Business / Business News

Prinesha Naidoo
3 minute read
17 Feb 2016
2:08 pm

De Beers sees a rebound in diamonds

Prinesha Naidoo

Earnings fall 58% but the company remains cautiously optimistic.

Picture supplied

JOHANNESBURG – De Beers may have lost some of its sparkle but expects a rebound in the diamond market to boost its performance.

Weakness in the rough diamond market weighed on the world’s largest diamond company in the financial year ended December 31 2015. A 36% decline in rough diamond sales pushed total revenue down 34% to $4.7bn. Despite an 8% decline in its rough price index for the year, the Anglo American subsidiary managed a 5% increase in average realised diamond prices to $207/carat (ct). A combination of cost-saving initiatives and favourable exchange rate movements saw consolidated unit costs improve to $104/ct from $111/ct. Still, underlying earnings before interest and tax (EBIT) more than halved from $1.36bn to $571m, but came in 5% higher than forecasts by JP Morgan analysts.

At the same time, weaker than expected consumer demand coupled with a build-up of stocks and a cash-crunch among diamond traders put downward pressure on the polished diamond prices and the mid-stream industry.

In response, it cut diamond production by 12% to 28.7m ct from an initial target of 32m ct. “We demonstrated, at that time, that production to demand is working. We saw the demand being a little bit shaky, we started to cut, we saw the perfect storm building up and we cut further and at the end it was the right response to the market,” Phillipe Mellier, CEO of De Beers said in a pre-recorded video.

Despite tough trading conditions, the company said its Forevermark brand enjoyed double-digit sales growth. Forevermark, which recently relaunched De Beer’s famous “A Diamond is Forever” marketing campaign, increased its footprint by 14% and is now available in more than 1 700 outlets across 35 markets.

In an attempt to boost holiday gift giving in its key US and Chinese markets, De Beers said it also invested in additional marketing campaigns. “We’re still in the middle of Chinese New Year and if holiday sales are robust, we should expect restocking by diamantiers soon,” BMO Capital Markets’ Ed Sterck said from London.

Sterck said initial indications point to a slightly improved diamond market. De Beers and Alrosa, which together make up around two-thirds of the diamond market, sold close to $1bn worth of diamonds in their first sales of the year. However, he expects diamond prices to remain flat from where they ended in 2015.

De Beers, which expects to produce 26-28m carats in 2016, said it will adjust production in accordance with trading conditions. It also plans to deliver $200m in cash savings through a reduction in production costs, overheads, and capex. It has announced plans to cut 121 jobs at its South African operations and expects natural attrition to impact a further 68 positions across its workforce.

Describing the market as fragile, Mellier said the company has worked to “close 2015 on the right note” and ensure that stocks were close to normal levels at the end of the year. “We are now in a position to start 2016 and look at 2016 as a new cycle with a rebound,” he said.

Anglo American CEO Mark Cutifani said the company must continue driving an understanding of its products. “When people think diamonds, they have to think De Beers and our Forevermark brand,” he said.

De Beers is central to Anglo American’s future plans and, together with platinum group metals and copper, will form part of the diversified miners’ consumer-oriented core business units.