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Lower Diamond Production

01 august 2012

Predicting the diamond market can be tricky at times, particularly for those on the supply ‎side of the pipeline, Avi Krawitz says in his analysis of July 27 posted on 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.