De Beers registered a higher than usual volume of sales in the first quarter following a “strong” rebound in demand levels for lower value stones during the first sales cycle of 2017.
The unexpected introduction of demonetisation in India late last year had resulted in weak demand, albeit temporary, for smaller, lower quality rough diamonds from the Asian country’s cutting and polishing industry.
De Beers had to temporarily put in place some additional flexibility for Sightholders purchasing a range of lower value rough diamonds following the introduction of the Indian demonetisation programme, as they recognised the challenges some customers would face as they adjusted to the new monetary environment.
However, group senior manager, media and commercial communications, David Johnson told Rough & Polished’s Mathew Nyaungwa that the diamond giant was now projecting sales volumes for the rest of the year returning to more normal levels as demand was more balanced across the assortment.
He said the group had already reverted to the normal supply situation with its Sightholders.
Below are excerpts of the interview.
De Beers sold almost double the diamonds it mined in the first quarter. Does this show that the group is now clearing stocks that piled up after India’s demonetisation?
The sudden introduction of demonetisation in India in late 2016 led to a temporary reduction in demand for smaller, lower quality rough diamonds from India’s cutting and polishing industry.
It appears, however, that the impact of demonetisation has been less pronounced than first anticipated. The first sales cycle of 2017 saw a strong rebound in demand levels for these lower value stones, which is why there was a higher than usual volume of sales in the first quarter.
However, we anticipate sales volumes for the rest of the year returning to more normal levels as demand is more balanced across the assortment.
The group allowed its clients room to refuse more of its cheaper stones than usually allowed under complex offering arrangements following the Indian policy. Is this still the case and are you achieving intended results?
We temporarily put in place some additional flexibility for Sightholders purchasing a range of lower value rough diamonds following the introduction of the Indian demonetisation programme, as we recognised the challenges some customers may face as they adjusted to the new monetary environment.
However, as we have seen demand for this material return to more normal conditions, we have reverted to the normal supply situation with our Sightholders.
Barclays Bank analysts suggested that your first quarter figures show that the group reduced stocks by 6.7 million carats, or 43 percent more than for the whole of last year. Is this assessment correct, if so will you continue at the same rate?
In the first quarter of 2017, De Beers Group produced 7.4 million carats of rough diamonds, but sold 14.1 million carats. However, as noted above, a high percentage of this sales volume was of the lower value material that saw low demand at the end of 2016 (as the demonetisation programme was introduced). As such, there was a significant reduction in the volume of inventory to the tune of 6.7 million carats, but this was mainly due to the average price of the material sold in the first quarter.
We have now seen demand return to more normal levels across the assortment so we would expect sales and production volumes for the rest of the year to be more in balance.
The same analysts also raised concern over the sustainability of the current market environment. Do you share the same sentiments?
De Beers takes a responsible approach to the sale of rough diamonds in line with demand from our customers. We continue to experience good rough diamond demand from customers and global consumer demand for diamond jewellery remains robust.
As Indian demonetisation was a one-off event, and as demand levels have stabilised, the industry has reverted to more normal trading conditions.
It is also important to recognise that, while there was an increased volume of sales in the first quarter, most of this was in the lower value area as a result of the rebound in demand from Indian cutters and polishers following significantly reduced demand in this area at the end of 2016.
What is your projection of the diamond market for the second half of the year?
The US consumer market is expected to continue to be the main driver of global demand for diamond jewellery in the second half, although we have also seen improvements in the Chinese and Indian consumer markets this year when compared with 2016.
The extent of global growth in 2017 will be dependent on a number of macro-economic factors, including the strength of the US dollar impacting consumer demand and economic performance in China.
Bloomberg cited unnamed sources claiming that De Beers has cut the amount of gems it plans to sell to some clients by about a fifth. What is your comment on this?
The total value of allocations in terms of the 2017-2018 ITOs (intention to offer) is lower, as we have lower forecast availability for the forthcoming ITO period versus what we had forecast at the start of the 2016-2017 ITO year.
The amount by which individual ITOs have changed varies by location and pool of availability (i.e. international ITO, Botswana beneficiation ITO, Namibia beneficiation IT, South Africa beneficiation ITO), as well as each customer’s own demonstrated demand and the availabilities for the particular categories of goods in which they have an ITO.
While we can’t give out the detailed amounts and changes for commercial reasons, the overall impact has been biggest in the international ITOs as our producer country beneficiation commitments have seen a greater share of our availability being allocated through these channels.
The group had been directing more sales to Botswana, Namibia and South Africa. Will this affect supply during the 2016-2017 ITO year and beyond?
De Beers Group has a number of commitments to beneficiation sales in the countries of our producer partners and last year we signed a new 10-year sales agreement with our government partners in Namibia.
Over time we have seen an increasing amount of our global availability sold through beneficiation channels and the new sales agreement with the Government of Namibia also provided for the establishment of a new government-owned trading entity, Namdia, which will sell 15% of Namdeb’s rough diamond production each year.
What is your projected impact of output from Gahcho Kué in Canada for the group this year in terms of volume?
Unfortunately, we do not publish forward-looking production data on a mine-by-mine basis. However, we have been very pleased with the progress of Gahcho Kué to date. The mine achieved commercial production in March, on budget and ahead of schedule, and will be an important contributor to De Beers Group’s global production portfolio.
Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished
