Despite remaining the largest single diamond producer in the world and retaining the enormous prestige within the diamond industry that goes with that position, De Beers has experienced an uncomfortable past 18 months, Antwerp Facets says. It appears that size does not always bring advantages, with its recently published financial results for 2009 showing a huge decline in sales and a large loss for the year.

De Beers, which produces around 40 percent of global production, reported in February that its sales of rough diamonds almost halved last year to $3.2 billion from $5.9 billion in 2008. Its revenue figures provide a stark reflection of the slump in demand for diamonds following the onset of the global financial crisis in the fourth quarter of 2008. The company also reported a $743 million loss for the year, compared with net profit of $90 million in 2008, largely due to an impairment of its Canadian mining assets.

At the beginning of last year De Beers dramatically reduced production at its mines in response to and in line with reduced demand from DTC sightholders, leading to a sharp fall in carats produced compared to 2008. Sightholder demand increased gradually from the second quarter and De Beers responded by increasing its production to 18 million carats in the second half of the year compared with 24 million carats in 2008. That was an increase of 173 percent compared with the first half, resulting in a full-year total of 24.6 million carats, which was 49 percent below the 2008 figure.

Of course, the fall in revenues was expected, and inevitable. The company could not have been expected to continue supplying the market throughout 2009 with the previous levels of goods it had been selling. Indeed, the producer was roundly praised by diamond industry leaders for cutting back supply with the full backing of its three shareholders. This played a significant role in shoring up prices and preventing a collapse in the market.

However, De Beers remains in an unenviable position. The company announced in February that a group of bankers had agreed to renew its outstanding $3 billion borrowing facility, of which $1.5 billion was to become due and payable in March 2010. But the company still needed to ask its shareholders to pump in $1 billion, in proportion to their existing equity holdings, in a bid to reduce overall debt of $4 billion and strengthen the group's balance sheet.

De Beers’ three shareholders are Anglo American Plc which owns 45 percent, South Africa's Oppenheimer family with a 40 percent holding, and the Botswana government which owns the remaining 15 percent.

Looking ahead to the rest of 2010, De Beers expressed caution, saying output would show only a slight increase this year after halving in 2009. "With the fragility of the world economy and perceived weakness of the global recovery post recession, the company would only expect a gradual increase in production levels, sales and prices," a company statement said. De Beer results were impacted by its actions early last year when it slashed output, and Debswana operations in Botswana were closed down completely for three months.

Due to its huge role in the diamond industry, De Beers will always be second-guessed about its future intentions. Observers are asking about the company's strategy in the coming years due, in part because operations in its three main mining countries – South Africa, Botswana and Namibia – all provide significant challenges.

In South Africa, most of it mines are at relatively aged stages and some are approaching the end of their lifespans. The firm's operations in Namibia also have a limited lifespan, and some of the Botswana mines need to go underground to keep producing.

Just last November, the company announced a major $500 million expansion project, Cut-8, at the huge Jwaneng mine in Botswana that will ensure continuous and profitable production at the mine until at least 2025. Although the expansion will create access to a further 95 million carats, with a value in excess of $15 billion over the life of the mine, the estimated project cost is likely to cost $3 billion over the next 15 years for De Beers and its partner in Debswana, the Botswana government.

Meanwhile, some analysts believe that after selling only $3.23 billion of rough stones in 2009, it is likely to raise that figure to just $4 billion in 2010. That has several implications. Firstly, its market share would fall from just over 40 percent in 2009 to little more than 30 percent in 2010. Industry commentator Chaim Even-Zohar believes that De Beers would need to sell around $5.4 billion of rough goods this year to maintain its market share and prevent prices from shooting up.

Secondly, it would lead to supply shortages at a time when the global economic recovery is forecast to gather pace. And thirdly, it may show that De Beers, aware as it is that its mines are depleting and attempting to maximize existing operations while searching for new mines, is in no hurry to increase output.

Reducing production and mining the diamonds at a later date, when prices will inevitably be much higher, has a compelling market logic. Stephen Lussier, De Beers Executive Director of External and Corporate Affairs, said the company plans to "significantly reduce production levels to align them with levels of demand. There’s no point in digging a diamond out of the ground when you don’t have a client ready to buy it.”

"We have a feeling that De Beers is now entering a new period of what I would call revenue optimisation through output reductions," said Even-Zohar. "Getting better prices for fewer goods, and extending the lives of the mines. If we read the map correctly, we are entering a new era. The main beneficiaries will, as always, be the other producers. They have always enjoyed a good profitable ride on the De Beers coattails."

Will such a strategy on the part of De Beers lead to a further increase in the difference in prices between rough and polished? And with diamond firms stretching themselves to the hilt in order to continue buying rough stones, will this prove to be a tipping point that will lead to more bankruptcies and industry consolidation, which many had forecast would happen last year as a result of the financial slowdown. The diamond business came out of the recession in relatively good shape but further sharp price rises, following those since mid-2009, could create new financial difficulties for diamantaires.

De Beers, for its part, described the estimated output in 2010 as a "speculative prediction" according to spokeswoman Louise Prior. "We don't yet know what our sales will be or how well the industry will perform in 2010. What we have seen of late is an increase in demand from sightholders as the world gradually emerges from recession. We expect this trend to continue but it's much too early at this time and too complex given the world economy to put a figure on full year sales. Likewise Chaim's estimate of De Beers' market share is a mere assumption as this calculation is dependent on many factors including the sales in 2010 of other producers."

A reduction in De Beers supply is also seen as inevitably having an effect on the banks that finance the diamond industry. On the one hand, they may have to make difficult decisions as to whether they are willing to finance their clients' purchases of rough diamonds when they are constantly rising. On the other hand, with fewer goods available, banks may find themselves having to provide less credit.

Prior, however, believes diamantaires simply need to exercise caution. "Consolidation can be healthy for an industry if it delivers synergy and/or other benefits. Whilst we cannot comment on individual businesses, we believe widespread bankruptcies should be avoidable if diamantaires, as they have done in 2009, continue to give considered thought to their requirements."

But there is a further implication of reduced supply to the market for the entire mining industry. As a result of the slowdown last year, De Beers aggressively reduced costs, achieving a $900 million reduction in production and operating costs, which was down 45 percent on 2008. That unavoidably meant miners and other employees losing jobs, as the firm slashed its global workforce by 23 percent, but it also means far fewer orders across all sections of its business with the subsequent impact on suppliers in the countries in which it operates.

A clue as to De Beers' thinking about the rest of this year came in the statement that it released about its 2009 financial results. Demand for rough diamonds was much higher at the first sight of the year in January, and it expected the trend to continue at the February sight. "However, De Beers will continue to take a cautious and prudent approach to production and sales levels for 2010.”

“Consumer demand for diamond jewelry is beginning to recover, driven in part by the strength of the developing markets of China and India. However, with the fragility of the world economy and perceived weakness of the global recovery post-recession, the company would only expect a gradual increase in production levels, sales and prices. Desire for diamonds remains strong and, given the improvement o industry fundamentals, the directors are cautiously optimistic about medium-term prospects."

Alex Shishlo, Editor of the Rough&Polished European Bureau in Brussels