Global demand rises for retail diamonds

The first half of 2004 saw buoyant diamond jewelry retail sales around the globe.

Consumption in the U.S., the world’s major market, was 7% ahead of last year in each of the first two quarters of 2004, reports Gary Ralfe, managing director of the De Beers group of companies. The U.S. alone accounts for over half of world diamond jewelry sales.

Strong growth was reported from China and Hong Kong, with double-digit returns. Asia-Arabia experienced “good growth,” says Ralfe, while both France and the United Kingdom showed double digit growth in the first quarter of this year. European sales, however, were dragged down by lacklustre performances in Italy and Germany. Japan, with a modest sales increase of 1-2% in the first quarter, has begun to show signs of life for the first time since that country’s economic bubble burst, some 10 years ago. Ralfe says an indication of “a surge of confidence” in the diamond trade in Japan is that in the first quarter, imports of polished diamonds were up 20% over the same period of 2003.

On a global basis, polished exports from cutting centres into the retail market increased by 15% in the first quarter of 2004 over the comparable period of 2003. Polished prices have risen by an average of 9-10% so far this year.

Imports of rough diamonds into the cutting centres are up 7% on a comparative basis, which Ralfe says is a clear indication that there has been de-stocking of polished from the cutting centres. Against this back drop, bank debt in the cutting centres remains unchanged at historically high levels of around US$8.5 billion.

Consistent demand for rough diamonds through the first half of 2004 resulted in sales by the Diamond Trading Co. (DTC), De Beers’ marketing arm, of US$2.98 billion — 2.2% ahead of last year. The DTC raised its prices on two occasions during the 6-month period, which together amount to 9%. The DTC’s rough prices for the first half of 2004 averaged 14% higher than a year earlier.

“The strong showing, not only in the United States but also in other countries, of diamond jewelry demand continues to gives us confidence that the year as a whole will be a good one in terms of consumer demand,” says Ralfe. But he acknowledged there is a feeling in the trade that rough prices in general are higher than polished prices justify.

Rough diamonds are sourced from some two dozen mines De Beers owns and operates in South Africa and in partnerships in nearby Botswana, Namibia and Tanzania. In addition, De Beers purchases rough stones from Russian diamond producer Alrosa on a willing-buyer/willing-seller basis. An outstanding contract signed by De Beers with Alrosa in December 2002 still awaits clearance by the European Commission. “We hope that before the end of the year, this matter will be resolved,” says Ralfe.

De Beers and its partners account for more than 40% of world diamond production. In 2003, De Beers produced 43.9 million carats of rough diamonds, or 9% more than in 2002. Production for the first six months of 2004 totals 19.3 million carats against a budgeted 22.8 million carats, for a shortfall of 18%. The De Beers group had targeted a 7% increase in carat production across the board. It has fallen short at Debswana, the leading mining company in the De Beers group. Debswana accounted for 30.4 million carats in 2003. Now, at the half-year mark, Debswana is 20% behind budget and 12% behind the comparable period of 2003.

Debswana experienced a series of mechanical breakdowns in the Jwaneng treatment plant. “We did not have anything like an acceptable level of plant availability to us during the first half of the year,” explains Ralfe.

Debswana is a partnership with the government of Botswana. A 25-year mining lease covering the Jwaneng mine was set to expire July 31. Discussions with the Botswana government concerning the lease renewal are in progress. The lease is being extended until an agreement is reached. Jwaneng is the richest mine in the De Beers group.

“I can’t remember ever concluding any agreement to do with Debswana within the proper time line,” Ralfe concedes.

Six-month production from the Namdeb joint venture in Namibia is up 33% over last year’s period, while South African operations are 16% ahead of 2003. However, De Beers continues to face “great difficulties” at five of its seven South Africa mines. These five — Koffiefontein, Kimberley underground, The Oaks, Cullinan and Namaqualand — are the oldest and most marginal of the company’s mines, and have been severely affected by a strengthening rand. “We are doing all we can to try to ensure the survival of those mining operations,” says Ralfe, “and we are conscious of our social responsibilities to the people who work in those mines.”

De Beers’ mining operations as a whole will be doing a substantial amount of catch-up in the second half of this year in order to exceed last year’s carat production. Ralfe is optimistic the operations will see a 5% increase for the year.

In the meantime, the major received final operating permits at the end of May for its Snap Lake underground diamond project in Canada’s Far North. The company expects to be in a position to begin construction of the US$350-million mine during the course of next year. The Canadian division of De Beers is spending the summer months carrying out further preproduction development of the existing underground workings. This work will be used to refine mining methods, confirm dilution estimates, and fine-tune aspects of the plant design, in preparation for approval at De Beers’ board meeting in November.

Snap Lake is expected to produce US$150-200 million worth of diamonds annually. By the end of the decade, De Beers anticipates its Canadian operations, which include Snap Lake, Victor and Gaucho Ku, will be churning out US$500 million of rough diamonds.

For the first six months of 2004, headline earnings of US$424 million for the De Beers group of companies are 12.8% higher than for the comparable period of 2003. Diamond inventories were further reduced by US$388 million, and an operating cash flow of US$871 million was generated. This enabled the group to reduce net interest-bearing debt to US$1.12 billion from US$1.76 billion at the end of 2003. As a result of an early redemption of 25% of its preference shares on June 30, the remainder, with a value of US$642 million, was reclassified as debt in the balance sheets. The board declared an interim ordinary dividend of US$250 million, payable Aug. 2.

The South African titan is owned by a consortium of three main shareholders, including Anglo American (AAUK-Q) and Central Investments DBI, each of which has a 45% stake. The remaining 10% is owned by the Debswana Group in Botswana. Central Investments DBI, in turn, is owned 89% by Oppenheimer family-run Central Holdings Group and 11% by Debswana.