“The major mining companies have much to be pleased about. It appears that 2010 was a strong year across the board. Heavy-weights BHP Billiton and Rio Tinto posted record profits in the recent fiscal half year as they rode the wave of the commodities price boom with demand spurred by strong growth in emerging markets and signs of recovery in developed economies. Significantly, supply constraints also helped stimulate growth,” says Avi Krawitz in his article posted on www.diamonds.net which is given below with some exceptions.
Still, the familiar chant of “cautious optimism” was stressed on more than one occasion, and by more than one chief executive. From their perspective, the mining companies have good reason to be both positive about the market and concerned about economic trends.
The optimism of the chief executives is fed by the quite sensational financials that are being published by the sector: BHP Billiton’s group revenues rose 38 percent year on year to $34.2 billion during the six months that ended December 31, 2010, while profits grew 72 percent to $10.5 billion. Rio Tinto’s full-year 2010 results showed that revenues increased 37 percent to $60.3 billion while net earnings jumped 194 percent to $14.3 billion. Xstrata doubled its profits.
Their concern is focused on macroeconomic issues, which according to BHP Billiton remains the main influencing factor on short term price movements and attitude, and is expected to slow the pace of growth in 2011.
BHP Billiton’s chief executive officer (CEO) Marius Kloppers stressed that despite economic growth, improving retail sales and employment in developed economies, the level of sovereign debt that persists remains a challenge that could still reverse the positive trends. He also warned of a possible “overheating” of the emerging economies in China, India and Brazil, while inflation in all markets remains a serious challenge that will inevitably bring further tightening measures.
Rio Tinto’s CEO Tom Albanese added that the timing and speed at which post-crisis government stimulus packages are removed have the potential to generate both volatility and upswings in commodity prices.
Both Kloppers and Albanese expressed a positive short-term pricing outlook for commodities due to supply constraints, which Kloppers explained was being impacted by factors such as weather, as well as “the challenges of bringing on new supply, particularly given an industry-wide withdrawal of capital during the year of financial crisis.”
To sum up, they predicted that supply shortages, together with economic growth, is expected to continue to stimulate demand and prices in 2011, albeit at a slower pace than last year.
The same could be said for the diamond industry. While demand for diamonds in 2010 was driven by economic growth in developing countries and a recovery in mature markets, supply-side management ensured that rough diamond prices stimulated diamond miner’s profits for the year.
De Beers reported that its rough prices rose 27 percent during 2010, while the diamond divisions at BHP Billiton and Rio Tinto, along with lower level producers such as Petra Diamonds, Gem Diamonds, Trans Hex and Namakwa Diamonds, all stressed robust rough price recovery which boosted profits.
While there was a significant ramp up of supply throughout 2010, with De Beers selling 38 million carats, of which about 5 million carats was from stock, there remains a cautious supply outlook for the current year. De Beers is expecting 2011 production to rise by 15 percent to approximately 38 million carats, meaning that actual supply will probably be about the same as last year.
Echoing Kloppers and Albanese, De Beers executives said they expect the pace of growth, and therefore price increases, to slow in 2011. They cited similar macro-economic, as well as geopolitical concerns, which may have a negative impact the diamond market.
For now, however, the uptrend appears to have continued with higher prices boosting sales.
Many have expressed that shortages of polished goods is the result of the lack of rough coming to through the manufacturing sector due to unreasonably high rough prices, particularly on the secondary market. Another concern suggests that dealers have been buying rough, and polished for that matter, in anticipation of future increases, while further reports from the market indicates a genuine demand for rough stemming from good demand at the consumer level.
With rising sales and shortages of goods on the market, the diamond mining companies continue to walk a fine line in their rough supply management. Just as in the commodities market, supply constraints, be they artificial or not, together with projected economic and consumer growth, is expected to continue to stimulate demand and prices.
Barring any major economic event, and regardless of the macroeconomic concerns they expressed, the signs are there that 2011 may well be another profitable year for the diamond mining sector. It is therefore hoped that their supply mechanisms will ensure reasonable prices which can enable growth throughout the industry.
