Wednesday, July 17, 2024

Diamond industry crisis forces De Beers to slash production

Diamond mining juggernaut De Beers has lowered its production guidance for the next two years following challenges in the diamond industry that saw sales volume decline, resulting in lower revenues, and the developments are expected to put pressure on the Botswana government’s already strained budget. 

After cutting this year’s diamond production to 31 million carats from earlier estimates of 33 million carats,  De Beers’ parent company Anglo American on Wednesday announced further downwards revisions, disclosing that diamond output in 2020 will be between 32 million and 34 million carats, lower than the initial target of 33 million to 35 million carats. The forecast for 2021 was also downgraded from the output target of 35 million to 37 million carats, with the mining giant now forecasting between 34 million and 36 million carats in production. The forecast output for 2022 has been pegged at between 33 million and 35 million carats. 

According to the recently released ninth annual report on the global diamond industry prepared by the Antwerp World Diamond Centre (AWDC) and global consulting behemoth Bain & Company, the diamond industry has struggled to maintain buoyancy in the first three quarters of 2019 following mild growth in the last two years. 

The report states that the global diamond industry as a whole is still mired in a 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 softer demand for polished diamonds was also driven by two major factors: geopolitical and macroeconomic tension which lowered consumer confidence and thus demand, and an increase in e-commerce created efficiencies in the supply chain that decreased the need for inventory on hand. 

De Beers’ diamond production in the three quarters of the year is 12 percent lower than the corresponding period last year. It is not only production that has been affected, with the diamond giant also feeling the heat in its top line as revenues have fallen by 26 percent on the back of lower volumes of sales, a weaker product mix and softening price index. 

The mining company which holds ten global sightholder sales and Auction Sales every year in Gaborone, with the sights or auction sales restricted to its selected sightholders has so far in the past nine sights sold $3.6 billion, which is $1.2 billion lower than the comparable period in 2018. The fall in sales forced De Beers to go against its tradition of offering non-negotiable diamond packages to its sightholders, this time around offering more flexibility to its customers by allowing them to reject some purchases. Last month, De Beers cut prices across the board by about 5 percent. 

Meanwhile, the fall in De Beers revenue will affect the Botswana government which has a 15 percent stake in De Beers and relies on diamond exports revenue which account for 35 percent of the country’s revenues. Already, the effects of the diamond industry recession are being reflected in Botswana’s trade statistics and budget projects. 

In the first quarter of the year, the country recorded a trade deficit of P2.1 billion but recovered slightly in the second quarter with a trade surplus of P57.2 million. The third quarter’s deficit is pegged at P5.2 billion, making it the largest quarterly deficit since the 2008 financial crises.

The country is expected to run budget deficits in the next two financial years as government ramps up on job creation and improving civil service salaries. The budget deficit for 2019/20 is estimated at P7.7 billion or 3.8 percent of GDP, while the expected deficit for 2020/21 is set at P6.9 billion or 3.1 percent of GDP, and then another deficit of P4.4 billion in 2021/22.


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