A recently released report indicates that De Beers’ diamond production decreased across all of De Beers Group’s mining operations. This is despite the company’s 2015 year-end report specifying that rough diamond demand in 2016 will be dependent on consumer demand for diamond jewellery and the resultant levels of restocking required by retailers. The reduced diamond production also means that demand is still sluggish.
According to a production report released by Anglo American for the second quarter (Q2) ended 30 June 2016, De Beers’ diamond production decreased by 19 percent to 6.4 million carats in comparison to the corresponding period in 2015. The decline is attributed to the decision taken to reduce production in response to the tough trading conditions in the second half (H2) of 2015. Another comparison between the first half of 2016 and that of 2015 shows that production declined by 15 percent. However a contrast between the first and second quarter of 2016 cites a lower decline of 6 percent.
The declining conditions refer to what South African Afena Capital senior analyst and portfolio manager Shoaib Vayej in February described as the ‘bullwhip effect’. Vayej said that “weaker than expected consumer demand in 2015 resulted in retailers reducing their demand for polished diamonds from the midstream manufactures. A build up in polished stocks in the midstream put downward pressure on polished prices, and reduced the midstream’s willingness to purchase additional rough diamonds.” The production report cites that production at Debswana declined by 12 percent to 5.2 million carats. It specifies that Orapa’s production fell by 27 percent with no value recorded at Damtshaa as it cites that it was placed on care and maintenance from 1 January 2016.
Vayej also pointed out that due to the large inventory overhang, also known as market indigestion, the potential of a prolonged weak cycle was to be expected despite signs of recovery in the market. This could possibly explain the reason De Beers continued to reduce production in spite of the recovery that was reported following De Beers’ third sales cycle of rough diamond sales in April this year. According to the rough diamond sales results released by Anglo American, third sales cycle recorded a provisional value of US$660 million, reflecting a rise from the US$617 million and US$545 million recorded in the first and second sales cycles of 2016 respectively.
Chief Executive officer (CEO) of the De Beers Group Philippe Mellier was quoted saying: “So far, 2016 has seen significantly stronger rough diamond demand than that experienced at the end of 2015 as the actions taken by the industry continue to have a positive effect.” De Beers cited that it has scheduled 10 sights to take place in 2016, which given the three that have already produced results, the remaining seven sights are expected to give a much clearer picture as to the level of demand from the market.
Production level did not only decline in Botswana as indicated by the production report. Production also plummeted in both South Africa and Namibia. “Production at DBCM (South Africa) decreased by 26% to 0.8million carats due mainly to the completion of the sale of Kimberley Mines in January2016. Production at Namdeb Holdings (Namibia) decreased by 31% to 0.3 million carats with reduced production at Debmarine Namibia because of extended planned in-port maintenance of the Mafuta vessel and lower grades at Namdeb’s Land operations,” cites the report.
It might be too early to make deductions on whether or not the market will turn up a significant improvement but should the positive sales trend continue De Beers could pull through the stock pile and start registering positive production figures. Following the third sales cycle De Beers acknowledged that it was entering into a low season in terms of sale, as dictated by the seasonality of diamond purchases, but it however maintained that it continues to be optimistic about the positive trend it expects. In fact the production report states that the consolidated rough diamond sales in the second quarter of 2016 were 9.6 million carats (from three sights) compared to 4.9 million carats (from two sights) in the corresponding period of 2015.
“Apart from the additional Sight in 2016, this increase reflected higher midstream restocking from lower inventory levels in 2015,” states the report.