Liquidity crunch and a sluggish Chinese economic growth, inter-alia, dampened the appetite for rough diamonds last year.
Mining analyst and partner at Deloitte Tony Zoghby told Rough & Polished’s Mathew Nyaungwa that despite the depression, diamonds fared much better compared to other commodities.
He said the diamond sector had its uniqueness far removed from the factors that were affecting other mining sectors.
Despite this prognosis, Zoghby noted that it does not make sense for mining companies such as De Beers to flood the market with rough diamonds, hence, the reduction in production was ideal.
He also noted that the southern African region should be innovative if it wants to continue dominating the global diamond industry, in terms of production, with the main objective being to drive costs down.
Below are the excerpts.
What is your assessment of the current state of the diamond industry?
My perception of the diamond industry is that it is probably doing a little bit better than most of the other commodities. Some of the biggest diamond fields are in southern Africa: Botswana, Namibia and South Africa. Although sales have been relatively muted, I think prices are still reasonable and Sightholders are still buying and that's a positive. I think that is a positive, there are some concerted marketing campaigns that are happening to continue to market diamonds as a girl's best friend or whatever the case maybe. For some of the mining houses that we see, who have diamonds in their portfolios, it will become clearer when they announce their results that diamonds have contributed significantly to their results. Diamonds are a very different commodity compared to other commodities in the sense that the marketing is different, your market is different and I think there is still a strong demand of diamonds from Southern Africa. With all commodities, the mining companies do have to look very carefully at costs, do have to take unprofitable production off the market, they got to make sure that their operations have sufficient scale to lower the cost and to ensure that they are operating as efficiently and effectively as possible.
What are some the factors that you think are driving diamonds to perform better as opposed to other commodities?
The only reason is that it’s a very different market so if you look at the other commodities. If you look at the bulk commodities … those guys are depended on infrastructure growth, development in the countries where they are doing their production. If you take say China, their development has slowed…and that does affects the market. So where the economies start to diminish, you cut back on infrastructure, you cut back on the major projects but there is a very specific market for diamonds, the wealthy are the people who buy diamonds for jewellery, they still have disposable income, they are still able to purchase diamonds. I think there is also less diamonds that go onto the market, but with bulk commodity you can increase your mining footprint, you can flood the market with your product, but with diamonds there are fewer producers, there are fewer diamond fields and I think it’s much easier to moderate the supply of diamonds into the market and therefore the prices.
Talking of moderation, we have seen De Beers sort of cutting down on its production…
I think for now that strategy is probably right as the world economy is down, people obviously, do have less disposal income. Obviously there is going to be less buying of diamonds, but nevertheless the mining companies like De Beers do have to ensure that they are not flooding the market with product, which drives the prices down and obviously affect their own profitability. What De Beers are also doing is that they are taking out unprofitable access off the market. The days of mining companies just putting production onto the market whether its diamonds or any other precious metal or base metal, I think those days are over for a while. The mining companies are going to look at low cost, high quality diamonds to put onto the market and slow down on the inefficient and high cost production.
Do you think De Beers is a cash-cow for Anglo-American?
De Beers is making a significant contribution to Anglo American. The group has operations across the broad range of commodities. For example, Anglo Platinum, among other companies, is cash positive. Although these mining companies are showing losses, I think they are managing their debt and cash. All the commodities are making contributions to the cash, I haven’t seen De Beers' results so I don’t know, but I do think De Beers will probably make a contribution to the Anglo cash position.
A number of diamond polishing companies had been struggling due to liquidity challenges. What do you think the polishers should do to weather through the storm?
I think they need to buy a lot of quality they need to make sure that they are not overstocking. It’s a fine balance between what you buy now and what you are able to polish and put onto the market. They need to make sure that they are not sitting on high inventory piles and cash tied up in stock that they are not able to move. The supply chain needs to be finely tuned.
South Africa came up with measures to boost the polishing of diamonds, but nothing much has materialized, what is the problem?
I think it’s probably lack of skills, as we know that when you are cutting diamonds you need to be skilled. I don’t think South Africa has some necessary skills for cutting and polishing diamonds and I until we have such skills we won’t be able to compete with the traditional diamond polishers.
Do you see any willingness to boost value-addition by Pretoria?
The government is ticking all the right boxes but we are not seeing the details that fleshes out those particular issues to the point that there is a clear plan to raise the level of skills or talent that we need. I don’t think in the diamond industry there is a programme that is sponsored by government to boost skills in cutting and polishing of diamonds.
Zimbabwe has indicated plans to set up a diamond bourse, do you think the country will manage to attract anyone?
Zimbabwe has never been a traditional diamond selling country and I think they will struggle, again they don’t have the skills and am not quite sure who would go and buy Zimbabwean diamonds as opposed to buying the Botswana diamonds. I think with the diamond industry you need a lot of experience; you need to know where you can get the product... I think a fledgling bourse in Zimbabwe will struggle. However, let’s not say it won’t pick up in future. One of the things that we promote at Deloitte is innovation. What we want is for these countries to succeed or set up successful bourses or trading houses. They need to demonstrate that they can innovate and do something different that will attract the buyers.
Talking of innovation, southern Africa is known for producing the bulk of the world's diamonds. What advise can you give the region to remain on top of the pile?
It’s an interesting question, for a long time southern Africa has been dominant in the diamond industry and I think they have tended not to keep pace with innovation (I say that under correction). There is need for innovation and the main objective being to drive costs down so I think they need to look at how they can access diamonds, how their mining footprints look like, reduce the cost, access the right quality carats, etc. There is need for co-innovation, looking at your mining operations and see ‘where can we make a difference, where can you become more efficient and how can you take as much costs as you can’.
Given the scarcity of capital, what should mining companies do to remain afloat?
Capital is scarce, mining companies need to make sure they allocate their scarce resources or capital to projects that are going to give the best return and the best return is not always the immediate return, it’s a return into the future, we all know diamond mining, any mining is a long term investment cycle...you need to invest for the future because when the upturn does come you need to be in a position bring those new projects onto the market and take advantage of the excellent prices.