De Beers’ production dropped in the third quarter as the miner responded to a decline in rough demand that has left it with an inflated stockpile of diamonds.
Output fell 14% to 7.4 million carats for the period amid planned mine closures and the transition from open-pit to underground mining at its Venetia project in South Africa, parent company Anglo American said Tuesday.
“We continue to produce to weaker market demand due to macroeconomic uncertainty as well as continued midstream weakness,” the miner noted. “Diamond inventory has continued to build during the third quarter due to the subdued market conditions. The elevated inventory levels are not expected to unwind until 2020.”
De Beers reduced production across all the countries in which it operates except Botswana, the miner said. In De Beers’ South African operations, production fell 60% to 535,000 carats due to the lower volumes at Venetia. Production also ceased at the Voorspoed project in the Free State province at the end of last year.
Output shrank 7% to 426,000 carats in Namibia following the shutdown of De Beers’ Elizabeth Bay land operations in September 2018. However, production remained flat in Botswana, at 5.7 million carats, with a 22% planned increase at its Orapa project offset by an 18% decrease at the Jwaneng mine.
In Canada, production dropped 34% to 779,000 carats, largely due to the closure of De Beers’ Victor operation in Ontario, which reached the end of its life earlier this year.
Sales volume jumped 48% year on year to 7.4 million carats, as the company held one more sight than during the same period a year ago. However, overall rough demand remained subdued, the miner explained.
In the first nine months of 2019, the miner produced 23 million carats, down 12% year on year. Its rough-diamond sales remained flat during the period.
A technology provider part-owned by De Beers has unveiled an automated cutting machine that, it claims, will significantly speed up diamond manufacturing and reduce costs.
Synova’s DaVinci system is the market’s first automated instrument that can produce all 57 facets of a round brilliant diamond in one process, the Swiss company said Thursday. The user only needs to perform one final polishing stage to finish the stone.
“Several cost, skill and labor intensive steps in the polishing phase, such as crown and pavilion blocking, girdle bruting or recurrent quality checks, become redundant,” noted Bernold Richerzhagen, Synova’s founder and CEO. Synova cutting machine
The machine, currently intended for rough stones from 0.50 to 10 carats, gives manufacturers increased flexibility to adapt their production levels to business needs, such as seasonal demand, Synova explained.
It also gives better symmetry and a higher and more predictable polished yield, and uses water jet technology to reduce the risk of diamond cracking, the company asserted. It’s based on its existing DCS 50 cutting machine.
De Beers bought a 33% stake in Synova in 2015, pledging to work with the company to develop a fully automated cutting and shaping solution. The miner has made diamonds available for some of the machine testing.
De Beers has sold the Elizabeth Bay mine for $8.2 million USD, a year after it ceased operations at the deposit.
The miner chose Lewcor Group, a 100% Namibian owned consortium, following an extensive search for a new owner that would be able to operate the mine — part of its Namdeb joint venture with the government of Namibia in a sustainable way, and would also retain De Beers’ employees and contribute economic value to Namibia, it said last week. However, the amount of the transaction could increase to $12.4 million USD, as Namdeb will earn a share of revenue from the sale of diamonds recovered from certain marine mining areas.
“Throughout this process, our objective has been to create the best possible circumstances for reopening the operations, recreating jobs and growing empowered participation in Namibia’s diamond industry,” said Chris Nghaamwa, chairman of Namdeb. “A rigorous, independently advised process enabled Namdeb to select a company with not only the right mining and financial credentials, but also a commitment to meet future social and environmental obligations.”
De Beers ceased operations at the site in September 2018. Although the mine still contains a viable supply of diamonds, output failed to meet the company’s needs and it could no longer run the deposit economically, it said.
Diamond purchases at De Beers’ latest sale in Botswana plummeted 44 per cent, as the industry struggles with weaker consumer spending and the rise of lab-grown stones.
The world’s largest diamond miner said on Wednesday that sales of rough diamonds were $280m at last week’s sale compared with $503m in the same period a year ago.
The sharp decline follows another weak sale last month. So far this year, at $2.9bn, De Beers’ rough diamond sales are 26 per cent lower than the $3.9bn recorded at the same time last year. In July, Russian diamond producer Alrosa reported a 51 per cent fall in diamond sales.
“The current malaise in the market is due to oversupply,” said Paul Zimnisky, an analyst in New York, who said diamond buyers had too much inventory.
Macroeconomic uncertainty and, in particular, the trade war between the US and China, the world’s two largest diamond-consuming countries, has fuelled nervousness among wholesalers and retailers.
Diamond buyers, who polish and cut diamonds for retailers, are struggling to make money this year due to lower prices and tighter credit, prompting them to delay purchases.
Tiffany’s on Wednesday reported a 3 per cent decline in like-for-like sales, with the luxury retailer’s chief executive Alessandro Bogliolo warning that unrest in Hong Kong was “taking a toll on our business”, as did a drop in Chinese tourists visiting the US.
Shares in Signet, the world’s largest retailer of diamond jewellery, have fallen more than 60 per cent this year.
Increased sales of lab-grown diamonds, which are chemically identical to traditional stones, are also “taking a very precious piece of the mined industry’s modest growth”, noted Mr Zimnisky.
De Beers has responded by cutting production — with a target of 31m carats this year compared with 35.3m lin 2018 — and pledging to increase the amount of money it spends on marketing diamonds.
Anish Aggarwal, a partner at consulting firm Gemdax, said economic uncertainty was being aggravated by retailers shifting to a “just-in-time” stocking model.
De Beers, which made up around 10 per cent of Anglo-American’s earnings in the first half of this year, sells most of its diamonds to approved customers at 10 “sights” a year in Africa.
As an incentive to buyers, at the latest sale it increased the amount of stones customers were allowed to reject in each lot purchased from 10 per cent to 20 per cent, according to people familiar with the auction.
De Beers’ rough-diamond sales plummeted 53% this month as customers accepted the miner’s offer to defer purchases until the market improves.
Weak polished demand and excess supply in the manufacturing and trading sectors have hurt sightholders’ appetite for rough goods, sources explained. As a result, revenues fell to $250 million at De Beers’ sixth sales cycle, the company reported Tuesday — the lowest since late 2015.
“In the US maybe the demand is there, but because of slow demand in Hong Kong and China, we are not able to get the sales [to match] our inventory,” a sightholder told Rapaport News Tuesday. “It’s difficult to make money, and [with high inventories] it’s difficult to keep on buying rough and manufacturing like normal.”
De Beers kept prices steady at last week’s July sight in Botswana, after lowering them in June, buyers said. Instead of offering further discounts, it permitted customers to delay purchases, over and above the standard allowance of one deferral of a box of goods per “band” (selection of goods) per half year. Relaxing the buying obligations should help ease the crisis affecting the market, which will dissipate when diamonds work their way through the pipeline, De Beers predicted.
“With ongoing macroeconomic uncertainty, retailers managing inventory levels, and polished-diamond inventories in the midstream continuing to be higher than normal, De Beers Group provided customers with additional flexibility to defer some of their rough-diamond allocations to later in the year,” De Beers CEO Bruce Cleaver said. “As a result, we saw a reduction in sales during the sixth cycle of 2019.”
Sales haven’t been this weak since December 2015, when proceeds totaled $248 million. According to Rapaport estimates, the November 2015 sale was even smaller, at approximately $180 million.
Sightholders and brokers showed little optimism that the situation would improve soon, as companies need to sell their excess goods to redress the imbalance of stocks.
“The current crisis in the midstream has moved upstream,” Dudu Harari of brokerage firm Bluedax wrote in a report on the sight. “This means producers can’t sell the quantities they are used to. If they want to increase their sales, there will need to be a big price correction downward to allow the market to reduce its stock of polished.”
De Beers’ rough-diamond revenues have declined 23% year on year in the first six sales cycles of 2019, according to Rapaport calculations. The next sight begins on August 19.
Image: A box of rough diamonds from a De Beers sight.
De Beers loosened its purchasing requirements for rough buyers at last week’s sight in an effort to ease the oversupply affecting the diamond market.
Sightholders have struggled to reduce their inventories due to an imbalance of stocks and weak polished demand. To tackle the problem, De Beers allowed its customers to defer purchases from the July sight to other sales later this year, a spokesperson confirmed Thursday.
De Beers’ long-term sales program compels customers to show certain levels of demand at sights, which take place 10 times a year in Botswana. They are free to push off buying one box per “band” (selection of goods) per half year, but only from one sight to the next. However, at last week’s sale, sightholders were able to make an extra deferral, and could also delay to later in the year, not just by one sight.
In addition, the company has brought forward sightholders’ annual opportunity to reschedule their purchases, known as “re-phasing.” This year, that will occur after the July sight, the sixth of the year, whereas it’s normally scheduled for the eighth sight.
De Beers’ revenue and profit fell in the first half, as a buildup of excess polished goods in the midstream and retail sectors hit rough demand, the company explained last week in its half-year earnings. A price reduction at the June sight helped sightholders deal with the weak profitability they are facing, De Beers chief financial officer Nimesh Patel told Rapaport News Thursday.
The miner also lowered its production forecast to 31 million carats for this year, compared with an earlier outlook of 31 million to 33 million carats, Patel noted. Output in 2018 was 35.3 million carats.
Holding back rough
The combination of lower production and prices, together with increased purchasing flexibility, should tackle the “short-term” crisis, Patel predicted. The company also experienced a “meaningful increase” in its own rough inventories during the first half because it held back rough, he said.
“We’ve clearly reacted in terms of price, so we’ve injected profitability back into goods,” the executive said. “Secondly, we’ve reacted in terms of production…. Alongside that, we’re working with our customers to offer them more flexibility in the way they purchase, so [we’ve introduced] re-sequencing of the timing of their purchases of goods through the course of the year, which is something that we’ve allowed [them] to do, and we’ve added to that additional referrals as well. All those things will see us through this difficult period.”
The problems come from within the diamond industry rather than from outside: Growth in global gross domestic product supports consumer demand for diamond jewelry in the long term, Patel said. The US retail market is increasing, while sales in China and India are also rising in local currencies, he observed.
However, weak fourth-quarter holiday sales in 2018 and shaky consumer demand in the first half has made it difficult for the industry to offload polished stocks to retailers, Patel said. Consumers’ shift away from lower-end shopping malls has forced some companies to close stores and liquidate their goods, he added. Furthermore, retailers’ increased reliance on consignment has raised inventory risks for the midstream, as failure to make a final sale often forces suppliers to resend jewelry items to a different client, or to dismantle and remanufacture the jewelry, he explained.
“That doesn’t help the midstream in terms of sell-through,” he noted.
Yet the near future is positive because the issues are “specific to the balance of stocks in the midstream and the downstream,” Patel argued. “It’s a function of that excess polished as it sits today…just working its way through the system. As that happens, we should see polished prices perform better [and] rough demand return.”
De Beers’ profit dropped in the first half of the year as weak demand at the trade and consumer levels impacted diamond prices, the company said Thursday.
The rough market was subdued due to high inventories in both the midstream and the retail sector, as well as a slowdown in growth of consumer demand, the miner explained. The US-China tariff dispute, protests in Hong Kong and the strong US dollar hit retail performances outside the US, especially in China and the Gulf region. In the US, retailers’ store closures and reduction of stocks weighed on polished demand, creating a further negative effect for the rough business, De Beers added.
Earnings before interest, taxes, depreciation and amortization (EBITDA) slumped 27% to $518 million as a result of the impact on margins, the miner reported. Total underlying earnings fell 7% to $187 million. Revenue slid 17% to $2.65 billion, with rough-diamond sales decreasing 21% to $2.3 billion. Other revenues came from businesses such as Element Six, its industrial-diamond unit, and De Beers Jewellers, its high-end retail chain.
“The lower rough-diamond sales reflected higher-than-expected polished stocks at retailers and the midstream at the beginning of 2019, with overall midstream inventory levels continuing to be high throughout the first half,” De Beers noted.
De Beers’ rough-price index, measuring prices on a like-for-like basis, fell 4% for the period versus a year earlier. The average selling price declined 7% to $151 per carat, influenced by a change in the sales mix caused by the weaker conditions.
The company expects those challenges to continue in the short term, but also foresees an improvement as the industry reduces its inventory and consumer demand rises.
“Underlying GDP [gross domestic product] growth remains supportive of consumer-demand growth, and is expected to bring midstream and retailer stocks back to more normalized levels as we move into 2020, subject to an improving macroeconomic environment,” De Beers said.
Last week, De Beers reduced its production outlook following low demand, forecasting output of 31 million carats this year, whereas it had previously expected to recover 31 million to 33 million carats. Production fell 11% to 15.6 million carats during the first half, as the company chose not to increase mining levels at other deposits to compensate for a lull at the Venetia mine. Output at the site in South Africa has fallen amid its transition from open-pit to underground operations.
De Beers trimmed its production plans for this year as the world’s biggest diamond producer responds to a brewing industry crisis that’s hitting demand for its stones.
The Anglo American Plc unit will now mine about 31 million carats in 2019, at the bottom end of a previous forecast range. The company, once the monopoly supplier of diamonds, has a longstanding strategy to match supply with demand.
The diamond industry’s engine room, dominated by family-run businesses that cut, polish and trade the stones, is struggling to make money amid a flood of polished diamonds and stagnant consumer purchasing. That’s led to a slump in demand for the rough stones that De Beers mines from Botswana to Canada.
De Beers Diamond Sales Keep Dropping as Weak Patch Drags on
The weakness is showing up in the company’s sales, which are down about $500 million so far this year compared with 2018. The company has already gone unusually far in offering flexibility for its customers — allowing them to defer agreed purchases and lower the number of diamonds they plan to buy this year.
De Beers had already planned to produce a lot less diamonds than last year, when it dug up more than 35 million carats, the most since the global financial crisis. First-half output of the stones was 15.6 million carats, 11% lower than in 2018. The average selling price also fell 7%.
“Demand for rough diamonds remains subdued as a result of challenges in the midstream, with higher polished inventories, and caution due to macro-economic uncertainty, including the U.S.- China trade tensions,” Anglo said Thursday.
Macquarie Group Ltd. said before today’s announcement that it expects De Beers to post first-half profit of $567 million. While that’s down on last year, it’s performing far better than its smaller rivals, many of whom have seen their market values plummet to multi-year lows.
De Beers’ rough-diamond sales slumped to a 20-month low of $390 million in June amid weak sentiment in the manufacturing sector. Sightholders noted the price cuts De Beers implemented on certain categories were not enough to stimulate demand.
“The reaction to the price adjustments was lukewarm,” observed one Antwerp-based manufacturer who attended last week’s sale in Gaborone. “It’s a case of too little, too late, as polished prices have declined and we’re not seeing the same movement in the rough market.”
De Beers reduced prices by an estimated 4% to 8% on low-quality and smaller stones, sight participants reported. Sightholders who spoke with Rapaport News expected the company would need to make further cuts later this year, but recognized it was unlikely to do so at the next sight.
“We don’t expect a correction in July because that will start a downward spiral,” said one India-based sightholder. “But people will refuse goods. The mood is not good, even after this month’s reduction, as manufacturers are under pressure.”
High inventory
De Beers CEO Bruce Cleaver noted that rough buyers were cautious in June due to higher-than-normal polished-diamond inventories in the midstream. The sight was the lowest on record by De Beers since October 2017, and sales were down 33% compared to last June.
Manufacturers have cut production by an estimated 20% to 30% this year to reduce those inflated inventory levels, sightholders estimated. They’ve also shifted their production to lower-value goods to keep workers busy at a minimal investment, one India-based sightholder added.
As a result, De Beers’ sales declined 18% to $2.38 billion in the first half of 2019, while Alrosa’s rough sales fell 35% to $1.46 billion in the first five months of the year, according to Rapaport calculations.
Midstream pressure
Meanwhile, Cleaver also noted the challenging environment in China was affecting sentiment in the diamond market, while the US retail environment remained solid. Polished trading at the Hong Kong Jewellery & Gem Fair, which ended Sunday, was quiet, dealers noted. Attendance was down amid the mass protests that have taken place in the city during June, but also because Chinese buyers are not looking to make large purchases.
“People are hesitant to buy in a downward-trending market because they don’t yet see a bottom,” explained one Hong Kong-based polished dealer. “The mood is not good.”
US orders are more consistent, observed a Mumbai-based sightholder. US retailers are not making major orders, but he expects that will start to happen in the next month or two. Diamond trading generally remains quiet in July, when most US wholesalers close for the summer vacation.
“We expect the market will stabilize in late July,” he said. “But the problem isn’t from the retail side. It’s the business-to-business (B2B) trading that is low and the manufacturing sector that is under pressure. People don’t want to do business in the rough market.”
More than 110,000 Western Australian couples have celebrated a special occasion featuring a piece of Rosendorff’s fine jewellery.
An announcement to the Australian Securities and Investments Commission (ASIC) said a meeting of creditors was set to get under way at 11am Thursday.
Richard Tucker of KordaMentha Restructuring, appointed receivers and managers of Rosendorff Diamond Jewellers, said the business was holding too much stock.
“We are running a short highly discounted sale through the store to materially reduce the current stock levels whilst a sale or recapitalisation of the business is pursued,” Mr Tucker said.
I have always loved the mystique of diamonds. I’m attracted to the joy and romance they bring to their beholders
Craig Rosendorff “It is a tremendous opportunity to acquire a very special jewellery item at very competitive prices and may also help save an iconic Perth jeweller.”
He said a secured creditor would support the receivers to ensure current special orders, repairs and lay-bys were completed in time for the special occasions they might be destined for.
“From proposals, to weddings and anniversaries, we understand the importance and significance these items have on people’s special memories,” Mr Tucker said.
Daniel Hillston Woodhouse of FTI Consulting has been appointed as administrator.
Rosendorff is an iconic West Australian luxury business specialising in diamonds and bespoke jewellery design headed by Craig Rosendorff.
In 1975 Mr Rosendorff renamed and launched what became one of the longest-standing diamond companies in Australia.
His rags to riches story has been dubbed The Diamond Dream.
“I have always loved the mystique of diamonds,” he says on the company’s website.
“I’m attracted to the joy and romance they bring to their beholders, the heritage and their connection to families across generations.”
The large, glamorous showroom in the centre of Perth on Hay Street has been the setting of many magnificent parties and events showcasing the designs of the Rosendorff team.
Mr Tucker said gift cards and store credits would be honoured while trade continues.
White knight rescues collapased Rosendorff Diamond Jewellers
The Rosendorff fine jewellery business will carry on but under new ownership following a deal struck by receivers appointed last month.
Insolvency firm KordaMentha confirmed today it had struck an agreement to sell the business set up by Craig Rosendorff in the 1980s to an unidentified WA buyer also involved in the jewellery trade.
The deal, expected to be finalised in two to three weeks, guarantees more than 20 jobs and covers the Rosendorff trading name, stock and intellectual property.
Receivers from KordaMentha were put into Rosendorff Diamond Jewellers at the end of April.
The business, which owes at least $4 million to creditors, has shrunk on falling sales in the past three years to just its flagship store in Hay Street Mall.
The deal covers the Rosendorff trading name, stock and intellectual property.
Today’s sale announcement coincided with news the receivers are stepping up a discount sale which has already brought in between $2 million and $3 million.
The West Australian revealed yesterday that administrators from FTI Consulting had identified “irregularities” in the company’s accounts while sheeting home blame for the collapse to the mining downturn.
They questioned a $1.8 million shortfall in stock and four transactions totalling $170,000 where jewellery “left the store without payment”.
FTI said “there were limited controls around the accounting and inventory functions, which have led to some anomalies in the financial accounts”.
However, it noted that such irregularities were not uncommon, and there is no suggestion of any wrongdoing by Mr Rosendorff.
The firm’s statutory report on Rosendorffs also noted that Mr Rosendorff, who has invested millions of dollars in the business over the past 30 years, had drawn increasing amounts out of the company as its financial situation deteriorated.
Between July 2017 and FTI’s appointment, those withdrawals totalled $1.8 million, including $582,000 in the past 10 months.
The administrators says Rosendorffs had been under financial pressure for two years, citing “cash leakage” and a steady decline in sales after 2011, triggered by the end of the mining boom.
Gordon Brothers is owed about $2.2 million, Rosendorffs’ staff $400,000 and trade creditors $270,000.
