Diamond Sales in Dire Straits

De Beers, Debswana face cashflow challenges because of sharp decline in diamond sales Debswana slows down cash burn rate Demand for rough diamonds said to have dwindled. India placed import ban on rough diamonds in October and November 2023 Debswana compelled to terminate, hold, and defer some contracts ODC suspended November diamond sales Debswana Diamond Company is experiencing cashflow challenges because of a plummet in diamond sales, and this may result in deferment, termination, and suspension of some contractors.

De Beers CEO, Al Cook, said in the final sales cycle of 2023, the group continued to offer lower levels of rough diamond supply, in line with current demand.

“As the end-of-year holiday season progresses, we are seeing signs that the diamond industry is regaining its balance between wholesale supply and demand,” said Cook.

“Polished diamond prices [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="1" ]

look to have stabilised as inventory levels have decreased, though we expect improvements in rough diamond trading conditions to be gradual.”

A look at De Beers’ value of rough diamond sales reveals that the group began 2023 on a higher note, recording US$454 million during the first cycle (compared to US$660 million in the first cycle of 2022), with the trend of higher sales continuing up until the sixth cycle, whereafter sales started to nose dive.

In the sixth cycle of 2023, De Beers recorded U$411 million compared to US$638 million in the same cycle in 2022.

By the seventh cycle of last year, the value of rough diamond sales amounted to US$370 million, compared to US$638 in the same cycle the year before.

Further De Beers’ rough diamond sales in cycle 8 of 2023 were $200 million (compared with $508 million in cycle 8 2022); in cycle 9 2023 they were $80 million (compared with $454 million in cycle 9 2022); and in cycle 10 2023 they were $130 million (compared with $417 million in cycle 10 2022).

Economists attribute the underperformance of diamond sales to weaker demand in key markets.

“The weaker diamond sector outlook is on the back of global growth uncertainties and weaker demand in key markets including the USA and China,” Naledi Madala, an economist at Absa Bank Botswana, said recently.

Another economist at First National Bank Botswana (FNBB), Gomolemo Basele, said global diamond demand is expected to continue to remain under pressure over the 1 st half of 2024 (H1 2024).

“However, as global growth improves from the 2 nd half of 2024 (H2 2024) onwards, so is diamond demand and, by extension, Botswana’s growth prospects,” said Basele.

At the beginning of 2023, De Beers set production guidance at 30–33 million carats (100 percent basis), subject to trading conditions.

Unit cost guidance for 2023 was set at c.$80/carat.

By Q3, production guidance for 2023 remained unchanged at 30–33 million carats (100 percent basis).

However, unit cost guidance for the year was now at c.$75/carat.

De Beers gets 75 percent of Debswana production, while the remaining 25 percent goes to the state-owned Okavango Diamond Company (ODC).

Due to the current macroeconomic challenges facing the diamond industry, this publication engaged De Beers to find out how this is going to affect its investments going forward and the implications of such.

Also, The Business Weekly & Revie w sought to establish if lower sales experienced in H2 2023 may have led to financial difficulties within the group.

Following strong demand for rough diamonds in 2021 and 2022, Otsile Mabeo, vice president, corporate affairs at De Beers Group, acknowledged that rough diamond trading conditions were very challenging across the entire industry in 2023.

“During 2023, macroeconomic challenges (high inflation and interest rates) led to softer consumer demand for diamond jewellery,” explained Mabeo.

“With high pipeline inventory levels, demand for fresh diamond supply fell sharply.”

According to Mabeo, with retailers expressing lower demand for polished diamonds, the cutting and polishing sector in India (which polishes more than 90 percent of the world’s diamonds) put in place a rough diamond import ban in October and November 2023.

As such, she said rough diamond producers and distributors throughout the industry subsequently recorded historically low levels of sales in the final quarter of the year.

Mabeo stated that other leading rough diamond distributors saw similar challenges in late 2023, with other leading diamond companies reporting low sales and prices and others cancelling sales events.

While this period of historically low demand has had a significant negative impact on De Beers’ financial performance, Mabeo said the actions De Beers took towards the end of 2023 with its supply flexibility and marketing investments have supported the recovery of some stability in polished diamond prices and retail demand.

“We are now cautiously optimistic that rough diamond demand will gradually recover,” she asserted.

This publication had sent questions to ODC which had not responded by time of press. ODC had suspended its November sales on the back of dampened market.

The Business Weekly & Review also sent a detailed inquiry to Debswana to appreciate the essence of the current market strain on its operations.

These included establishing if indeed Debswana is experiencing cash flow challenges because of low diamond sales; whether Debswana may defer projects, cancel some contracts, and put some on hold because of cash flow challenges; and the significance of healthy diamond sales to the survival of Debswana.

This publication further sought to find out if Debswana is considering halting some contracts and terminating some and if that happens, would it not be costly to it; and if Debswana was to reduce its contractors, would that not affect its production.

In response to these questions, Debswana began by stating that it has made a downward revision of its production outlook for 2024 to align with reduced demand levels in the global diamond market.

“The primary reason for our revised production plans is the reduced demand for rough diamonds in the global market,” said Matshidiso Kamona, Debswana spokesperson.

“The current fluctuations in demand do not affect the medium and long-term supply and demand outlook for the diamond market which remains positive.”

According to Kamona, the demand for rough diamonds was impacted by the ongoing global macroeconomic headwinds which she said have resulted in the accumulation of higher than usual inventory levels throughout the industry pipeline.

She said that as part of Debswana Strategy 2024, the company operations have achieved operational efficiency and productivity capabilities.

She further stated that this has enabled Debswana to traverse seasonal market volatility with minimal impact on business continuity.

“Furthermore, a comprehensive market slowdown response plan has been implemented to ensure the sustainability of our operations during this period of uncertainty,” she said.

Kamona said the following key actions have been implemented:

Aligning production with demand through predetermined flexibility and agility levers, which include slowing down waste mining at both Jwaneng and Orapa mines, which are ahead of plan; slowing down cash burn rate to compensate for reduced sales revenue.

Maintaining a close focus on people safety and the operational stability that has been embedded over the recent years; issues of contractual matters will be addressed separately through established supply chain processes.

“The current situation remains dynamic, and our plans will be adjusted according to market developments,” said Kamona.

The significance of diamonds' contribution to the domestic cannot be over-emphasised.

The mineral contributes around 80 percent of the country’s export earnings.

The latest International Merchandise Trade Statistics (IMTS) from Statistics Botswana indicate that in October 2023, Botswana’s total exports decreased by 31.6 percent (P1.3 billion), from the revised September figure of P4 billion to P2.7 billion.

Diamonds are reported to have played a major role in the decline of overall exports, falling by 49.5 percent (P1.2 billion) from the revised September 2023 value of P2.5 billion to P1.2 billion in October.

Due to lower diamond exports, following a trade deficit of P4.5 billion in September 2023, the country recorded another one in October amounting to P5.6 billion, resulting in a P10.1 billion deficit for the two months.