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Rough Producers May Cut Prices Further: Moody’s
Dec 15, 2015 7:49 AM
By Rapaport News
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RAPAPORT... Rough diamond
producers will have to slash prices further as a 28 percent slump from a peak
in 2014 may be insufficient to revive demand, according to Moody’s Investors
Service.
Miners will remain under pressure over the next
12 to 18 months because of slowing jewelry sales and cutters and polishers’
reduced access to credit, which have caused a temporary mismatch between supply
and demand, the credit rating agency said in a report December 14.
Rough diamonds prices have fallen 18 percent in the first 11
months of 2015 and dived since 2014, according to the report, "Metals
& Mining -- Global: Diamond Miners May Have to Cut Prices Further to Revive
Demand.”
"The latest drop in diamond prices, which
are down about 28 percent from a peak in 2014, may be insufficient to revive
demand and we think producers may have to cut prices further as supply and
demand challenges continue into 2016," said Denis Perevezentsev, Moody's vice
president and senior credit officer as well as a co-author of the report.
"Producers' decision to scale back production and/or
sales will help rebalance the market over the next 12 to 18 months."
ALROSA reduced prices by 3 percent in February 2015 and by
another 3 percent in April. It cut prices by 8 percent in the third quarter of
2015, Moody’s said. De Beers lowered prices by 8 percent between the end of
2014 and June 2015 and slashed them by another 8 to 10 percent in August.
Miners with production facilities outside the U.S. will
benefit from lower costs because of a stronger U.S. dollar against currencies
such as the Russian rouble, Botswana pula, South African rand and Canadian
dollar. Costs in dollar terms have declined in line with or slightly less than
diamond prices, partially offsetting the negative impact of lower prices for
companies such as ALROSA, De Beers and Petra Diamonds.
ALROSA,
with production assets in Russia, is the least affected by the drop in prices
because most of its costs are denominated in roubles, which depreciated 42
percent versus the U.S. dollar in 2014, but its revenues are mostly measured in
terms of the American currency. Approximately 90 percent of its revenue in 2014
came from diamond sales, which were in U.S. dollars, while only about 10
percent of costs and 15 to 20 percent of capital spending were in the
greenback, improving its profitability.
The long-term
fundamentals of the sector are solid despite price drops because the limited
number of new high-quality mines and high depletion rates at existing mines
will help prevent an over-supply of diamonds in the long term. Moody’s expects
global rough supply to continue increasing at a compound annual growth rate of
2 percent over the next five to seven years and to peak at 159 million carats
in 2022, up from an estimated 135 million carats in 2015.
Production will start to fall in 2023, propping up miners’ pricing power,
the report forecast.
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Tags:
Alrosa, De Beers, Moody's, Petra Diamonds, Rapaport News, rough prices
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