De Beers H1 Earnings Fall along with Consumer Demand

Finance and Trade
26/07/2019 14:48

The De Beers Group recorded a 27% decline in first-half earnings to $518 million (2018: $712 million) due to the challenging midstream trading environment and slowing consumer demand growth, parent company Anglo American stated in their interim financial results. The difficult market has led to a decrease in rough diamond prices and has put pressure on the margins of those in the trading business, the company said. As previously announced, the miner will be scaling back production in response to low demand, revising their production guidance down to 31 million carats 31 million to 33 million carats. Production fell 11% to 15.6 million carats during the first half, as De Beers is working with its customers, giving them greater purchasing flexibility and limiting supply, the company said.

By the numbers: Total revenue decreased by 17% to $2.6 billion (2018: $3.2 billion), with rough diamond sales declining by 21% to $2.3 billion (2018: $2.9 billion). The volume of rough diamond sales volumes decreased by 13% to 15.5 million carats (2018: 17.8 million carats), while the average rough price index decreased by 4%. The lower rough-diamond sales "reflected higher-than-expected polished stocks at retailers and the midstream at the beginning of 2019, with overall midstream inventory levels continuing to be high throughout the first half," De Beers explained. The average realised rough diamond price decreased by 7% to $151/carat (2018: $162/carat), 

As has been referenced numerous times in recent months, De Beers notes that demand for rough diamonds was subdued in the first half, with De Beers CEO Bruce Cleaver pointing to a variety of potential causes. In late 2018, he explains, US retail results were impacted by stock market volatility and US-China trade tensions, which resulted in retailers as well as the midstream starting 2019 with higher-than-anticipated stock levels. During 2019, demand outside the US continued to be impacted by US-China trade tensions, the Hong-Kong protests and a stronger US dollar, particularly affecting China and the Gulf. In the US, retail store closures and destocking have also impacted demand for polished diamonds and, in turn, midstream demand for rough diamonds.

“If we get a good season, this will pass.”

JCK's Rob Bates spoke with CEO Bruce Cleaver following the release of the financial results: while the CEO is not underestimating the difficulties for many in the industry, he believes it may turn around quickly. “The midstream is being buffeted by a series of things that is making it tough for them. There is an oversupply of polished in the midstream, less restocking," he told Bates. "I don’t want to underestimate how difficult it is in the midstream right now, but there is a psychological element to this,” he says. “If we get a good season, this will pass.”

De Beers says that rough diamond trading conditions in the midstream are expected to continue to be challenging in the short term as a result of high polished inventory levels. However, longer term, the outlook remains positive in light of the expected growth in consumer demand, particularly in the U.S. market. Finally, De Beers says that underlying GDP [gross domestic product] growth remains supportive of consumer-demand growth, and is expected to bring midstream and retailer stocks back to more normalized levels as we move into 2020, subject to an improving macroeconomic environment."