The ranking of producer states in 2009 by the Kimberley Process created something of a surprise, with Russia in first place and Canada second, Antwerp Facets writes.
To say that 2009 was a pivotal year for the diamond industry might be something of an understatement. In the wake of the global financial crisis that struck in the final quarter of 2008 and the widespread recession, particularly in the United States, which lasted much of 2009, the diamond industry was forced to make many changes.
Statistics recently released by the Kimberley Process Certification Scheme (KPCS) give an indication of what happened last year, albeit a skewed one for various reasons. Furthermore, continuing developments at De Beers, still the largest single diamond miner in the world, indicate the pressures under which diamond producers are operating.
In addition, there is the issue of some diamond marketing methods which are causing concern to diamond manufacturers. Selling diamonds at tenders and via fixed contracts may be seen as discriminating against smaller and medium-size firms that do not have the financial muscle to take part. Moreover, the clear need for a global diamond marketing body to promote diamonds, as De Beers did until recently, has still not got off the ground.
The KPCS announced in July that worldwide diamond output dropped 32 percent by value in 2009, due to falling prices and large-scale cutbacks in production in the main mining centres in the face of slumping demand. Indeed, the value of output in 2009 came to $8.6 billion compared with $12.7 billion in 2008. In volume terms, the fall was slightly less severe, dropping 24 percent to 124.8 million carats, while the average price per carat of diamonds decreased by 11 percent on the year to $69.2 per carat.
Of more interest was the ranking of diamond producing states. Russia was named by the KPCS as the largest diamond producer in both volume and value terms. However, that was due to the country's mining monopoly Alrosa maintaining almost full mining capacity at its mines despite falling demand, which was likely under political orders, since the Kremlin did not want to see a hike in unemployment in the mining areas.
The result was that the Russian Finance Ministry made funds available to enable the state precious minerals repository, the Gokhran, to buy Alrosa diamonds to ensure the market would not be flooded. De Beers, by way of contrast, swiftly moved to temporarily close down mines and slashed production.
Russia’s rough diamond production for 2009 had a value of $2.34 billion from 34.76 million carats. That compares with figures of $2.51 billion and 36.93 million carats in 2008. Meanwhile, Botswana, the leading manufacturer by value until 2008, was third since its output had a volume of $1.44 billion compared with $1.47 billion for second-placed Canada. However, in volume terms, Botswana was far ahead of Canada with 17.73 million carats compared with Canada's 10.95 million carats.
Botswana's output dropped 56 percent due to production at Debswana, jointly owned by De Beers and the Botswana government, being slashed. Meanwhile, Angola was ranked in fourth place, followed by South Africa. With Debswana returning to full production, the figures for 2010 are likely to be substantially different.
As for De Beers' financial performance in the first six months of this year, it was a huge improvement on that of 2009 with strong growth in sales and earnings due to the recovery in the diamond market. Total sales were $2.98 billion, a 74.1 percent rise on the $1.71 billion registered during the first half of 2009. Production of rough diamonds soared 133 percent to 15.4 million carats, while sales of rough diamonds by the Diamond Trading Company jumped 84 percent to $2.6 billion as a result of increased demand from retail markets, particularly India and China, as well as restocking by the trade, the company noted.
Gareth Penny, De Beers, outgoing CEO, oversaw the reduction of the De Beers' cost base globally by 45 percent, and staffing levels by 25 percent in 2009. Meanwhile, at the end of June, De Beers’ net debt amounted to $1.98 billion, compared with $3.20 billion at the end of December 2009. De Beers’ third party debt was $ 1.87 billion, down from $3.09 billion at the end of December.
However, if anyone believed that was the end of the changes at De Beers, they were further surprised in August when news leaked out that the miner was planning to sell off its Finsch and Namaqaland mines in South Africa. The miner is apparently less interested in what it regards as smaller mining operations, and is concentrating on production from its large mines, such as Jwaneng in Botswana.
Meanwhile, at the world's second-largest producer, Alrosa, comments from a senior executive in August confirmed that it was selling around 60 percent of its goods via long-term contracts and aimed to raise that figure to 70 percent within two years. "In the first half of 2010, sales were $1.97 billion, with around 60 percent being sales under long-term agreements," Yury Okoemov, the company's vice president for sales, told Interfax. "Another 10 percent was sold at competitive trades, including auctions for the sale of diamonds of special size. The remaining 30 percent, were sales under one-time contracts and on the spot market," Okoemov said.
In addition to Russia, Alrosa has long-term deals with buyers in Belgium, India and Israel with a total of 24 companies. The firm is also holding talks with companies in China, Armenia, and Belarus, and a number of other companies in Russia, Israel, and India. Okoemov defended long-term contracts as being the most transparent and stable sales format from the price standpoint.
"During auction sales the price is set by the buyer, judging from an understanding of the value of the end product at the moment of sales and [the buyer's] own evaluation of the medium-term perspective. Expectations of growth give the seller an additional advantage, and when a downturn or stagnation is expected - a disadvantage," Okoemov said.
However, many sectors of the diamond industry are in strong disagreement regarding auctions, not least of all the World Federation of Diamond Bourses (WFDB). The WFDB general assembly debated the issue at the World Diamond Congress in Moscow last month and said the marketing method was unfair to small and medium-size firms who do not always have the financial means to attend auctions or to compete with large companies during bidding.
In addition, the WFDB said, auctions did not allow companies to plan ahead or to fulfill programmes which demand a guaranteed supply of goods. The WFDB members were not persuaded, either, by claims from diamond producers who sell at auctions that the method enables buyers to purchase goods at a fair market price.
As for the issue of global diamond promotion, the International Diamond Board (IDB), set up by a range of diamond industry stakeholders, appears to be having problems getting off the ground. The IDB is a joint effort of a working group of representatives of the International Diamond Manufacturers Association, the De Beers Group, Rio Tinto Diamonds, BHP Billiton Diamonds, Alrosa and Harry Winston, and others who met for the first time in St. Petersburg, Russia, in 2008.
The IDB was officially launched in July 2009 with the aim of creating and sustaining strong consumer demand for diamonds worldwide through effective category marketing. This is due to include implementing communication and public relations activities aimed at sustaining consumer confidence.
