Wednesday, October 21, 2020

De Beers seek to spark diamond demand

Recently, global diamond mining giant, De Beers engaged the media in a teleconference discussion with its Chief Financial Officer Gareth Mostyn. From his London office, Mostyn explained to a small group of business journalists at the diamond park based De Beers’s headquarters the diamond trends observed in the previous year. He did not shy away from explaining the difficulties being experienced by the sector which have pushed De Beers to take action as part of the broader intent of rebuilding confidence in the market. The absence of demand for diamonds put De Beers under pressure as it could not continue with its initial production target. In response to the soft conditions exhibited by the market, Mostyn highlighted three countermeasures which De Beers put in place as an attempt to defy the 2015 tough conditions.

The first countermeasure was reducing the production of rough diamonds which fell below the original target by 16 percent. The second was the reduction in rough prices which fell by 15 percent, and third, De Beers increased flexibility towards sight holders. These reactive measures however did not save De Beers from experiencing a sharp decline in profits. Mostyn described 2015 as a “financially disappointing year” citing a 58 percent decline in profitability from $1,363 billion in 2014 to $571 million in 2015.

The weak demand that rippled through 2015 and the resultant actions taken by De Beers cannot be looked at in isolation, it is also important to find out how De Beers will work towards reducing the high stock pile that continued to build up during the difficult period. If De Beers is to rebuild confidence in the market, particularly at the retail end of the pipeline, it will therefore need to engineer a solid set of measures that will stimulate diamond demand and growth.

Mostyn explained that close to the end of 2015, initial feedback from the key selling Christmas season in America suggested that it was a reasonably good year, adding that mid-single percentage growth year on year was observed. He described midstream industry as a fragmented sector in terms of the number of varied cutters and polishers. This, he said, makes it difficult for De Beers to gather specific numbers on stock levels. “Our sense is that the level of stock in midstream has rebalanced somewhat, and we believe that behind the pickup in demand that we’ve seen in the first sight in 2016 the midstream is in a slightly better place now in terms of stocks,” he said.

He also highlighted that De Beers will continue to take a very cautious improving view of the stock levels. “It’s important to say we’ve looked to rebuild confidence in the midstream, 2016 sight has pleased everyone but we’ll take it one step at a time,” he said.

Analyst’s take

On the backdrop of De Beers’ sense of rebalancing stock levels Sunday Standard quizzed a senior analyst and Portfolio Manager at Afena Capital South Africa, Shoaib Vayej on the matter who opined that production was not cut far enough to reduce the stock pile. He said that the continual build up of stock resulted in a stock overhang which therefore means that rebalancing will not be immediate.  According to Vayej, “demand needs to exceed expectation”.

Rebound in ‘fragile’ diamond market

De Beers may have lost some of its sparkle but expects a rebound in the diamond market to boost its performance.

Weakness in the rough diamond market weighed on the world’s largest diamond company in the financial year ended December 31, 2015. A 36% decline in rough diamond sales pushed total revenue down 34% to $4.7bn. Despite an 8% decline in its rough price index for the year, the Anglo American subsidiary managed a 5% increase in average realised diamond prices to $207/carat (ct). A combination of cost-saving initiatives and favourable exchange rate movements saw consolidated unit costs improve to $104/ct from $111/ct. Still, underlying earnings before interest and tax (EBIT) more than halved from $1.36bn to $571m, but came in 5% higher than forecasts by JP Morgan analysts.

At the same time, weaker than expected consumer demand coupled with a build-up of stocks and a cash-crunch among diamond traders put downward pressure on the polished diamond prices and the mid-stream industry.

In response, it cut diamond production by 12% to 28.7m ct, from an initial target of 32m ct. “We demonstrated, at that time, that production to demand is working. We saw the demand being a little bit shaky, we started to cut, we saw the perfect storm building up and we cut further and at the end it was the right response to the market,” Phillipe Mellier, CEO of De Beers said in a pre-recorded video. 

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