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Miners are stuck with gems worth millions

(Bloomberg) – In one of the world’s largest diamond vaults, hidden inside an undescribed office compound on the dusty outskirts of Botswana’s capital, precious stones are just being poured.

Owner De Beers, who mines and auctions most of his pearls in the South African nation, has hardly sold any rough diamonds since February. Russian rival Alrosa PJSC has neither. As the coronavirus restrictions, which freeze the global industry for months, are beginning to lift, the unsold diamonds pose a dilemma: how to reduce inventory by billions of dollars without undermining the initial recovery

The pandemic has destroyed the diamond world. Jewelry stores closed their doors, India’s cutting and polishing of artisans was forced to stay home, and De Beers had to cancel sales in March because buyers could not travel to see the items.

De Beers and Alrosa have moved to defend their market. The miners refused to lower prices, but instead gave buyers an unprecedented freedom to take care of contracts to buy stones. They have also reduced production in an attempt to control inventory levels. Yet the diamonds are popping up.

The top five manufacturers are probably sitting on excess inventories worth about $ 3.5 billion, according to Gemdax, a specialized consulting firm. The figure can reach 4.5 billion. Dollars at the end of the year, or about one-third of the annual crude diamond production.

“They have been trying to limit the supply of rough diamonds to protect the market and protect value,” said Gemdax partner Anish Aggarwal. “The question will be, how does this destocking occur? Can miners remove and still protect the market? “

After being forced to cancel the event in March, De Beers managed to hold a sale in May, but did not announce the results, as it usually does. According to people familiar with the situation, the sale yielded about $ 35 million. Last year, sales were $ 416 million.

The next big test for the industry comes later this month with De Beer’s next sale. The company goes out of its way to attract customers, including by allowing diamond views outside of Botswana. Buyers are still allowed to refuse the goods they have agreed to purchase.

Read more: Anglo leaf diamonds in the ground with pearl sector curled

De Beers customers, some of whom were deeply frustrated with some of the company’s sales practices in recent years, have hailed its actions so far.

Although De Beers and Alrosa have been adamant on pricing – even refusing approaches from customers offering to buy on special terms, smaller diamond manufacturers have dropped their own prices, according to people familiar with the matter.

Younger miners, some of whom fought for survival even before the pandemic, have offered steep discounts of up to 25% in trade centers such as Antwerp, the people said. It can make it difficult for big companies to convince big buyers to come to the table.

Diamond miners are facing “a double embarrassment of weak prices and a sharp decline in sales volumes on a scale reminiscent of the 2008-09 crisis,” Social Services analyst Sergey Donskoy said this week.

“Can miners remove and protect the market?”

Supply management has been a constant headache for the diamond industry ever since De Beers ended its monopoly. The company spent the early 2000s running down about $ 5 billion in inventory, and industrial stocks ballooned during the global financial crisis and again in 2013. Each time the stocks sold has caused the build of polished diamonds and put tremendous pressure on cutters, traders and manufacturers who buy from them.

Read more: The problem of diamonds is becoming cheaper

It can be even harder this time. These industry middlemen were struggling before the pandemic, while retail is one of the sectors most affected by the virus measures.

Alrosa said Friday that its diamond holdings could rise to 30 million carats by the end of the year, roughly like its annual production, but yielded no value. The company said it wants to cut those stocks to 15 million carats in three years.

There are some signs of improvement. Chinese retailers are open again, and India has allowed manufacturing to restart in the central Surat polishing hub, though at only 50% of capacity. The main Indian trading offices allow 10% of the staff on site.

Manufacturers continued to buy heavily in the first two months of the year in anticipation of an improvement in the market. As cutting centers have been closed for the past two months, this inventory is expected to last until July or August. There is very little need to buy now.

“At this point, it’s hard to speculate on what the recovery curve will look like,” Aggarwal said. “What we don’t expect is an immediate jump back in consumer demand.”

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