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Lower Diamond Production

Editorial
Jul 27, 2012 6:00 AM   By Avi Krawitz
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RAPAPORT... Predicting the diamond market can be tricky at times, particularly for those on the supply ‎side of the pipeline. Miners, generally loath to scale down operations, have ‎understandably been treading cautiously in 2012.‎

The pledge made last week by De Beers to monitor production in line with sightholder ‎demand, should therefore not be taken lightly. ‎

‎“In light of prevailing rough diamond market trends, and in keeping with De Beers’ stated ‎production strategy from [the fourth quarter of] 2011, operations continued to focus on ‎maintenance and waste stripping backlogs,” management stated in the company’s ‎interim results. “This strategy has enabled De Beers to meet sightholder demand for ‎rough diamonds while gradually positioning the mines for future increases in demand.”‎

De Beers production fell 13 percent year on year to 13.4 million carats in the first half of ‎‎2012, while it maintained that market conditions would remain challenging in the second ‎half. Philippe Mellier, De Beers chief executive officer (CEO), meanwhile, stressed that ‎De Beers is on track to reach full-year production of between 28 million and 30 million ‎carats in 2012, compared to 31.328 million carats achieved in 2011. ‎

That would require a production ramp up to at least 14.6 million carats during the second ‎half in order to achieve the low-end projection. While production levels would still be ‎below 2011, when 15.8 million carats were mined between July and December, such ‎goals seem ambitious at this stage — especially given the rocky start that De Beers has ‎had to the second half of this year. ‎

The company has missed a month’s worth of production at its high-volume Jwaneng ‎mine after operations were suspended due to a fatality there on June 29. More ‎significantly from a market viewpoint, while De Beers reported that it sold slightly more ‎than it produced in the first half and that it is not building inventory, that situation may ‎have changed in July.‎

Sightholders rejected goods at the June and July sights indicating that the Diamond ‎Trading Company (DTC) is currently holding some amount of unsold inventory. By ‎rejecting the supply, sightholders are demanding lower prices, or at least lower supply ‎that they are not obligated to take.‎

DTC told its clients they could defer up to 50 percent of their July sight allocations to later ‎sights before April 2013. But even if the company expects sightholders to take up those ‎rejected allocations in addition to their remaining intentions to offer (ITOs) in the next ‎eight months, demand for DTC rough is clearly down. Similarly, Neil ‎Ventura, CEO of De ‎Beers Diamdel unit, told Rapaport News that buyer participation fell by about 10 percent ‎at Diamdel’s latest round of rough diamond online auctions.‎

The reality is that diamond companies across the pipeline have been monitoring their ‎inventories throughout 2012 and will continue to do so. Anecdotal reports note that there ‎is an excess of rough and polished goods sitting in the safes of diamond manufacturers ‎and dealers. ‎

Sightholders are holding rough they bought at high prices in the second quarter and in ‎July, which they are unable to sell or manufacture without incurring a loss. At the same ‎time, polished trading has slowed, partly due to summer’s seasonal quiet but more ‎importantly, as demand has diminished amid prolonged economic weakness. ‎

Wholesalers and retailers in both the U.S. and the Far East are content to work through ‎August with existing stock as they don’t foresee polished prices stabilizing before the ‎fourth quarter. No one wants to buy big quantities in a downtrend out of fear that prices ‎will continue to soften causing the value of their stock to depreciate. Currency volatility ‎against the dollar has added to industry uncertainty, not only for Indians who deal in ‎rupee, but also for Belgian traders incurring euro-based expenses and even Israeli ‎dealers hedging the weaker shekel. ‎

Buyers of both rough and polished are confronted with a new reality of tighter margins ‎and diminished supply and are understandably hesitant to build inventory amid such ‎instability. ‎

For their part, mining companies are walking a tight line. Whether or not they need to ‎reduce supply largely depends on the scale of their operations and the price at which ‎they are prepared to sell their goods. ‎

Recent rough tenders by some of the smaller producers have in fact yielded encouraging ‎results. Namakwa Diamonds reported that it sold all 51 lots on offer at its Kao mine July ‎tender that took place in Antwerp, but  the average price of $286 per carat fell 28 percent ‎below the average price achieved at its May tender. Firestone Diamonds reported that ‎prices at its July tenders in Antwerp and Gaborone increased to $91 per carat, from $71 ‎in May, as it sold 45,773 carats of its Liqhobong mine production. ‎

In fairness, it is easier for smaller producers to sell their goods at the moment than the ‎larger miners who supply via long-term contracts. De Beers and ALROSA, which ‎together account for about 60 percent to 70 percent of global production, have a different ‎selling model and production strategy. ‎

While prices at the smaller company tenders are driven by client demand and have ‎dropped, those at De Beers and ALROSA are determined by contract obligations. DTC ‎has often stressed its long-term view in setting prices noting that it is neither at the top of ‎the market when conditions are positive nor at the bottom in more challenging times.‎

Either way, the company does not want to hold excess inventory come the end of the ‎year. If DTC is intent on keeping prices relatively steady, De Beers only option is to limit ‎supply. As inventories elsewhere along the pipeline are high, and while economic ‎anxieties continue to weigh on demand, De Beers production is expected to reflect its ‎own stated caution. ‎

Certainly given its continued focus on waste mining and maintenance, and its troubles at ‎Jwaneng, De Beers production forecasts for the second half of 2012 seem ‎overstretched. But then again, if prices are to remain high, lower than expected supply ‎during a challenging period may be a welcome relief for the market.

The writer can be contacted at avi@diamonds.net.

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.

Copyright © 2012 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.

Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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Tags: Alrosa, Avi Krawitz, De Beers, Diamond Trading Company, diamonds, DTC, Jwaneng, Philippe Mellier, Rapaport
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