The major’s core business is the mining and marketing of rough gem diamonds. Hampered by the weak economy and an excessive inventory of polished diamonds, held primarily by the U.S. trade, the company saw its rough diamond sales slip 21.5% in comparison with 2000, at US$4.45 billion.
De-stocking by the retail trade and lower demand for diamond jewelry created a downward spiral on polished and rough prices, a shortage of liquidity and reduced profitability.
On a positive note, the Christmas season of retail diamond jewelry sales was better than expected, especially the American market, which accounts for close to half of all such purchases worldwide. De Beers reports that U.S. sales “appear to have been slightly better than Christmas 2000.” Consequently, global retail sales were not down as badly as had been feared.
For all of 2001, diamond jewelry retail sales worldwide fell about 5%, as opposed to the 7% registered at the half-year stage. Net polished imports into all of the retail centres declined by 17%, and rough imports into the cutting centres fell by 18%.
De Beers Managing Director Gary Ralfe says that while a lot of discounting took place in the U.S. diamond jewelry market during the fourth quarter of 2001, he believes the post-Sept. 11 mood augurs well for diamond sales insofar as the product represents “commitment and family values.”
In Japan, the second most important diamond jewelry market, retail sales were down 13%, in line with other declining economic indicators for that country.
“It was a difficult year, and I’m pleased to say we worked closely with our clients in order to see a difficult year through together,” says Ralfe. Referring to the profit sightholders made on rough goods sold through De Beers’ marketing arm, the Diamond Trading Company (DTC), he says “there is no doubt that profitability last year was generally too low within the diamond industry.
“In spite of our attempts to get our assortments competitively in line for the benefit of our clients, it was lagging behind the pressure on both polished and rough prices in the market place.”
At the beginning of 2001, there was a considerable overhang of polished goods, particularly in the U.S. retail trade. Indeed, De Beers estimates there was as much as US$1 billion (at wholesale prices) in polished overhang in the retail pipeline. “It looks as though that was substantially absorbed last year, with retailers not wanting to build up their inventories, and because conditions turned out to be better than expected,” says Ralfe.
Overall, the level of diamond stocks in the total pipeline, including cutting centres and the retail end, fell substantially last year, which could augur well for 2002.
“We have certainly started the year on a pleasing note,” says Ralfe.
At its first sale in January, the DTC carefully put together a small site of appealing rough gems for its clients. Ralfe says the mood was buoyant, and adds that it continues to be so leading up to the second site this month, with clients showing a strong interest.
“At the moment there’s considerable optimism that the bottom has been reached, and market sentiment has improved considerably,” Ralfe says, though he cautions that “there’s still an excess of polished stock in the cutting centres, and we remain concerned that bank debt is at too high a level.
“But on the other hand, rough stocks in the cutting centres are at an all-time low.”
The cutting centres are carrying about US$6 billion in bank debt and have financed the purchases of some US$3.8 billion of polished stock on exceptionally long credit terms.
De Beers operates more than a dozen mines in South Africa and in nearby Botswana, Tanzania and Namibia. Some are wholly owned, whereas others are joint ventures with governments.
In 2001, total carat production rose 6% to some 39 million carats. The South African operations recorded a 9% increase in production at just under 11 million carats. Debswana, a 50-50 partnership between the government of Botswana and De Beers, produced 26 million carats, representing a 6% increase.
The Snap Lake underground kimberlite dyke project in the Northwest Territories “is well on its way to becoming a mining project,” says Ralfe. It will be the first mine owned by De Beers outside of southern Africa. The project is currently working its way through the environmental assessment process, and Ralfe hopes to obtain permits during the course of 2003, which could put Snap Lake on track to starting production in late 2005 or early 2006.
About 40% of De Beers’ worldwide exploration budget of US$75 million was spent in Canada last year. Ralfe says both the Victor project in northern Ontario and Gahcho Kue (Kennady Lake) in the Northwest Territories look positive and justify further expenditures in the coming year.
“We’re still in prefeasibility, but feeling hopeful about both projects,” he says.
South African projects
A third of the global exploration budget is spent in South Africa. De Beers recently entered into a joint venture with Mvelaphanda, a black empowerment mining company, to explore for diamonds in northern South Africa in parts of the Northern Province and Mpumalanga. The joint venture has applied for prospecting licences based on earlier work by De Beers, which had identified some prospective targets.
For the year ended Dec. 31, 2001, total net earnings of the De Beers group, which includes retained earnings of associated companies, were 59% lower than at the end of 2000, coming in at US$776 million. Headline earnings fell 51% to US$837 million, compared with US$1.71 billion in 2000.
Operations generated a cash flow of US$638 million for the year, against US$2.24 billion a year ago. Paddy Kell, executive director of group finance, says a negative operating cash flow in the second half of 2001 is attributed to a “slight buildup” of diamond stocks after De Beers imposed quota restrictions on those producers supplying diamonds to the DTC.
“We were not buying a full 100% of production available from our partners,” Kell says, and Ralfe confirms that the deferred purchase arrangement accounted for less than 10% of the partners’ production.
In addition to its own mines, De Beers purchases diamond production from group companies such as Debswana and Namdeb, as well as the Russian producer Alrosa and
Alrosa deal
In December 2001, De Beers signed a 5-year deal with Alrosa for annual diamond purchases of US$800 million. The agreement covers about 50% of Alrosa’s production. Under European competition rules, the trade agreement remains subject to clearance by the European Commission. Meanwhile, De Beers is in the final year of a 3-year contract to purchase 35% of the run-of-mine production from Ekati.
One of the company’s aims, under its proposed supplier-of-choice strategy, is to achieve full legal compliance in those jurisdictions where it operates. De Beers is engaged in an ongoing dialogue with the competition authorities for the European Commission in Brussels, which last July published a statement of objections to De Beers supplier-of-choice initiative. Specifically, the major is seeking approval on its vertical chain of diamond distribution to its clients.
Ralfe says the talks with the European Commission have been positive. “We’re hopeful that this process is now drawing to a close. It is important to have achieved their legal approval of the way we select our clients and distribute our diamonds.”
The intent of the multi-faceted strategy is to revive the diamond jewelry business and drive incremental demand for the finished product. Under the supplier-of-choice strategy, sightholders would be encouraged to play a greater role in promoting diamonds at the retail level. The DTC will make its marketing expertise available, as well as possible financial support, to assist clients in developing their own marketing campaigns. The DT
C will also offer technical support and consultation.
During the past year, De Beers received approval for its joint venture with
Settlement
Meanwhile, in the U.S., De Beers settled a class action civil suit arising out of the indictment brought against General Electric and De Beers for conspiring to fix the price of industrial diamonds, dating back to 1994. De Beers has yet to address the criminal part of that indictment, which continues to hang over the company in the U.S.
De Beers was delisted and privatized last year by a consortium comprising
Ralfe stresses that De Beers Consolidated Mines, as a South African company, continues to be managed from Johannesburg, with its own executive committee residing in South Africa. De Beers underwent a major restructuring in 1989 in response to the pre-reform political environment in South Africa and the threat of sanctions. The company’s South African assets and operations were put into De Beers Consolidated Mines, while De Beers Centenary housed the non-South African assets.
Be the first to comment on "De Beers saw diamond sales shrink in 2001"