Diamond jewellery consumers are unlikely to get any respite from high prices this year, as the world’s largest supplier, De Beers, has decided not to raise the production of rough diamonds to maintain its growing appetite in developing countries, says Dilip Kumar Jha, an observer of the Business Standard, in his article posted on www.business-standard.com.
The miner, which produces about 40 per cent of the world’s rough diamonds, raised prices by 29 per cent in 2011, to maintain value in tune with rising global demand. For 2011, it reported a 5.15 per cent decline in output at 31.3 million carats, compared to 33 million carats in the previous year.
“We will continue to prioritise waste stripping and maintenance backlogs and, therefore, no increase in material production is expected in 2012,” said Philippe Mellier, De Beers’ chief executive.
This focus, which began in the second half of 2011 and will continue during the first quarter of this calendar year, will position De Beers to ramp up profitable carat production, as Sightholder demand dictates. In the medium to longer term, industry fundamentals are positive with consumer demand, fuelled by the emerging markets of China and India, outpacing what will likely be level carat production.
The decision is a major setback for India’s diamond processing industry, which procures every 11 of 13 diamonds mined across the world for cutting and polishing.
“Initially, jewellers in India would like to pass on the rupee’s appreciating benefit to consumers by lowering prices. But the overall diamond price would remain up on rising demand from domestic consumers,” said Praveen Shankar Pandya, chairman of Diamond India Ltd.
For demand, the company banks on developing markets and a reversal in buying trend in the US. In spite of uncertainty and barring a global economic shock, the company expects to see continued growth in global diamond jewellery sales, albeit at lower levels than the exceptional growth in 2011. This will be driven by the overall strength of the luxury goods market, improving sentiment in the US (the largest diamond jewellery market), continuing growth in China and the positive impact of the 2011 polished price growth on retail jewellery prices.
Since the US consumes nearly 38 per cent of the global finished jewellery output, exporters have kept a close eye on this market. According to Mehul Choksi, chairman of Gitanjali Gems, the overall US market has turned positive between five to seven per cent, while the company recorded 9.5 per cent growth in sales during the last festival season that ended with the New Year.
Varda Shine, chief executive of Diamond Trading Company (DTC), the distribution arm of De Beers, feels demand for rough diamonds in 2012 will be significantly influenced by retail activity at the end of 2011. Early indications are that retail performance at the year-end was positive, with a stronger performance in the US counterbalancing a weaker performance in the Indian consumer market.
For DTC, 2011 was a successful year. The company recorded its second highest ever sales of $6.47 billion, despite a volatile and fragile macroeconomic environment. Of the $6.47 billion, diamonds worth $1.20 billion were sold ‘in-country’, in accordance with the company’s benefication commitments to producer governments. In 2011, 72 Sightholders (almost half of which were Indians) provisionally qualified for supply during the 2012- 15 Supplier of Choice contract period.
The first half of 2011 saw extremely strong DTC price growth, as a high level of demand for rough diamonds from Sightholders was supported by the ready availability of finance. As the macroeconomic environment deteriorated in the second half, sales were impacted by constraints in midstream financial liquidity. However, 2011 ended with DTC prices far ahead of their positions at the start of the year and healthy demand for diamond jewellery at the consumer level.
During the first half, De Beers’ operations were confronted with a number of challenges, including excessive rainfall in southern Africa, maintenance backlogs, poor contractor performance, skill shortages and strikes. However, the company was able to remain focused on carat production and produced 15.5 million carats, similar to that of the same period last year (15.4 million carats). In the second half, as it became clear the market was beginning to cool, the company decided to focus on maintenance and waste stripping backlogs. By addressing these issues, the company put its mines in a strong position to ramp up production, as Sightholder demand dictated in 2012, Mellier said.
