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.
Following a devastating first half of the year 2020 due to COVID-19, the global diamond industry started gaining positive momentum towards the end of the year as key markets entered into thanks giving and holiday season.
However Bruce Cleaver, Chief Executive Officer of De Beers Group cautioned that the industry is not out of the woods yet, citing prevailing challenges ahead into 2021.
The first half of 2020 was characterized by some of the worst challenges in history of global diamond trade.
The midstream, where rough diamonds are traded in wholesale and bulk to cutters and polishers, was for the most part of second quarter 2020, suffocated by international travel restrictions as countries responded to the contagious Corona Virus.
This halted movement of buyers and shipment of the rough goods , resulting in unprecedented decline of sales, in turn ballooning stockpiles as the upstream operations produced with little uptake by the midstream.
The situation was exacerbated by muted demand in the downstream where jewelry industries and tail end retailers closed to further curb the spread of COVID-19.
However towards the end of third quarter getting into the last quarter of the year, demand in both midstream and downstream started to steadily pick up as countries relaxed COVID-19 restrictions.
De Beers, the world’s largest diamond producer by value started reporting significant recovery in sales in the sixth and seventh cycle, figures began to reflect an upswing in sentiment as well as increase in uptake of rough goods by midstream.
Sales for the sixth cycle amounted to $116 Million, following a sharp downturn in the previous cycles, significant jump was realized during the seventh cycle, registering $320 million, an over 175 % upswing when gauged against the proceeding cycle.
De Beers noted that diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations.
“Manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas, accordingly, we saw a recovery in rough diamond demand in the seventh sales cycle of the year, reflecting these retail trends, following several months of minimal manufacturing activity and disrupted demand patterns in all major markets,” said De Beers Chief Executive, Bruce Cleaver in September last year.
The diamond mining behemoth continued to register impressive sales in the eighth and ninth cycle signaling the industry could end the year on a positive note.
The momentum was indeed carried into the last cycle of the year. The value of rough diamond sales (Global Sightholder Sales and Auctions) for De Beers’ tenth sales cycle of 2020 amounted to $440 million, a significant increase from the 2019 tenth sales cycle value.
Against what seemed like a positive year end that would split into the New Year Bruce Cleaver, CEO, De Beers Group, however warned the industry not to count eggs before they hatch.
“Positive consumer demand for diamond jewellery resulting from the holiday season is supporting the continuation of retail orders for polished diamonds from the diamond industry’s midstream sector. This in turn supported steady demand for De Beers’s rough diamonds at our final sales cycle of 2020,” Cleaver had said in December.
In caution the De Beers Chief noted that “While the diamond industry ends the year on a positive note, we must recognise the risks that the ongoing Covid-19 pandemic presents to sector recovery both for the rest of this year and as we head into 2021.”
All segments of the supply chain were severely impacted by the global lockdown measures introduced in response to the Covid-19 pandemic in the first half of 2020.
After a strong US holiday season at the end of 2019, the rough diamond industry started 2020 positively as the midstream restocked and sentiment improved.
However, from February 2020, the Covid-19 outbreak began to have a significant impact on diamond jewellery retail sales and supply chain, with many jewelers suspending all polished purchases and/or delaying payments to their suppliers.
Rough diamond sales were materially affected by lockdowns and travel restrictions, delaying the shipping of rough diamonds into cutting and trading centers and preventing buyers from attending sales events.
These resulted in significant decline in total revenue for the business in the first six months of 2020. Total revenue decreased by 54% to $1.2 billion from $2.6 billion registered in the prior half year period ended 30 June 2019.
For the entire first six (6) months of the year 2020 De Beers Rough diamonds sales fell drastically to $1.0 billion from $2.3 billion in the prior H1 period ended 30 June 2019. Sales volumes decreased by 45% to 8.5 million carats compared to 15.5 million carats registered in the prior period.
Next month Minister of Finance & Economic Development, Dr Thapelo Matsheka will face the nation to deliver Botswana‘s first budget speech since COVID-19 pandemic put the world on devastating economic trajectory.
The pandemic that broke out in late 2019 in China has put the entire world on unprecedented chaos ,killing over P1 million people across the globe , shattering economies and almost rendering the year 2020 – a 12 months stretch of complete setback.
The 2021/22 budget speech will come at time when Botswana’s economy is still trying to emerge out of this.
National lockdowns and local travel restrictions have hit small medium enterprises hard, while international travel restrictions halted movement of both good and people, delivering by far some of the heaviest and worst catastrophic blows on the diamond industry and tourism sector, the likes of which this country has never seen before on its largest economic sectors.
As Minister Matsheka faces parliament next month, the reality on the ground is that Botswana’s national current cash resource, the Government Investment Account (GIA) is depleting at lightning speed.
On the other hand the COVID-19 economic mess is prevailing, the virus is reported to have taken a new dangerous shape of a deadly variant, spreading like fueled veld fire and causing some of the world’s super powers back to tough restrictions of lockdown.
According official figures released by Bank of Botswana, in October 2020 the GIA was running at P6 billion compared to the P18.3 billion held in the account in October 2019.
However reports indicate that the account could be currently holding just about P3 billion. The draw down from the GIA has been by exacerbated by declining diamond revenue, the country‘s largest cash cow. The sector was experiencing significant revenue decline even before COVID-19 struck.
When the National Development Plan (NDP) 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at a 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.
Taking into account the COVID-19 economic mess in 2020/21 financial year, the budget deficit could add up to P20 billion after revised figures.
Drawing down from government cash balances to finance these budget deficits meant significant withdrawals from the Government Investment Account, hence the near depletion of this buffer.
Meanwhile should Botswana’s revenue streams completely dry up to zero levels; the country would only have 11 months, before calling out for humanitarian aids and international donors, because foreign reserves are also on slow down.
During 2019, the foreign exchange reserves declined by 8.7 percent, from Seventy One Billion, Four Hundred Million Pula (P71.4 billion) in December 2018 to Sixty Five Billion, Three Hundred Million Pula (P65.3 billion) in December 2019.
The reserves declined further in 2020, falling by 2.3 percent to Sixty Three Billion, Seven Hundred Million Pula (P63.7 billion) in July 2020. This was revealed by President Masisi during State of the Nation Address in November last year.
The decrease was mainly due to foreign exchange outflows associated with Government obligations and economy-wide import requirements.
However latest statistics(October 2020) from Bank of Botswana reveal that Botswana’s foreign reserves are estimated at P58.4 billion, with government’s share of these funds significantly low.
Government has since introduced several measures to contain costs and control expenditure with the most recent intervention being the halting of recruitment in government departments and parastatals.
Furthermore, Value Added Tax has been signaled to go up from 12% to 14% in April this year with more hikes and service fees anticipated as government embarks on unprecedented domestic revenue mobilization.
Botswana Stock Exchange listed hotel group Cresta Marakanelo Limited (“CML” or “the Company”) announced the signing of a lease agreement for Phakalane Golf Estate Hotel & Convention Centre, which will see CML extend its footprint by adding the 4 star Gaborone property to its already impressive portfolio. The agreement is subject to regulatory approvals therefore the effective date of the transaction is expected to be 1 February 2021.
CML brings a wealth of expertise to the lease and despite the difficult year for the tourism and hospitality industry, due to the impact of the COVID-19 pandemic, CML remains confident in the recovery of the sector and the need to invest in expanding the Company’s footprint.
CML Managing Director, Mr Mokwena Morulane commented: “Our continued efforts to improve our offerings, understand the market dynamics and modern day trends in the face of global challenges, means we are ready for the changing face of tourism and international travel, and this addition to the Cresta portfolio signals our confidence in the future.
“Despite the headwinds faced in 2020, Management has continued to focus on projects that enhance CML’s product offering such as the refurbishments at Cresta Mowana Safari Resort & Spa in the tourism capital Kasane and the ongoing refurbishment of Cresta Marang Residency in Francistown. The signing of the lease for the 4 star Phakalane Golf Estate Hotel & Conference Centre is a great addition to the Cresta portfolio and will unlock shareholder value in the future.
“We remain vigilant to value-enhancing opportunities including acquisitions or leases, after having reconsidered our pipeline against current and expected market conditions.”
Commenting on the lease agreement, the Chief Executive Officer, Mr S Parthiban, speaking on behalf of Phakalane noted; “No hotel chain holds as much expertise in the region, understands our local culture and tastes and what hospitality is about better than Cresta Marakanelo Limited. We believe that the renovations done to the property has made Phakalane Hotel and Convention Centre a unique product in Botswana and at par with international facilities. We believe that this lease will benefit not only us as Phakalane , but the market in general as Cresta has run hotels successfully in Botswana for over 30 years and is therefore expected to bring new offerings that appeal to the local and international markets as well as the residents and visitors to the Golf Estate. We look forward to a long mutually beneficial relationship with Cresta.”
CML like the rest of the tourism and hospitality industry and the entire value chain was hard hit by lockdowns with the surge of COVID-19. By investing during the low period, the company hopes to realise the future value of spending time in preparing for the new consumer dynamics and behaviour. Despite business interruptions as a result of a six-month long state of emergency and several lock-down periods declared by the Government of Botswana to limit the spread of COVID-19, the Company is starting to record an increase in occupancies, which bodes well for the recovery of the industry and the Company’s future prospects.