On the last site of De Beers sightholders refused more than half of the goods or postponed its purchase at a later date. According to several sightholders, many abandoned 60-90% of the proposed diamonds. Some did not buy any goods, having refused all allocated volume. The desire to show loyalty and understanding that they will be compensated in the future is a thing of the past. Sightholders now say that they will buy diamonds only if they can make a profit on them.
Such sentiments, although new, already have an impact on diamond mining companies. According to the production and sales figures published in the last few days, diamond miners are beginning to feel the negative impact of failures.
Do they make economic sense?
Despite all the deviations of the allocated volumes, their refusals and postponements, which are used by clients of major suppliers such as De Beers, ALROSA, Rio Tinto, Dominion, etc., why is it that a few bought-out lots are offered in the secondary market? In the end, these parties, bought during this week's sales, should have a good price.
It looks as though even diamonds that have been carefully selected for purchase have not been priced at a good enough price, so that first-time buyers can make diamonds from them. Either of the parties was not profitable, or the diamond reserves in these companies were high enough to ensure the movement of the goods.
The industry can be in such a terrible situation that it seems that almost any action it takes will not lead to a good result. Thus, the first scenario is as follows: if diamond prices decline and the supply volume remains the same, the loss of capital invested in stocks and the inability to sell the diamonds obtained in the same quantities can lead to bankruptcy.
The second scenario is: keeping the price of diamonds and allowing buyers to abandon the goods, while allowing the market to determine the required supply volume, does not seem to be a solution to the problem. Almost no one wants to produce diamonds in the current situation. Most of the purchased rough is sold to the secondary market. Profits (if any) can be obtained through payment terms. This is likely to allow you to service your loans and pay factory overhead. In this scenario, which is already used by many in the market, diamond producers hope that demand for diamonds will grow again at some point. This hope is not a solid basis for business and, in fact, many are slowly walking along this path.
And the third scenario is this: stop selling diamonds completely. This will force the middle part of the diamond pipeline to face the need to accept credit line conditions, because, as mentioned above, some of the credit lines can be supported through diamond trading. Without this key activity in buying and selling diamonds to generate some income on credit terms, most of their business cycle will essentially disappear. This is not a simple situation for diamond producers, because most of their money is tied to their stocks.
In anticipation of further price reductions
Even if diamond prices have fallen and are comparatively low compared to the previous year, most diamond buyers expect prices to continue to decline after they return from their August holidays. This creates a situation of constant purchases of diamonds in small quantities, despite the lower cost.
If this assumption is not correct and they missed the opportunity to buy at low prices, and prices start to increase as people return to work in late August, it is better to pay higher prices and stand firmly on their feet without fear of loans. The rise in prices and the increase in demand go hand in hand. Usually, in such circumstances, we expect an increase in demand for diamonds.
An example of this situation are round cut diamonds weighing 0.30 carats. Since the peak of prices for them, they have fallen in price by 30 percent. Now, if you look at many lots of diamonds, from which these diamonds are made, then the price for them is lower by 25-30 percent. Even if diamond manufacturers buy "cheap" diamonds at a price 30% lower, they still face a non-profitable scenario when cutting and polishing these diamonds. In the absence of profit in the market, they increasingly come to the conclusion that it is better to sit and wait for changes in the business environment if you can afford it. They think it's better to hold your money and try to protect your diamonds until things get better, maybe in November, when the festive season will begin.
Preliminary results of De Beers show a drop in sales volumes
On the site held last week, De Beers customers found that prices did not change the way they expected, and they decided to abandon the goods. Among the group of sightholders who refused the goods, there were diamond manufacturers, traders and even retailers - those who very rationalized business operations. Surprisingly, in some areas there was even a sharp increase in prices. The response was a huge disappointment, according to many sightholders. The hope for further steps in meeting their needs in this difficult time has unfolded.
Large-scale failures reflect an understanding that this is the only way to avoid further losses. If diamonds are offered at high prices, then the movement of diamonds is not fast enough, and diamond trading is a risky business, and then the refusal to purchase additional diamonds is a reasonable step. And that's what most people did. The total cost of the site is estimated at about $ 150-175 million, which is lower than the originally planned offer for more than $ 600 million. On the site, customers either refused about three-quarters of the goods, or postponed them to the next site, which will take place at the end of August.
According to the sightholders, the August site is now of concern, which is now expected to become large due to all recently deferred volumes. They would like to see a decline in prices, expressed by a high single-digit or even a two-digit figure, and a much smaller amount. Otherwise, they say they will not be able to make purchases with confidence from an economic point of view.
On Thursday, Anglo American, the parent company of De Beers, published its results for the half-year showing that the diamond sales volume fell by 26% year-on-year to 14 million carats. According to Anglo, a sharp decline in sales reflected the low levels of replenishment of stocks by diamond manufacturers and dealers.
According to Anglo, De Beers' average selling price rose 7% to an average of $ 206 per carat in the first half of this year. This is due to the sale of a higher product mix compared to the previous year. On the other hand, the diamond price index of De Beers declined by an average of 4% in the first six months compared to 2014.
In response to declining sales volumes, De Beers reduced production at tailing plants at the Venetia and Jwaneng mines. It also indicates that overall production volumes were affected by lower maintenance levels and reduced plant employment at the Orapa mine in Botswana.
The volume of production fell by 6% to 7.96 million carats in the second quarter and 3% to 15.63 million carats in the first half of this year. The diamond miner confirmed its forecast for annual production of up to 30-32 million carats, which is below the 32-34 million carats it planned to mine.
Production at Debswana, the De Beers diamond miner in Botswana, fell 6% to 5.913 million carats. At Namdeb, production fell by 15 percent. In South Africa, it fell by 5%, and in Canada, production fell by 11 percent.
http://www.ehudlaniado.com/home/index.php/news/entry/making-the-right-decisions-in-rough-diamond-times
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