Johannesburg - De Beers is looking for alternative outlets for its diamond sales outside its carefully selected group of buyers as the market continues to feel the pain of a global economic downturn that will result in the diamond market worsening further.
De Beers is the largest supplier of rough diamonds and sells its products to a handpicked group of 75 clients through a process called "sights". It also gives this group something called an "intention to offer" or ITO, which is a forecast of what stones it expects to have available in a certain period to allow customers to plan their own business.
"We can all agree that the diamond business is operating well below its potential. However, global consumer demand has not fallen off a cliff - it contracted marginally last year and will do so again this year," said Varda Shine, MD of the De Beers Trading Company (DTC).
"The real challenge is financial liquidity combined with the large polished stock overhang in the pipeline," he said in a speech prepared for DTC's client reception on Tuesday night.
The first of 10 sights for 2009 will start with a smaller offering, Shine said. Respected diamond analyst Des Kilalea from RBC Capital Markets said in a note dated January 20 this month's sight is being reported by Antwerp diamantieres as having a value of between $80m-$150m against December's sight of less than $100m.
Shine said the size of the January sight would give De Beers the chance to assess the market. The results of the sight should be made known when De Beers releases its results on 20 February along with its 45% shareholder Anglo American.
"In view of the substantially decreased level of sightholder demand for new rough diamonds, we anticipate reducing the ITOs offered to sightholders by roughly 50 percent for the remainder of the current ITO period the January, February and March/April 2009 sights, although this will be assessed on a sight-by-sight basis," he said.
De Beers is also cutting back on production. Kilalea said reports put the company's output reduction at "well in excess" of 30%, but a De Beers spokesperson said that figure was "speculation".
"There is no point in producing or trying to sell it when there is a limited market for it," said De Beers MD Gareth Penny at the same event. "While exact production targets will fluctuate as demand changes, I can tell you that our reduction in production will be 'significant'."
It is difficult to extrapolate the 50% reduction in ITOs directly into a quantum of production cuts because De Beers is looking at other avenues of diamond sales outside those to its sightholders.
Very difficult patch
"The DTC is exploring options for bringing surplus goods to the market once every avenue of sightholder demand has been satisfied," Shine said.
What exactly this will entail is unclear at this point and Gould declined to give a timeframe of when DTC would unveil this strategy. What is clear though is that the diamond market is going through a very difficult patch.
A number of junior producers have scaled back production, in some cases like BRC DiamondCore, halting production for nearly two months, to preserve cash and not sell their diamonds at reduced prices.
"The foundation for a strong recovery in diamond prices is being laid as producers brutally cut back output," Kilalea said. "However, until final jewellery demand bottoms and liquidity improves, prices will remain depressed."
"Our view is that the diamond market will worsen before improving, simply because the chill of a global recession is going to become increasingly evident in the form of accelerating job losses," Kilalea said. "People don't rush out to buy luxury goods in a recession."
Both Penny and De Beers chairperson Nicky Oppenheimer urged calmness and level-headedness during these difficult conditions, with Penny putting the ball somewhat firmly into the diamond buyers' court.
"There is only so much De Beers can do. The onus is on you, amongst the best diamantieres in the world, to seek out and exploit niche and emerging markets with innovative marketing programmes and products, such as wedding and engagement rings, which will be buoyant throughout the economic cycle," he said.
Kilalea used US luxury goods retailer Tiffany & Co's reported sales - which were down 35% - as a bellwether for diamond jewellery Christmas sales in America.
Glimmer of good hope
De Beers said it expected US sales, which were worse than expected, to not be as bad as that.
"We do not have a precise read but the percentage decline year on year is likely to fall somewhere between 15% and 20%, leaving the decline for the US market as a whole for the year in the high single digits," Varda said.
"While a glimmer of good news is that the number of pieces sold may in fact not have declined, the need to move those items means that retailers' margins have suffered and they are not in a position to replenish stock as strongly."
- Miningmx.com
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