Saturday, October 31, 2020

De Beers’ damned if I do, damned if I don’t situation

The world’s biggest seller of diamonds by value, De Beers, is in a dilemma of how to proceed with its rough diamond sales amid disruptions brought by the coronavirus outbreak which has affected global movements of people and goods. 

The mining giant has in the past weeks been locked in several meetings with its partners, trying to find the best course of disposing rough diamond stones, which are carried out through ten sales cycles or sights in Gaborone. De Beers has already held the first two sales, with the January sight staging a recovery from a difficult 2019, but that recovery was reversed by a 36 percent sales plunge in the second sight. 

The plunge was attributed to fall in demand from China, where the outbreak of the COVID-19 virus was first reported.  Interventions by the country’s leadership resulted in massive lockdowns, curtailing movements during the Chinese lunar year, where diamond demand is usually strong as Chinese splurge on shopping and gifts.

Bruce Cleaver, chief executive officer at De Beers, said falling the 36 percent fall in diamond sales in the second sight of the year, they recognised the impact of COVID-19 Coronavirus on customers focused on supplying the Chinese market and have put in place additional targeted flexibility to enable customers to defer allocations of the relevant rough diamonds.

However, the coronavirus has since quickly spread beyond China, affecting other top diamond markets, and causing further restrictions to movements. Botswana has placed a travel ban on some of the high-risk countries, where some of De Beers’ selected sightholders are from, piling pressure on the third sales cycle logistics. 

De Beers and the Botswana government found themselves in a conundrum on how to proceed with the sale which is slated for March 30 to April 3. The options on the table include postponing the sight, which is the least favoured choice, considering that some sightholders were allowed to defer purchasing the rough stones offered in the second sight of the year. 

“If you postpone the sight, you are looking at increased future supply of diamonds and this creates a glut in the supply chain, affecting later demand during other sights,” said of the people familiar with the matter but did not want to named as they are not authorised to publicly discuss the issue. 

The insider revealed that the company is doing everything it can to avoid a supply glut which has been blamed for the diamond industry recession that has its roots in the 2015 downturn and was exacerbated by overproduction of rough diamonds in 2017, leading to higher inventory levels that generated a ripple effect through the supply chain.

The industry was hoping for recovery in 2020, with diamond cutters and polishers clearing excess inventory in the beginning of the year. De Beer’s first sale of 2020 appeared to support the recovery narrative. The first sight raked in $551 million, making it the largest sale since April last year – Cycle 3 2019 – and outpaced the January’s first sight of 2019, which earned $500 million, as well as the final sight of 2019, which earned $426 million.

The other option is to proceed with the impeding third sight through an online sale, which is not much of a problem since De Beers already has its own selected sightholders, estimated at 80, who can purchase the latest allotments. However, fears remain that with COVID-19 still causing havoc in the markets, sightholders might not purchase all their allocated diamonds and choose to defer some allocations until the market improves. 

“It is a conundrum either way you look at it. If the sight is postponed, De Beers is left with a higher rough diamond inventory, and if the sale goes ahead, sightholders will price in the possibility of being stuck with a stockpile of diamonds which are not moving fast due to the coronavirus effect,” the insider said.

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