Increase in profits when the diamond market begins to replenish its reserves again

Today, the diamond market is on the brink of collapse, and in order to retain at least some chance to regain growth prospects, De Beers will have to reduce prices by 10-20% - and it's not about making profits Diamond processing enterprises. Since prices in 2015 reached the heights, it is simply unrealistic to hold on, the mood in the market fell to the lowest level in six years.

Although reports of bankruptcies, unavailability of loans, low liquidity and even reports of suicides of people on a professional basis, resemble the times of the global crisis, this time is different. Then the decline in the diamond market was due to macroeconomic factors. Last year the difficult situation was provoked by the trade itself, and to a large extent from the supply side.

Therefore, sightholders deserve praise for having abandoned 65% of the goods offered on the De Beers website in July (see the website report here). The authors of this column called on diamond processing companies to abandon the unfavorable acquisitions of rough diamonds for most of the past 12 months (see Rough Price Correction - Part 2, published on January 30). So while De Beers and, for that matter, ALROSA, slightly reduced prices in the first half of the year, these declines were insufficient.

De Beers hoped for an increase in demand for previously deferred goods in the second half of the year. Supporting supplies at a low level - allowing sightholders to postpone the purchase of 25% of the product throughout the year - the company expected that the diamond and diamond reserves of the cutters would be depleted enough for companies to resume purchases for the holiday season.

However, diamond manufacturers are not ready to buy goods, if their acquisition is unprofitable - these are the basic principles of the economy. They make their decisions on buying rough diamonds based on (falling) prices for diamonds, and not on the basis of long-term supply interests. If the price of diamonds is not matched with the price of diamonds, diamantaires will refuse the goods on the next site, scheduled for the week of August 24-30.

Deliveries for the holiday season from surplus diamonds

There remain questions about whether there will be a sharp drop in prices enough to stimulate the purchase of rough diamonds. Perhaps, diamantaires are even happy that they do not deal with the diamond market, trying to reduce their large stocks of diamonds. As one of the sightholders told Rapaport News, jewelers will receive supplies [for the festive season] mainly from surplus diamonds, not from diamond mining companies, since rough diamonds are almost not involved in the supply system.

This may help to some extent normalize the market in January, when stocks will decrease enough to stimulate demand after the holiday season. Taking into account the fact that the traditional replenishment of reserves did not occur in the first quarter of 2015, and in June nothing was done, it will happen at the latest in 2016.

Analyst RBC Capital Markets Des Kilalea suggests that De Beers strategy is rather to try to keep prices and sacrifice sales volumes in the hope that current prices will be perceived as reasonable in 2016, when it will be possible Sell large volumes of diamonds. "The problem for De Beers is that if prices fall by 10-15%, three years will be needed to return to the current level," he suggests.

The problem for diamond manufacturers, however, is that if prices for rough diamonds do not drop, in January supplies will continue to be unprofitable. Prices for diamonds are still under pressure, and their noticeable growth in 2015 is not expected.

The vicious circle will continue

Diamond producers should be confident of a steady increase in profits when the diamond market begins to replenish its reserves again. If the expected rise in diamond prices, in turn, will be an incentive for the price increase for diamonds in 2016 compared with the current as a starting point, the price race will begin again, and the vicious cycle will continue.

All this leads us to the consequences for Anglo American, which owns an 85% stake in De Beers. Although in 2014 De Beers was the best asset for Anglo American in terms of financial performance, Kilali predicts that the financial return of the diamond unit, which is due to report on July 24, in the first half of 2015 was reduced by 50%. This would mean "another financial blow" for the mining conglomerate, Kilali wrote in the publication of a memorandum before investors for publication.

Losing money Anglo American would not like to see a low sales volume coupled with substantially lower prices in the second half of 2015. Sales on the July site, which are estimated at $ 200 million, already represent a significant reduction in comparison with previous years. In July and August, sites are traditionally the largest in the year, when diamond producers store raw materials for the festive season.

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