All glitter and sparkling like a diamond as total revenue increased by 4 percent, to $6.1 billion (P611 billion) in 2018 from $5.8 billion (580 billion) in the previous year. De Beers Group executive vice president Paul Rowley revealed this week when presenting preliminary financial results for 2018 that last year the group delivered a “robust” financial and operational performance despite headwinds which will continue to haunt the Group into 2019.
The rough diamond sales also shined by 4 percent, increasing to $5.4 billion (P540 billion) in 2018 from $5.2 billion (P520 billion) and De Beers on Thursday said this is driven by improved overall consumer demand for diamond jewellery and a 1% increase in the average rough diamond price index.
According to De Beers preliminary financial results for 2018 the average realised price increased by 6 percent to $171/carat from $162/carat in 2017, reflecting the lower proportion of lower value rough diamonds being sold in the second half, which resulted in a 2 percent decrease in consolidated sales volumes to 31.7 million carats from 32.5 million carats in 2017.
The financial results also states that other revenue also increased owing to improved ‘high end’ jewellery sales at De Beers Jewellers (consolidated for a full year in 2018, compared with nine months in 2017), partly offset by a 5 percent decrease in Element Six revenue due to a reduction in sales to the oil and gas market. The De Beers rough diamond production increased by 6 percent to 35.3 million carats from 33.5 million carats in 2017 and this was in the lower half of the production guidance range of 35-36 million carats.
In Botswana’s Debswana production increased by 6 percent to 24.1 million carats from 22.7 million carats in 2017. De Beers also said production at Jwaneng was flat, as the effect of processing planned lower grades was offset by a 12 percent increase in plant throughput. The mining giant said at Orapa, a 13 percent increase in output was driven by higher plant utilization and the full effect of the successful restart of the Damtshaa operation.
According to De Beers, production in 2019 is expected to be in the range of 31-33 million carats, subject to trading conditions. The lower production is driven by the planned process of exiting from the Venetia open pit, with the underground operation becoming the principal source of ore from 2023, according to De Beers.
The major diamond group said associated with this, an increased proportion of production in 2019 is expected to come from De Beers Group's joint venture partners, a proportion of which generates a trading margin, which is lower than the mining margin generated from own-mined production.
Diamonds demand and the trade war
De Beers vice president Rowley said although current economic forecasts remain positive, the outlook for 2019 global diamond jewellery consumer demand faces a number of headwinds. Chief among headwinds is the risk of a potential intensification of US-China trade tensions, the Chinese government’s ability to rebalance economic growth towards consumption and further exchange rate volatility.
Rowley sees China as a biggest market for De Beers diamonds while he regards the US as a “mature market.” The De Beers executive also said India is a “potential market.” According to De Beers the global growth during the first half of 2018 was driven by solid US and Chinese consumer demand.
The Group said during the second half, while the US maintained its growth rate, increased political and policy uncertainty and stock exchange volatility led to a general slowdown of demand. When explaining the demand dynamics further, De Beers said the midstream started the year on a positive note due to healthy demand for polished diamonds from US and Chinese retailers.
However, in the second half, the low-priced product segment came under considerable pressure due to weak demand and surplus availability, the rapid depreciation of the rupee and a reduction in bank financing in the midstream. According to De Beers, this resulted in a surplus of low-priced polished diamonds at the end of the year, leading to lower sales at the start of 2019.
When making reference to the trade war whose mediatory bilateral talks are impending, Rowley said Chinese demand also slowed following the escalation in US-China trade tensions, slower economic growth and stock market volatility. Rowley said in India the significant depreciation of the rupee reduced local demand in US dollar terms.
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”