Diamonds Are Piling-Up
Inside De Beers
Issue 148, December 2015
The pile of diamonds building-up inside mining giant De Beers is rising quickly.
As the diamond sector has softened this year, De Beers has held firm on prices, whilst pulling-back production from 34m to 29m carats, in an attempt to stabilise the market. But sales have fallen far faster, plunging to 3m carats last quarter, versus more than 6m carats produced.
Its fourth quarter will be bleaker still. Sales at its November “sight”, a monthly sale of uncut diamonds, were estimated at $70m, the company's worst sale on record; forecasts for its December sight, due this week, are no less grim.
As a result, De Beers' diamond inventory has rocketed. And at Russian diamond giant Alrosa, which produces a higher volume of lower-value stones, the problem is even worse: the company sold less than half the diamonds it produced last quarter and is now sitting on “in excess of 20m carats”, its finance director said last week.
“We are in unknown territory here,” according to Panmure Gordon analyst, Kieron Hodgson.
By holding firm on prices, both groups are losing money. De Beers' figures are not disclosed, but Alrosa's losses hit 15.4bn rubles last quarter, equal to $227m, up from 10.5bn the quarter before.
Analysts believe there is almost zero chance of either company dashing to release capital from its inventory by slashing prices, releasing a flood of stones onto the market. “Cutting prices by a huge amount isn't one of the options that they'll be considering,” says Stuart Brown, former finance director and interim CEO at De Beers.
Instead, to avoid devaluing their inventory, or their goods in the ground, both companies are more likely to pull-back production further, taking a short-term hit on sales.
Alrosa has mined more diamonds this year than last, but says it is considering production cuts, whilst De Beers put its Snap Lake mine in Canada on care and maintenance on Friday. “I think they do have to pull the production lever,” Brown says. “That's about the only lever they've got right now.”
But for how long can the two groups hold firm on price?
Russia's currency has plunged 60 per cent versus the dollar this year, incentivising Alrosa to over-produce and offering tantalising margins, even at heavily discounted prices. It also has “its own political issues”, an adviser to the company says, “and will keep the production cuts only if De Beers will also.”
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