Let’s set our sights on the auctions

| September 30th, 2019

Let’s set our sights on the auctions
"Let’s set our sights on the auctions"

It’s time to break the rough supply cycle. 

De Beers’ first-half earnings highlighted the many challenges facing the diamond trade. But beyond the sharp declines the mining company suffered, CEO Bruce Cleaver and chief financial officer Nimesh Patel were insistent with their messaging: This, too, shall pass.

The executives recognized that the challenges came from within the trade rather than a slump in consumer demand, even as they acknowledged the prevailing macroeconomic uncertainty. They observed that there was excess polished inventory and a shortage of liquidity in the midstream.

De Beers also pointed to retailers’ more conservative approach to inventory management. Jewelers are holding fewer goods in-store and taking more supply on consignment. They’re buying less from diamond manufacturers, which in turn require less rough from the miners.

These developments are not new; they have been evolving since the 2008 financial crisis. Their impact is being felt now because of the excessive volume of rough pushed onto the market in 2017 and 2018. The midstream is under pressure from both the mining and retail ends — but more so from the mining sector.

More flexibility

Global rough production rose 19% in 2017, or approximately 24.5 million carats, according to Kimberley Process data. That was the year three new mines came onstream: Gahcho Kué, owned by De Beers and Mountain Province; Stornoway’s Renard mine; and Firestone’s Liqhobong operation.

Their timing was unfortunate given the weak market — particularly for Stornoway, Firestone and Mountain Province, which have only one diamond-producing asset each. De Beers, for its part, chose short-term gains in the last two years by selling as many diamonds as it could — with minimal adjustments to rough prices — at a time when midstream inventories were rising and polished prices declining.

Now, De Beers is trying to position itself as a market savior through Cleaver and Patel’s messaging and the “flexibility” the company showed in July, when it allowed sightholders to defer large portions of their purchases until later sales.

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Source Rapaport

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