De Beers cuts production of rough diamonds, bets $170 million on marketing

Market expected to remain under pressure in near future, says CFO

De Beers is cutting production of rough diamonds from 35 million carats last year to 31 million carats to reduce supply and is increasing spending on marketing from $110 million in 2014 to $170 million.  

The decision by one of the largest diamond companies in the world follows a few quarters of a slowdown and lower prices. But some inventories of polished diamonds with polishing units and major retailers will continue to be a pressure point for Indian units for some time.  

India is the world's largest supplier of polished diamonds. The polishing industry here still holds polished diamonds' inventory and until this stock is exhausted, the import of rough diamonds will remain on the slow track,  despite De Beers’ cutting the prices of rough diamonds. 

In the first half of 2019, the company declared interim results which show that total revenue decreased by 17 per cent to $2.6 billion compared to the first half last year. 

Rough diamond sales declined by 21 per cent to $2.3 billion but in quantity terms, consolidated rough diamond sales volumes decreased by 13 per cent to 15.5 million carats due to prices falling from $162 per carat to $151. 

“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,” said De Beers Chief Financial Officer Nimesh Patel.  

In late 2018, US retail performance was impacted by stock market volatility and US-China trade tensions which resulted in both retailers and the midstream starting 2019 with higher than anticipated stock levels. 

During this year, demand outside the US continued to be impacted by US-China trade tensions, the Hong Kong protests, and a stronger US dollar, particularly in China and the Gulf. 

In the US, retail store closures and destocking also lowered the demand for polished diamonds and, in turn, midstream demand for rough diamonds. 

The impact in India, Patel explained, was that cutting and polishing units were facing “slow sales, high inventory, and lower realisation” along with local issues of tight liquidity and scarce working capital after the banks tightened flows to the sector. Consequently, exports of polished diamonds will be subdued as reflected in the first quarter of FY20.

Patel said while the diamond market is expected to remain under pressure in the near future, “underlying GDP growth remains supportive of consumer demand growth and is expected to bring midstream and retailer stocks back to more normal levels as we move into 2020, subject to an improving macroeconomic environment”. 

If Patel is confident about the long term market outlook for natural diamonds, it is because diamond supply is falling. Even De Beers has closed some mines that have lived out their life and are now exhausted. In Australia, for example, a large mining company is closing a big mine with 14 million carat production due to exhaustion. 

“Demand for diamonds in general will be good going ahead and reduced supply will increase value. In fact, we are investing money to sustain mines that have a good life ahead,” he said. 

Interestingly, under the industry project initiated by De Beers, the whole industry chain from mining diamonds to reaching consumers is being covered under a ‘Block Chain’,  which keeps a record of every diamond from mining to polishing to ensure they are sold in a transparent manner. 

According to Patel, more and more retailers across the world, diamond mines owned by other companies, and intermediaries are showing interest  and many of them are coming under the Block Chain. A full roll-out may take some time, he said, but the “response is very good”.  

De Beers, through its independent arm, is increasing production of honest and ethically produced diamonds and synthetic or lab-grown diamonds to 200,000 carats next year from 20,000 carats as of now. This is to meet the needs of a separate class of consumers seeking fashion diamonds as opposed to natural diamond consumers who know they are buying an asset.   

The share of synthetic diamonds only constitutes 2 per cent of the total diamond market currently. With production increasing, their prices are also expected to fall.