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31 august 2015

excl_31082015_xx.jpgDiamond giant De Beers, which has so far this year adjusted its sales terms for sightholders due to weak diamond market, has said that it is cautiously optimistic for the outlook in the major consumer markets for the all-important end of year selling season.

The end of year selling season was often characterised by higher sales in the US market, which consumes about 40 percent of global diamond production.

Soft diamond prices in the last quarter of last year overlapped into this year, although analysts posit that the softness was unrelated to the downturn in global commodity markets.

De Beers Group head of media relations Lynette Gould told Rough & Polished’s Mathew Nyaungwa from her base in London that demand conditions in the near term would be dependent upon consumer demand, retail stocking appetite and the rate of midstream inventory depletion.

She also commented on the group’s move to provide increased deferral flexibility in sightholder sales as well as its new licences that were granted in Botswana and South Africa.

Below are the excerpts.

De Beers has twice been forced to make adjustments to its sales terms for sightholders as a result of the weakening market. How bad is the market?

The diamond industry began to face unusual pressures in Q4 2014 as consumer demand growth was softer than expected and the GIA backlog was cleared; this led to abnormally high pipeline inventories of polished diamonds at the start of 2015.

Growth in consumer demand for diamond jewellery has also been constrained in 2015 due to weakness in the macroeconomic environment (with Chinese growth slowing and the stronger performing US market also seeing difficulties in Q1) and USD strength impacting demand in non-USD denominated areas (Japan, India, South Korea and, to an extent, China).

Chinese demand has been particularly challenging with slowing in growth in Q2 2015, a reduction in new store growth and weak Hong Kong and Macau sales over the last nine months having led to significant issues relating to the demand for new polished (which contrasts starkly with previous years' inventory building).

When combined with the ongoing liquidity/profitability challenges faced in the midstream and the concern over recent bankruptcies in India, this resulted in significant indigestion throughout the pipeline. This in turn brings its own cash flow pressure, which has been compounded by the introduction of new banking norms and reduced credit provision within the trade resulting from concerns over the solvency of midstream trading partners.

However, there continues to be a decent level of consumer demand for diamond jewellery at the retail level globally even if growth has slowed. 2015 is expected to show the value of consumer demand for diamond jewellery being stable on 2014 at worst - and 2014 was a record year at $81 billion. Once the oversupply of polished in the pipeline resolves itself we will see better balance return to the industry and improved demand conditions within the trade. We have come a long way through the most challenging period and, once the current challenges restore themselves, we can look ahead with more optimism as medium to long-term demand is very attractive.

Do you see the market taking a rebound anytime soon?

Demand conditions in the near term will be dependent upon consumer demand, retail stocking appetite and the rate of midstream inventory depletion. We are cautiously optimistic for the outlook in the major consumer markets for the all-important end of year selling season.

Is the group expected to make further adjustments should market sentiment continue on a downward trajectory?

We have already had to make some short-term changes in light of the difficult trading environment. First, we have trimmed our 2015 production guidance from 32-34 million carats to 29-31 million carats in response to reduced sightholder demand. Second, we've provided increased deferral flexibility in our global sightholder sales. And third, over the first half of 2015 we've adjusted our rough prices based on prevailing market conditions whilst taking a long term, sustainable view on pricing. Of course the reality is that there was never going to be a 'silver bullet' that would immediately solve all the industry's problems when we are facing such a range of pressures; however, we will continue to monitor the situation carefully and take appropriate actions. 

What was the level of rejections by sightholders in the July sale?

We don't comment on this.

What is the projected outcome of your next sight?

Again, we don't forecast numbers for forthcoming Sights.

Can you comment on reports that De Beers is expected to permit buyers during the August sight to defer up to 75% of their sight, with an option to buy them at any of the three remaining sights this year and the first three next year?

Yes, sightholders will be able to defer up to 75% of their Sight with an option to re-plan not only those deferred goods, but also their remaining in-plan goods, at any of the remaining six sights in this ITO period, that is Sight 8, 9 and 10 of 2015 and Sights 1, 2 and 3 of 2016. We recognise that this is a challenging period for our customers and this should provide them with extra flexibility during this time. Coupled with the continuing support we will provide during the rest of the year, this will, we hope, help provide a platform for better industry prospects in the second half of 2015.

De Beers lowered its full-year production forecast to between 29-million and 31-million carats from 32-million to 34-million carats. Is this an adjustment influenced by the prevailing weak market conditions and which operations are cutting down on production?

Given the challenges faced in the midstream during the first half of 2015, rough diamond demand for 2015 as a whole is expected to be lower than the initial outlook, hence our reduced production guidance. Much of the planned reduction comes from built in flexibility at our tailings plants at Jwaneng and Venetia Mines, but the remainder will be spread across all the operations.

Is the group pleased with the recent marketing and sales deal that you reached with the Namibian government? Can you shed more light on the points agreed on?

We have a long and proud partnership with Namibia, going back more than two decades. This new agreement in principle is for 10 years and demonstrates De Beers' continued commitment to ensuring that diamonds from Namibia continue to play a key role in the socio-economic development of the country.

By way of background, this is a new 10-year sales agreement for the sorting, valuing and sales of all of Namdeb Holdings' diamonds (production from Namdeb and Debmarine Namibia). The agreement will be the longest sales contract ever agreed between the two partners. Namibia Diamond Trading Company will continue to sort and value all Namdeb Holdings' production. De Beers will continue to support the domestic cutting and polishing industry in Namibia, and will increase its commitment by making more diamonds available for manufacturing businesses operating in the country. The agreement will provide for an independent sales outlet for the Government of the Republic of Namibia for 15 per cent of Namdeb Holdings' run of mine production, per annum, over the duration of the sales agreement.

Can you provide an update on De Beers' diamond exploration project in Angola and what are the changes of De Beers finding new deposits in South Africa?

Discussions with the Angolan government and Endiama for a Mineral Investment Contract are on-going and comments by Angola's Minister of Mines, earlier this year, have been very encouraging. We typically spend around $40m per year on exploration across Canada, Angola, Botswana and South Africa. Botswana remains highly prospective and we were granted four new licenses in 2015; three in the Tsabong Area, and one in the Orapa area. The Orapa licence [is] of some significance. New reconnaissance and prospecting permits have also been awarded in South Africa in the Limpopo, Northern Cape and Free State Provinces, which is very encouraging.

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished