Following a difficult sales year in 2019, Global Diamond mining giants De Beers Group has started the year 2020 on higher note as its first cycle of rough diamond sales registers significant upswing compared to the same cycle in 2019.
According to a statement released by Anglo American, De Beers’s parent company on Wednesday, rough diamond sales value for De Beers’ first sales cycle of 2020 as conducted at the Global Sight holder Sales and Auctions amounted to $545 million. This provisional figure mirrors 9 percent increase when gauged against the first sales cycle of 2019 which registered $500 million actual value. This is also much higher that the preceding sight of December 2019 which registered $426m actual sales value.
Chief Executive Officer of De Beers Group Bruce Cleaver attributed this sales upswing to continued increase in demand spilling over from 2019 year end “Demand for rough diamonds increased during the first Sight of 2020 following the end of year selling season and subsequent inventory restocking”.
DIFFICULT YEAR IN 2019
De Beers didn’t have it easy in the year 2019, experiencing the worst sales path since the 2008/09 global financial crises. The lucrative industry behemoth sold about $1.36 billion less worth of rough diamonds. In the year 2018 De Beers’ 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 the company‘s entire ten cycles only gathered total sales provisional value of US$4.04 billion, way below the 2018 value by about $1.35 billion (around P14 billion) mirroring a 25 % decrease. During the year 2019 De Beers provided customers with additional flexibility to defer some of their rough diamond allocations to later in the year. The flexibility offer ran 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 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. It 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. Following 2019 revised full year production guidance to approximately 31 million carats of diamonds down 11 percent from 35 million the previous year, De Beers’ parent company Anglo American further 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.
OVERHAUL OF SUPPLY POLICY
Last week international media reported that De Beers has plans to abandon its practice of using sightholders’ purchase history as the main factor in determining how it allocates rough supply. According to Rapaport , a US based diamond industry insights and think tank the move, which would go into effect from 2021, would see the mining giant shift to more subjective criteria for deciding the value of goods each client receives.
The current system, known as “demonstrated demand,” requires sightholders to buy the rough that De Beers has allotted them or risk losing access to De Beers’ diamonds in future. The method has faced criticism for encouraging dealers and manufacturers to take on unprofitable inventory.â€¨â€¨But with the current sightholder agreement expiring at the end of this year. Rapaport reports that De Beers has told clients demonstrated demand will not be the main driver of allocations in the new contract period.
It is reported that during this ended sight discussions between De Beers and its sight holders continued in Gaborone about the matter. â€¨â€¨The proposals include studying data about clients’ business activities, as well as qualitative factors, to help determine whether companies should be on the client list, a sightholder explained to Rapaport on condition of anonymity. De Beers is also considering reducing the number of sightholders, according to a Bloomberg report last week.
SALES RECOVERY IN 2020
Late last year Rapaport reported that Going into 2020 there is some optimism for the new decade. The company says the industry can expect lower rough supply, market consolidation, and further changes to the way diamonds are bought and financed aswell as greater use of technology. Rapaport further predicts that there will be more emphasis on ethical sourcing, and segmentation of lab-grown and natural diamonds into distinct markets.
According to the Las Vegas based experts, to navigate these trends and bring about an upswing in diamond prices, the industry must invest in marketing and develop more efficient processes and inventory management. “Diamond jewelry sales must outperform the last decade’s and should exceed $100 billion by 2030,” forecasts Rapaport.
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”