clients. IDMA President Moti Ganz, at the recent Moscow World Diamond Congress, has urged producers to balance their short term needs for market price feedback and revenue optimization, with the need to ensure long-term sector stability and enable the market to grow.

Even World Federation of Diamond Bourses (WFDB) has often expressed strong reservations about the sale of rough through auctions and tenders. $$ WFDB Honorary President Shmuel Schnitzer has often said that the diamond trade is like a pyramid with the large concerns at the top, while the overwhelming majority of medium, small sized firms and individual operators form the broad base on which the system rests. He has argued that the diamond business is strong due to that broad base, and that auctions and tenders tend to weaken that base because the financially stronger large firms as a rule of thumb always will be able to outbid the SME's. $$ WFDB President Avi Paz too has pointed out that the organisation is opposed to tenders and auctions which he describes as being against the interest of the bourses, limiting trade and upsetting the balance. $$ While it is no one’s case that the DTC plans to increase the volume of goods it distributes via auction, the permission granted to sightholders, and possibly later to other diamantaires to compete with players in the secondary market via Diamdel auctions, certainly has the potential to weaken the broad base on which the industry pyramid rests. Unfortunately Diamond World could not get direct feedback from WFDB officials regarding the changes announced by DTC. $$ In a response to an email interview, IDMA Secretary General Ronnie VanderLinden presented the organisation’s viewpoint, saying, “For DTC sightholders to participate in Diamdel auctions may be useful for complementing occasional gaps in one's rough purchase programmes, and, as such, for DTC sightholders to have an additional rough acquisition option is only to be welcomed." $$ “It is our understanding,” he added, that "in recent years De Beers has been unable to sell all Diamdel's diamonds [i.e. about 10% of the DTC worldwide sales] and allowing sightholders participation is definitely a win-win situation." $$ However, Vanderlinden also said that this does not contradict IDMA's strong belief that the producers – including De Beers – must maintain the needed supply balance in allocation systems… Long term market stability and long-term consumer market growth require the preservation of the current balance where some 80%-90% of the main supplier’s rough sales are on a contractual basis with diamond manufacturers. IDMA President Moti Ganz expresses confidence that De Beers understands this and there is no need to doubt the De Beers commitment to their own Supplier of Choice mechanism, which remains the pillar and backbone of its marketing strategy and philosophy. $$ In this fluid situation, the pilot project of this new distribution model begins to get implemented from October. Where it will lead may not be immediately clear. Meanwhile the season of change that began with the rather sudden announcement about the stepping down of Gareth Penny as CEO of De Beers is far from over.

|*“Diamdel is focused on providing more opportunity for customers to buy more goods, more frequently at prices they determine”*|{{Neil Ventura, CEO, Diamdel}}%% {{1. Are all Sightholders eligible to participate in the auctions or are there any pre-conditions?}}$$ |*Yes. For the first time, all current DTC Sightholders will be able to participate in the auction pilot alongside existing Diamdel customers.*|%% {{2. How will DTC determine which “non Sightholder, non-Diamdel customer” diamantaires will be eligible to participate in the auctions? }}$$ |*This is for Diamdel to determine, not DTC. Any business which had not already registered with Diamdel on or before the 22.08.2010 will only now be able to register with Diamdel from April 2011 onwards.*| %% {{3. What are the criteria for selection? Is there a defined application process? }}$$ |*Yes there is a defined process to become a registered business with Diamdel. Successful completion of this registration process, to the specified standards, is a pre-requisite to becoming a registered customer. *|%% {{4. When do you estimate that this phase will be launched?}}$$ |*Stage I of the pilot will be launched next month and will continue till March 2011. If successful, this will be extended from April 2011 to include other diamantaires. *|%% {{5. What percentage of overall supply to the secondary market does goods auctioned by Diamdel constitute?}}$$ |*It’s relatively small. Diamdel’s sales model is based partly on placed sales and partly on auctions. We anticipate that the amount Diamdel auctions during the pilot is going to be broadly in line with the amount DTC makes available to Diamdel (see below), meaning that Diamdel’s focus will inevitably continue to move away from placed sales. *|%% {{6. What percentage of overall DTC rough sales does it constitute? }}$$ |*DTC has available to sell to Diamdel is approximately 10% of the DTC annual sales. *|%% {{7. What will be the impact of this change on the Secondary Market?}}$$ |*We believe this latest evolution of the De Beers’ distribution model offers real benefits for the secondary market. Diamdel auctions have been running for two and a half years now and we believe now is the opportune time to pilot extended participation. Subject to a successful pilot, diamantaires who have performed strongly at the auctions, may be invited to submit a CPQ (Contract Proposal Questionnaire) to compete for an ITO (Intention to Offer) at yearly intervals during the 2012-2015 Supplier of Choice contract period, subject of course to availability. In other words they have the opportunity to become DTC Sightholders. More immediately, Diamdel is focused on providing more opportunity for customers to buy more goods, more frequently at prices they determine.*|

|*While it is too early to judge the full implications of the changes in the distribution model announced by DTC recently, it is certainly going to impact a market already experimenting with new distribution systems, rising prices and growing shortages of rough, contraction of demand and other challenges.{{ Stephen Rego}} takes a closer look.*|%% When the Diamond Trading Company (DTC) announced many months ago that it was extending the Supplier of Choice contracts with existing clients for a year, it did not take too many people by surprise. $$ The diamond industry, after all, was just about beginning to see the end of what must have been one of the worst ever crises it had faced in recent times, brought on by the global financial crisis that had unexpectedly exploded in September 2008. Giving the sightholders a chance to recover and get their businesses back on track seemed like the natural thing to do in the circumstances. It also gave the DTC time to assess which of them would return to their earlier levels of equilibrium, and whether any would fail to recover from the downturn.$$ The mid August announcement regarding changes to SoC, contracts, and the entire rough distribution system of the DTC, however was much more unexpected and was clearly not an immediate fallout of the economic crisis. $$ How should the diamond industry view the proposed changes? Are they minor reforms, course corrections meant to revitalise the SoC? Are they a natural evolution of the system that has been central to the DTC’s functioning over the first decade of the new millennium? Or are they just the first steps, and there are more changes on the anvil?$$ At present, the industry can only guess and speculate on this, but one cannot escape the fact that while there is some continuity in the proposed system, some of the proposals are a sharp departure from the past. Moreover by suggesting that the change is a ‘pilot’, by partially breaking down the walls that have separated Sightholders from Diamdel clients, and both of these categories from other diamantaires, it seems likely that there is more to come over the next few months.

{{The DTC Rationale}}%5 Change and evolution have recently become important keywords in DTC communications. The press note from De Beers Group that announced the changes was issued with a covering letter that explained, “We continually evolve our distribution model. Diamdel has been building auction experience for nearly three years and Supplier of Choice has been adapted since its inception.”$$ This set the context for the proposed changes, including Sightholders being allowed to participate in Diamdel auctions, simplification of the Sightholder profile and application process, the possibility of adding new Sightholders to the list even midway through the next contract process and others.

The release itself however stressed, “De Beers will continue to focus on SoC as the primary method for distributing De Beers’ rough diamonds, and will be proposing enhancements to the Diamond Trading Company’s (DTC) Intention to Offer (ITO) process.” $$ In concrete terms this means that DTC will be streamlining the SoC application process for the 2012-15 contract period, to make it simpler, quicker and more efficient for all participants. One of the key changes now requires applicants to fill in just one simplified Contract Proposal Questionnaire (CPQ) to cover multiple categories of goods. In addition, during the new 3-year SoC contract period the DTC will be replanning future ITO allocations to better reflect individual Sightholder demand in the preceding ITO period. Practically this is going to have an impact on the distribution and allocation processes.$$ A more significant change, and one with greater potential impact on the market is the move to allow sightholders to participate in the Diamdel auction process. $$ According to DTC, “Following the success of its rough diamond auction platform over the past 2½ years, Diamdel will continue to transfer more of its allocation into the auction format whilst seeking to provide wider market access. While Diamdel auctions will continue to represent a relatively small proportion of De Beers’ overall sales of rough diamonds, existing Diamdel customers, DTC Sightholders and, over time, the wider market, will all be able to participate in the Diamdel auctions.” $$ The ability for DTC Sightholders to participate in Diamdel auctions will commence in October 2010 and will be extended to further qualifying diamantaires (in addition to existing Diamdel customers1 and DTC Sightholders) from April 2011. This will not impact on DTC Sightholders’ ITO allocations.$$ As part of the innovations anticipated in the new 2012 - 15 SoC contract period, it is envisaged that Diamdel clients who demonstrate consistently strong demand for certain categories of rough at the Diamdel auctions will, subject to availability, have the opportunity to compete for an ITO for those goods during the course of the 2012 - 2015 SoC contract period by being invited to submit a mid contract CPQ. $$ These pilot plans constitute part of the continued evolution of De Beers’ rough diamond distribution model and are subject to ongoing assessment by De Beers and stakeholder feedback.$$ The changes we propose demonstrate De Beers' commitment to increasing dynamism in its supply arrangements. They will also enable De Beers to respond more effectively to prevailing economic circumstances, maximise its distribution efficiencies and, in turn, manage its distribution risk.

Some further pointers to the DTC approach could perhaps be extrapolated from the annual Business Excellence Seminar held in London alongside the August sight. The seminar, entitled ‘Operating in the New Normal’ was hosted by DTC CEO, Varda Shine and addressed by her and outgoing CEO Gareth Penny, among others, and seemed to be focused on the need to evolve, and respond to the changes in the situation. $$ In her opening remarks, Shine set the tone, stressing on the need to change the ways of doing business and encourage evolution of the Supplier of Choice system. She introduced the concept of the ‘New Normal” saying that “it reflects not only the new economic realities that are being imposed on our businesses, but also the increasing opportunities that are afforded us by seeking to adapt quickly to the developing landscape.” She went on to stress that companies who adopt evolution as their watchword are the ones who will succeed, adding that it was in this spirit that DTC introduced the latest evolution to its Supplier of Choice distribution policy “so we can respond to the different world in which we now live.” $$ Penny then took the audience back to the beginning of Supplier of Choice and talked about how the challenges faced then have been addressed over the past ten years but cautioned that there “are challenges ahead”. $$ {{The Manufacturer’s View}}%% Two key issues that seem to be emerging are related to the question of auction sales and the existence and role of the secondary market, both in turn a part of the larger churning that the diamond industry has been going through ever since the breakdown of the single channel system, and the De Beers decision to formally move away from a supply driven model to a demand driven one. $$ An organisation like International Diamond Manufacturers’ Association (IDMA) have for long being emphasising that the new system that producers are developing, needs to strike a balance on many fronts. While recognising that producers have been trying to discover the optimal way to sell rough diamonds in positive and adverse economic market conditions, and have all tried ‘experimenting’ with “price discovery’ mechanisms like auctions or tenders, it also urged the producers that it is in the best interest of the producers themselves to have a stable, solid, and dependable manufacturing sector which ensures the development of polished demand in the consumer markets. $$ The organisation has always maintained that no manufacturer can efficiently manage a diamond plant employing hundreds or thousands of workers, if he had to wonder every month whether he will be able to find the specific kinds of rough needed for his production and able to meet the polished supply agreements with clients. IDMA President Moti Ganz, at the recent Moscow World Diamond Congress, has urged producers to balance their short term needs for market price feedback and revenue optimization, with the need to ensure long-term sector stability and enable the market to grow.

Even World Federation of Diamond Bourses (WFDB) has often expressed strong reservations about the sale of rough through auctions and tenders. $$ WFDB Honorary President Shmuel Schnitzer has often said that the diamond trade is like a pyramid with the large concerns at the top, while the overwhelming majority of medium, small sized firms and individual operators form the broad base on which the system rests. He has argued that the diamond business is strong due to that broad base, and that auctions and tenders tend to weaken that base because the financially stronger large firms as a rule of thumb always will be able to outbid the SME's. $$ WFDB President Avi Paz too has pointed out that the organisation is opposed to tenders and auctions which he describes as being against the interest of the bourses, limiting trade and upsetting the balance. $$ While it is no one’s case that the DTC plans to increase the volume of goods it distributes via auction, the permission granted to sightholders, and possibly later to other diamantaires to compete with players in the secondary market via Diamdel auctions, certainly has the potential to weaken the broad base on which the industry pyramid rests. Unfortunately Diamond World could not get direct feedback from WFDB officials regarding the changes announced by DTC. $$ In a response to an email interview, IDMA Secretary General Ronnie VanderLinden presented the organisation’s viewpoint, saying, “For DTC sightholders to participate in Diamdel auctions may be useful for complementing occasional gaps in one's rough purchase programmes, and, as such, for DTC sightholders to have an additional rough acquisition option is only to be welcomed." $$ “It is our understanding,” he added, that "in recent years De Beers has been unable to sell all Diamdel's diamonds [i.e. about 10% of the DTC worldwide sales] and allowing sightholders participation is definitely a win-win situation." $$ However, Vanderlinden also said that this does not contradict IDMA's strong belief that the producers – including De Beers – must maintain the needed supply balance in allocation systems… Long term market stability and long-term consumer market growth require the preservation of the current balance where some 80%-90% of the main supplier’s rough sales are on a contractual basis with diamond manufacturers. IDMA President Moti Ganz expresses confidence that De Beers understands this and there is no need to doubt the De Beers commitment to their own Supplier of Choice mechanism, which remains the pillar and backbone of its marketing strategy and philosophy. $$ In this fluid situation, the pilot project of this new distribution model begins to get implemented from October. Where it will lead may not be immediately clear. Meanwhile the season of change that began with the rather sudden announcement about the stepping down of Gareth Penny as CEO of De Beers is far from over.

|*“Diamdel is focused on providing more opportunity for customers to buy more goods, more frequently at prices they determine”*|{{Neil Ventura, CEO, Diamdel}}%% {{1. Are all Sightholders eligible to participate in the auctions or are there any pre-conditions?}}$$ |*Yes. For the first time, all current DTC Sightholders will be able to participate in the auction pilot alongside existing Diamdel customers.*|%% {{2. How will DTC determine which “non Sightholder, non-Diamdel customer” diamantaires will be eligible to participate in the auctions? }}$$ |*This is for Diamdel to determine, not DTC. Any business which had not already registered with Diamdel on or before the 22.08.2010 will only now be able to register with Diamdel from April 2011 onwards.*| %% {{3. What are the criteria for selection? Is there a defined application process? }}$$ |*Yes there is a defined process to become a registered business with Diamdel. Successful completion of this registration process, to the specified standards, is a pre-requisite to becoming a registered customer. *|%% {{4. When do you estimate that this phase will be launched?}}$$ |*Stage I of the pilot will be launched next month and will continue till March 2011. If successful, this will be extended from April 2011 to include other diamantaires. *|%% {{5. What percentage of overall supply to the secondary market does goods auctioned by Diamdel constitute?}}$$ |*It’s relatively small. Diamdel’s sales model is based partly on placed sales and partly on auctions. We anticipate that the amount Diamdel auctions during the pilot is going to be broadly in line with the amount DTC makes available to Diamdel (see below), meaning that Diamdel’s focus will inevitably continue to move away from placed sales. *|%% {{6. What percentage of overall DTC rough sales does it constitute? }}$$ |*DTC has available to sell to Diamdel is approximately 10% of the DTC annual sales. *|%% {{7. What will be the impact of this change on the Secondary Market?}}$$ |*We believe this latest evolution of the De Beers’ distribution model offers real benefits for the secondary market. Diamdel auctions have been running for two and a half years now and we believe now is the opportune time to pilot extended participation. Subject to a successful pilot, diamantaires who have performed strongly at the auctions, may be invited to submit a CPQ (Contract Proposal Questionnaire) to compete for an ITO (Intention to Offer) at yearly intervals during the 2012-2015 Supplier of Choice contract period, subject of course to availability. In other words they have the opportunity to become DTC Sightholders. More immediately, Diamdel is focused on providing more opportunity for customers to buy more goods, more frequently at prices they determine.*|