Sight report, November 2014

H. Goldie and Company Limited

The Sight was estimated to be in the region of $560m and included a range of Ex Plan allocations.

It has to be said that following the Diwali vacation, and the first Sight in the New Year of the Indian calendar, Sightholders were disappointed by the presentations offered and sentiment quickly deteriorated as the week progressed.

Although De Beers had apparently made some small downward adjustments to price in certain areas, mainly in the better qualities, the general consensus was that the mixtures were less attractive when compared to last month and that rough prices had not been adjusted sufficiently to reflect current polished prices.

However the scenario in which we find ourselves is confusing to say the least:

From the De Beers perspective they have, to their credit, stuck rigidly to their pricing strategy during the year, by applying small, almost monthly adjustments, and clearly have confidence that the data available to them suggests that global seasonal demand will be positive and that polished pull through will lead to restocking in the early months of next year. Therefore they feel Sigtholders should also remain confident, and hold a longer term view in order to come through the current challenging period, and it seems certain that in this knowledge De Beers will not adjust prices downward in any significant way as some people on the market had expected.

From the Sightholder point of view it has been widely reported that returns on boxes manufactured have been marginal at best for many months, liquidity remains very tight, polished stocks are high in the centres, Indian factories have both the October and November rough allocations ready to input into factories which will start to open from next week, and polished prices have fallen yet again in the past few weeks, therefore taking the “long term” view is not easy to accept given the current situation and their experience of the past few months.

Sightholders however, despite all their concerns remain unwilling to underpin their rhetoric by refusing boxes (in any significant volume) which can only, and justifiably, strengthen the resolve of De Beers in their policy, strategy and pricing. We believe that total refusals were in the region of $40 – 50m and focussed on the higher value ranges rather than typical Indian boxes, and that “buy backs” we’re pretty much at normal level. Under the circumstances this level of refusals is minimal and probably below the level De Beers themselves had been prepared for.

The traditionally small December Sight is likely in reality to have a fairly substantial start point due to the recent deferrals and Sightholders may well struggle to accept larger Sights so readily if some degree of polished off take and price growth are not evident as the season unfolds.

It is clear that polished prices will have to increase in the coming weeks in order for rough stocks to be manufactured profitably and create a platform for sustainable business going into 2015. If polished prices do not begin to reflect more closely the rough reality, restocking demand when it does come early next year is likely to be factory driven with a greater focus on cheaper, labour intensive material and will not be the kind of demand that delivers a platform for growth in business going forward. This would not be in the interest of any of the stakeholders in the business, and would be a very different scenario to what has been seen in Q1/Q2 of recent years.

Early reports from the rough trading centres this month indicate that rough boxes are in most cases trading below list price, with buyers taking a cautious approach in fear that polished prices might fall further. Only when polished prices are felt to have reached their lowest point will a degree of confidence return to the market.

Mike Aggett, Managing Director

Source H. Goldie and Company Limited