COMMENTARY — Encouraging rough diamond signs

Initial signs (from the rough diamond market) for 1993 are encouraging. The two opening sights were acknowledged officially to be good (and were substantially higher than those of 1992). The March sight is also reported to have been unusually strong.

De Beers cites specific reasons for the apparent strength of the first two sights. These include:

— the current scarcity of Angolan diamonds resulting from the onset of the rainy season and resumption of the civil war;

— the hiatus in supplies of Russian polished stones, prompted by the imposition of a 20% export duty (now lifted);

— strong demand from India arising partly from the move to full convertibility of the rupee; and

— increased offtake from the U.S. where stocks had been depleted. Other indications supporting this recent strength come from Antwerp, Belgium, where strong rough buying interest is reported and where little surplus rough has been available in recent months. Overall cutting centre stocks were reported to be slightly lower at the end of 1992 than a year previously. We are forecasting a 5% increase in Central Selling Organization (CSO) sales in 1993 to US$3.6 billion, with a further advance to US$3.9 billion in 1994. Although 1993 may bring a resurgence of illicit Angolan stones, the flow is unlikely to be as high as last year. The wild card will probably be the role of Russia.

While De Beers produces half of the world’s gem diamonds, Russia has the capacity to produce around 25%. However, Russian production fell by 25% in 1992, largely because of the drop in output from the Udachnaya mine which produces 80% of the total estimated gem output of 10 million carats per year. With the lifting of the Russian 20% export duty, De Beers expects a flood of polished stones to enter the markets.

Despite the pressures created by the desperate need for foreign exchange, Russia has continued to market its permitted share of rough in an orderly fashion (5% of total rough sales; the remaining 95% is sold under contract to the CSO). Little leakage is reported, despite local demands for a greater “window.”

The terms of De Beers’ 1990 US$1-billion loan agreement have been adhered to scrupulously. It is being repaid on schedule (in diamonds) in quarterly tranches equivalent to US$50 million plus interest.

— Analyst Michael Spriggs writing in a recent issue of “International Mining Outlook” of S.G. Warburg Securities, London.