Industry
Improved Rough, Stagnant Polished Sales
The major mining companies have curtailed their operations, while some smaller – but significant – mines are coming on stream even as polished demand is sluggish.
By Avi Krawitz
The major diamond mining companies have contained their rough production amid declining polished demand in the first half of 2016. That is, at least while they reduce rough inventory built up last year, as there still appears to be an overhang of supply in the market. Indeed, recent data confirmed what dealers and manufacturers have been saying all along. The diamond market has been characterized by improved rough sales, stagnant polished trading and manufacturing and reduced mining production during the first half of 2016. The polished market was particularly quiet in July as slow demand was compounded by the U.S. wholesale market shutting down for the annual summer vacation period. Dealers in Antwerp and Ramat Gan were readying for their vacations in August. Sentiment therefore weakened, with dealers frustrated by sluggish demand, rising inventory and tight profit margins. Polished prices softened and the RapNet Diamond Index (RAPI™) for 1-carat diamonds fell 1.4 percent from July 1 to 25. RAPI for .30-carat diamonds declined 1.2 percent and RAPI for .50-carat diamonds slipped .5 percent. RAPI for 3-carat diamonds dropped 1.7 percent (see RapNet Diamond Index [RAPI™] chart in slideshow).
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Rough trading increased during the half year, marking a sharp turnabout from the slump in demand during the latter part of 2015. With manufacturing levels at an estimated 70 percent of capacity, rough and polished inventory levels have built up in the midstream, with the number of stones listed on RapNet, Rapaport’s diamond trading network, significantly up from January. Improved rough demand lifted mining company results for the period. De Beers reported sales volume rose 31 percent year on year to 18.3 million carats, while the average price declined 14 percent. Similarly, ALROSA’s sales volume increased 21 percent to 21.7 million carats with the average price achieved for its gem-quality production declining 7 percent. Higher sales and lower production have helped the mining companies reduce inventory built up in 2016. Wiktor Bielski, an analyst at VTB Capital, estimated ALROSA’s inventory fell by 4.8 million carats in the first half to about 17 million carats — “just 2 million carats above ALROSA’s estimated normalized level.” Bielski expects a small increase in inventory in the “seasonally weaker” second half. ALROSA subsequently cut its production guidance for the full year to 37 million carats after output fell 16 percent in the first six months. The decrease indicates a shift in strategy after the Russian miner maintained production growth of 6 percent in 2015 — despite the slump in market conditions. ALROSA’s reasoning at the time was that it was more cost effective to hold inventory than scale down its operations. In contrast, De Beers had already reduced production in 2015 to match lower levels of polished demand. And this year, the company placed its Damtshaa mine in Botswana and the Snap Lake operation in Canada on care and maintenance — with the latter also reportedly being put up for sale — and sold its Kimberley mines in South Africa. The contrasting strategies helped cement Russia’s position as the world’s largest diamond-producing country ahead of Botswana, which is the center of De Beers operations.
Global production by volume rose 2 percent to 127.4 million carats in 2015, according to recently published Kimberley Process (KP) data. Output by value fell 4 percent to $13.88 billion as the average price fell 6 percent to $109 per carat. Russia accounted for 31 percent of global production by value, up from 26 percent the previous year, while Botswana’s share slipped to 21 percent from 25 percent (see Share of Global Diamond Production by Major Mining Centers chart in slideshow). The decline is projected to continue this year as De Beers and ALROSA have curtailed their production and work through leftover inventory. Mid-tier and smaller miners have maintained their production, as they don’t have sufficient volume to impact the market conditions. Three such companies are even preparing to launch new mines in the second half of 2016 that will partially offset the declines at De Beers and ALROSA. The largest of those mines is Gahcho Kué in Canada, a joint venture between De Beers and Canadian mining company Mountain Province. It is projected to ramp up to 5 million carats in 2017. Stornoway Diamonds’ Renard mine, also in Canada, is expected to yield about 1.8 million carats, while Firestone Diamonds’ Liqhobong mine in Lesotho is on track to produce between 380,000 and 450,000 carats next year. Patrick Evans, president and CEO of Mountain Province, dismissed the idea that the timing was not ideal to launch a diamond mine. “We’re not going to move the dial in terms of global production,” he told Rapaport Magazine. “Mountain Province’s 2.5 million to 3 million carat share of Gahcho Kué production is not an extraordinary volume the market will have difficulty absorbing. So we don’t anticipate disrupting the supply-demand balance that has been achieved.” Whether that apparent balance will be maintained during the seasonally weaker second half remains to be seen as the outlook for the market remains cautious. “Higher rough demand may have been the result of hopes that end-demand may improve and result in a drawdown of inventories,” analysts at ABN AMRO wrote in a note about the diamond sector. “But the improvement in end-demand remains fragile and this doesn’t justify higher polished and rough diamond prices. We think rough diamond prices will struggle and lower prices are likely in the current environment.”
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