Despite Drastic Downsize, Anglo American To Keep De Beers' Diamonds

Market Analysis
19/05/2016 13:49

After posting a $5.6 billion loss for 2015 as a global rout in commodity prices punished the costly mines it operates around the world, mining giant Anglo American (AA) entered a drastic restructuring phase intended to reduce its total number of mining operations from 45 to 16, but it is holding onto De Beers. "Mining group Anglo American," writes Philip Blenkinsop for Reuters, "has retained De Beers as a prize asset after a radical overhaul in the belief that surging Chinese and Indian demand for diamonds will outstrip dwindling supply even after a 2015 crunch." De Beers, in which has an 85% stake, has seen its market share fall from over 80% in the 1980s to about a third now, but remains the largest diamond producer by value ahead of Russia's Alrosa, securing access to top mines through close ties to countries such as Namibia, with which signed a 10-year sales deal this week, and Botswana. 

Growing wealth in China and India are often cited as a potential source of more diamonds consumers at a time when output is set to start declining from 2020. "This is the basis of Anglo American's case for retaining De Beers in a drastic overhaul", writes Blenkinsop. Paul Gait, analyst at Bernstein Securities, thinks that Anglo keeping De Beers is way to remain attractive to buyers. As for the current market, De Beers sees subdued prices in 2016, but production is likely to peak in 2017 after two Canadian mines come on stream. Tha narrative of dwindling diamond resources is being challenged by the increase of gem-quality synthetic diamonds, though opinions on how this will shake out seem to depend largely on one's perspective. Chaim Even-Zohar, editor of Diamond Intelligence, believes synthetics will erode the power of producers, while De Beers head of strategy, Gareth Mostyn, told Reuters De Beers was not ignoring the competition from synthetics but was clear on consumer preferences. "If they have a choice between a diamond that was created three billion years ago by nature and one grown in a factory last week, customers want the real thing," he said. The key, as the natural industry knows all too well, is convincing consumers that this assumption is true, and finding the resources to market this message.