New De Beers Contract

The big story of this cycle is De Beers’ announcement about the new contract period to start in April 2015. As expected, the company greatly simplified the contract, setting a minimum standard, or gating criteria, for companies to be considered for a supply. The second important change is the introduction of a new type of client, Accredited Buyers, companies that meet the qualifying standards, but are not large enough to get a regular supply.

 

Some in the market view Accredited Buyers as those expected to buy the goods that Sightholders are not interested in – because they are priced too high, for example. The view on the number of such clients runs from dozens to just a few (because not many companies already meet the demand for IFRS accounting). Others see the potential to add competition, democratize supply and join the ranks of Sightholders. For more on Accredited Buyers see Sightholders Take Note, De Beers Has a New Group of Clients.

 

The third interesting change in the contract is the introduction of Strategic Supply. The idea here is to give some companies an additional supply beyond the ITO. De Beers will invite companies that have projects that add great value to diamonds to get this extra supply. Added value in this context is a successful diamond brand (think Chow Tai Fook’s Hearts on Fire) or “process efficiently greater volumes of De Beers supply (e.g. through world-class economies of scale),” as the company describes it.

 

According to one estimate, Strategic Supply could constitute 5%-10% of De Beers’ total production. This is a sizeable amount. What makes this initiative interesting is that this added supply will be counted as part of a receiving Sightholder’s purchases in the next ITO: If a Sightholder gets a $10 million Sight based on past purchases, and another $5 million allocation as part of the Strategic Supply, for the next ITO the starting point is $15 million.

 

It is possible to argue that one of the biggest changes in the next contract is that the largest firms are set to grow even more at the expense of the smaller companies, and there will be many more smaller companies competing for the goods. De Beers is creating a Long Tail list of clients.

 

De Beers’ Sight

De Beers Sight in July is estimated at $800 million-$850 million, one of the biggest Sights in several years. The large supply is a response to the jump in demand created when Alrosa announced it would supply fewer goods until September. Even though it had the opportunity, De Beers didn’t raise prices in a meaningful way.

 

The Collection 5-10 carats box is up 1.4% to $8,212 per carat while the smaller Collection 2.5-4 carats box is down 1.4% to $3,584 p/c. The price movement of the better commercial goods was mixed but prices of fancy goods are up sharply. The Fancy 2.5-14.8 carat box was hiked by 9%.

 

Reflecting the solid demand for De Beers’ rough, premiums paid by the secondary market are estimated at 4-6% even though De Beers is considered a high-priced supplier.

 

Sightholders continue to state that manufacturing is still not very profitable and are unhappy about the prices. At the same time, there is an expectation that the situation will improve by September because of the added Alrosa supply, which will result in lower rough prices, and the expected seasonal increase in demand for polished diamonds – and hoped for rise in polished diamond prices.

 

De Beers saw a large increase in production, rising 12% in the first six months of the year to 16 million carats. The increase is largely due to higher output at Venetia following the recovery from the pit flooding in 2013, parent company Anglo American reported. The increase comes despite high seasonal rainfall in southern Africa that affected production earlier this year.

 

Alrosa Production Down, Prices Are Up

Alrosa’s supply continues to be lower, as the company reported earlier in the year. The company scheduled maintenance works at two large processing plants and mined lower grade ore at the Nyurbinskaya pipe and the International underground mine. The result is a 7% decrease in production to 15.9 million carats in the first half of the year.

 

The company sold 21.1 million carats of diamonds for $2.7 billion, a 13% increase in revenue in the first half of 2014. This puts average prices at about $128 p/c.

 

During the second quarter, Alrosa sold 6.1 million carats of gem-quality diamonds with an average price of $200 p/c. This compared to a reported $191.4 p/c in the second quarter of 2013, a 4.5% year-over-year price increase. However, Alrosa is reporting that in the January-June period of this year, diamond prices are up by about 6%.

 

It’s not clear where the 1.5% difference comes from, but the important point to note is that rough diamond prices are seeing an overall increase in prices. Conversely, polished diamond prices are up by only 2.8% according to the IDEX Online Index, underscoring manufacturers’ reports of decreasing profitability.

 

Dominion, Lucara Doing Well

Dominion reported a 15% increase in production to 4.02 million carats in H1, after a 38% jump in production in Q2. The company said the increase was the result of a combination of higher grades and volume.

 

The company also increased its shareholding in Ekati to 90%, after buying Chuck Fipke’s 10% holding for $67 million.

 

Lucara’s second tender of +10.8 carat goods, consisting of 16 diamonds from the Karowe mine in Botswana saw some very strong prices. The top items by total value were a 109.4-carat diamond that sold for $6.19 million ($56,615 p/c) and a 118.4-carat diamond, which sold for $5.36 million ($45,225 p/c).

 

All 16 diamonds, totaling 1,445 carats and averaging 90.34 carats, were sold, fetching $40.12 million ($27,755 p/c). Lucara said that 13 diamonds sold for more than $1 million each, including four that sold for more than $4 million each.

 

Karowe continues to supply a good stream of exceptional diamonds. Among the goods offered at the last tender were six diamonds weighing more than 100 carats, the largest among them weighing 258.69 carats, proving that the adjustments the company made to their crushing and separation system is paying off.

 

Outlook

The diamond industry is heading into its seasonal August slowdown and activity will relax, even in India. However, the market expects to see good business in September. If demand for polished diamonds (and their prices) rises strongly enough, the increased demand for rough may drive prices up, even though more goods are expected in the market.

 

Usually, September starts slowly as traders returning from vacations try to get a feel for the market. If, however, expectations are high – and this high expectation is not met, the letdown will be bad. This is not only an issue of mood, but approach to doing business.

 

Demand for Key De Beers Boxes Following July Sight

 

Article	Demand*	Remarks on Demand
Fine 2.5-4 cts & Fine 5-14.8 cts	Medium demand	Same demand compared to previous Sight
Crystals 2.5-4 cts & Crystals 5-14.8 cts	Medium demand	Same demand compared to previous Sight.
Commercial 2.5-4 cts and 5-14.8 cts	Good  demand	Better demand compared to previous sight.
Spotted Sawables 4-8 gr	High demand	Same demand compared to previous Sight.
Chips 4-8 gr	Medium demand	Same demand compared to previous Sight.
Colored Sawables 4-8 gr & Colored 2.5-14.8 cts	Strong demand	Higher demand for 4-8gr than to +2ct.
Makeables High 3 gr +7	Low demand	Lower demand compared to previous Sight.
Preparers Low 3-6 gr	Low demand	Lower demand compared to previous Sight.
1st Color Rejections (H-L) +11/+7	Low demand	Lower demand compared to previous Sight.
1st Color Rejections (H-L) -7+3	No demand	Much less demand compared to previous Sight.

*Change from previous Sight