De Beers’ sales fell to their lowest level in more than a year and a half, as a slowdown in the Indian manufacturing sector hit rough demand.
Revenue dropped 25% to $415 million for the fourth sales cycle of the year, which included last week’s May sight in Botswana, the company reported Tuesday. Proceeds haven’t been that low since October 2017, when De Beers garnered just $376 million amid weak midstream profitability. This month’s sales were 29% below the $581 million the miner recorded in April.
Customers rejected a significant percentage of the goods on offer, as high rough prices have made polished production unprofitable, sources told Rapaport News. Many clients wanted to buy less, but still made purchases to keep credit lines with the banks and ensure they meet De Beers’ demand quota, even after the miner reduced that threshold.
Each customer must spend at least $8 million in the current intention-to-offer (ITO) period to be in the running for sightholder status in the next ITO contract, which begins January 2020, a De Beers spokesperson confirmed. The miner has lowered the minimum from $15 million, because its 2019 rough-diamond production will be less than last year, and since the current ITO is three sights shorter than usual as the company shifts to a calendar-year cycle.
Prices still high
With lower supply, the miner maintained its prices in May, which exerted greater pressure on midstream profits, sightholders cautioned. Liquidity challenges have forced cutting firms to reduce polished production, as banks have tightened lending and are demanding more collateral, a broker explained. Dealers’ average premiums — the margins they can make when they trade De Beers’ rough on the secondary market — have fallen to around zero, they added.
“It could be that up to 20% or 25% of goods have been refused,” a sightholder estimated. “If I look at what we refused, we’re talking boxes where the market value is 10% away from their list prices,” he added to emphasize his view that De Beers’ rough was overpriced.
De Beers feels many clients don’t want rough prices to fall because that would force polished prices down, the sightholder explained. However, sources said many sightholders were upset at the steady pricing, having hoped for a change of policy in the current ITO period, which began with last week’s sight.
“It did upset people a little, as some had hoped for a clean sheet of paper for the new ITO period,” a broker said. “They were hoping rough prices would go down to give people a bit of oxygen. If everyone were to leave their boxes on the table, they would know they have to change something.”
Sightholders are still concerned about losing their supply next year, and fear banks will reduce their credits lines even further if they fail to show they’ve bought rough, sight participants noted. “[Sightholders] need to leave all the goods on the table at Alrosa and [De Beers], but they can’t,” a rough broker emphasized.
De Beers’ rough-diamond revenues are down 14% to $1.99 billion for the first four sales cycles, according to company reports and Rapaport records. That reflects weak demand at the start of the year due to the challenges in India and disappointing US holiday sales, which led to lower restocking than usual. Alrosa’s rough sales slid 37% to $988 million for the first quarter, with the Russian miner citing the weak festive season as a key driver.
“Cycle four saw lower rough-diamond sales against a backdrop of macroeconomic uncertainty, and as we enter a seasonally slower period for the industry, with Indian factories closing temporarily for the traditional holiday period,” De Beers CEO Bruce Cleaver explained.
Image: Steve Millan, a sorter at De Beers’ DTC Botswana operation, measures the size of a rough diamond with a micrometer. (De Beers)