The year 2019 presented a difficult sales path for diamond mining giant De Beers Group, the lucrative industry behemoth has to date sold about $ 1.2 billion less worth of polished diamonds this year.
During the first half of the year, sales portrayed steeper downward trajectory in the wake of muted manufacturing sector resulting in a backlog of polished diamond inventories in the midstream and weaker trading conditions. The company which ethically sources about 60 % of its diamonds in Botswana through Debswana, a 50-50 partnership with Government of Botswana conducts 10 cycles in a year at its high rise magnificent Global Sight Holder Sales block in Gaborone.
Ten times a year, sight holders descend Sir Seretse Khama International Airport from Belgium, United States, India, China & the Gulf amongst others markets for about a week long auction sale of rough diamonds from Botswana, Namibia & Canada and South Africa. De Beers Global Sight holder Sales relocated from London to Botswana in 2011.
In the year 2018 De Beers’s rough diamonds sales amounted to US$5.39 Billion, approximately P54 Billion, this was a slight pickup from the 2017 sales value of US$5.31 Billion. For the year 2019 nine (9) cycles have only gathered total sales provisional value of US$3.60 billion, way below the 2019 value of the same period by over $1.2 billion. The slow start was evident right from the beginning of the year with 2019 Cycle 1 registering actual value of US$544 million , US$128 million less than the 2018 cycle 1 which hit heights values of US$672 million.
The first quarter of the year showed slight upward trajectory with cycle 2 sales a bit higher than cycle 1 and cycle 3 showing improvement from cycle 2 as well, however still below the same cycles in the previous year 2018. Right from after cycle 3 De Beers Rough diamonds sales graph started showing steeper downward gradient with Cycle 4 registering US$416 million compared to $US554 million recorded in 2018. De Beers Group Chief Executive Officer attributed the low performance to macroeconomic uncertainties as well as the period‘s seasonally slow trends owing to Indian factories closing temporarily for the traditional holiday period.
A major decline was registered at Cycle 6, which only managed to sell rough diamonds worth US$250 million, way below the 2018 cycle 6 values of $533 million. This was the lowest amount earned from a sale since December 2015, spilling over from cycle 5 value which were also below the 2018 corresponding cycle by about 32 %. De Beers explained that the trend was attributable to sluggish rough diamond trading circumstances in China, the second largest economy and one of its major markets
“While overall retail sentiment for diamond jewellery in the US remains solid, a more challenging environment in China and higher than normal polished diamond inventories in the midstream resulted in a cautious approach from rough diamond buyers during the fifth cycle of 2019," said Bruce Cleaver De Beers Group Chief Executive in June this year. For cycle 6 the group explained that sales were significantly low also because of persisting macroeconomic uncertainty, with retailers managing inventory levels, and polished diamond inventories in the midstream continuing to be higher than normal.
De Beers Group then provided customers with additional flexibility to defer some of their rough diamond allocations to later in the year. Rough diamond sales continued to be very slow in August (cycle 7) with sales revenue totaling to US$287 million, a slight increase from cycle 6 but still significantly lower that the corresponding cycle in 2018 mirroring 44 % decline when gauged against 2018 cycle 7 value of $503 million.
De Beers continued with its flexibility offer into cycle 7 and 8 giving its clients the opportunity to leave up to 50% of available goods on the table to lower the pressure on buyers without lowering their prices. The company announced in an internal communiqué to sight holders in August De that it would buy back up to 20% by carat weight of customers’ purchases instead of the typical 10%, specifying that they could not use both options on the same box of goods.
The company offered several options to increase the flexibility for manufacturers and traders struggling with an oversupply of rough and polished: in addition to the higher level of buybacks – whereby customers purchase the diamonds and then sell them back to De Beers at an agreed price, while having those purchases count toward their 'demonstrated demand' which determines future allocations. De Beers also enabled buyers to make additional deferrals of goods to later sights, and set an earlier date on the annual opportunity for customers to reschedule their purchases.
When commenting in August after cycle seven Bruce Cleave said “With midstream participants continuing to work down polished diamond inventory levels and reduced levels of manufacturing in the key cutting centers, De Beers Group provided customers with further supply flexibility during the seventh cycle of 2019.” To further respond to market pressures De Beers decreased its rough diamond production in Q2 by 14% to 7.7 million carats and revised its full-year guidance downwards to 31 million carats in response to a backlog of polished diamond inventories in the midstream and weaker trading conditions.
INCREASED MARKETING SPEND
In November De Beers Group announced that its marketing spend in the entire 2019 will be totaling to $180 million (around P1.9 billion). This was revealed by De Beers Group Chief Executive Officer Bruce Cleaver on the sidelines of the Diamond Conference held in Gaborone. Bruce said the $180 million dispatch is De Beers largest marketing spend in 10 years.
“This illustrates how difficult the market was in 2019 , and contrary to what many may think ,when the global demand is subdued we may cut down any expenditure for cost containment but not the marketing spend ,that is actually when you have to increase the marketing budget,” he said.
REDUCED PRODUCTION FORECAST FOR 2020 & 2021
When giving a business update in London this week Group Chief Executive Officer of Anglo American, De Beers’s parent company Mark Cutiffani said during 2019 the diamond industry didn’t have it easy, trade wars sparked uncertainty, depressing manufacturing inventories and slowing down the polished diamonds market uptake.
Anglo reported that De Beers sales fell 26 percent this year amid challenging market conditions adding that this will result in the company lowering its lowering its sights on production in the near future.â€¨â€¨Following its revised full year guidance Anglo noted that De Beers is expected to mine approximately 31 million carats of diamonds in 2019, down 11 percent from 35 million last year.â€¨â€¨Prices on a full-year basis have dropped about 20 percent while the diamond price index is down about 5 percent. De Beers’ mix is down in terms of quality (by price) about 15 percent, due in part to the company holding back some higher-quality goods in hopes market conditions improve.
Anglo has cut its diamond production forecast for the next two years. In 2020, it expects De Beers will mine 32-34 million carats, down from its previous outlook of 33-35 million. For 2021, the forecast was cut from 35-37 million carats to 34-36 million carats. Production guidance for full year 2022 is 33 to 35 million carats.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”