TORONTO (miningweekly.com) – Diamond miners might once more be forced to resort to cut prices of rough stones in a bid to revive demand, after the first eleven months of 2015 had witnessed prices drop by about 18%, owing to slowing sales of diamond jewellery – the end market for rough diamonds – and reduced availability of bank credit for cutters and polishers, which led to lower demand and overstocking, a new sector analysis by Moody’s Investors Service has found.
The advisory firm on Monday said that it expected rough diamond prices would remain under pressure over the next 12 to 18 months.
"The latest drop in diamond prices, which are down about 28% from a peak in 2014, may be insufficient to revive demand and we think producers may have to cut prices further as supply and demand challenges continue into 2016. Producers' decision to scale back production and/or sales will help rebalance the market over the next 12 to 18 months,” a Moody’s VP, senior credit officer and report author Denis Perevezentsev stated.
Counting in their favour, miners were benefitting from weak production currencies that would ease pressure on margins in the next 12 to 18 months. Price cuts and lower production volumes were weakening miners’ operating performance, Moody’s had found.
However, miners operating outside of the US would continue to benefit from lower costs owing to the depreciation of currencies such as the Russian rouble, Australian dollar and South African rand against the US dollar, the currency diamonds were sold in. According to Moody’s, this would help offset the impact of lower revenues on operating cash flow and profitability.
Moody's expected that Alrosa would be least affected by the fall in rough diamond prices, as most of its costs were denominated in roubles, which remained weak since depreciating by 42% against the US dollar in 2014, while its revenues were mainly in dollars.
Perevezentsev noted that production and/or sales reductions would eventually help rebalance the market. This reflected the fairly concentrated structure of the market where three producers, namely Alrosa, Anglo American subsidiary De Beers and Rio Tinto supplied 64% of the world's rough diamonds in 2014.
As a result of miners' actions on production and sales, rough diamond prices had fallen much less than other bulk commodities, such as iron-ore, where some lower-cost producers had lifted output. Alrosa, the biggest rough diamond producer in the world by volumes, had already reduced prices by 3% in February, followed by another 3% in April and 8% in the third quarter.
Similarly, De Beers, the biggest rough diamond producer by value, reduced prices by 8% between the end of 2014 and June 2015, and then cut them by a further 8% to 10% in August.
Moody’s noted that the sector had solid long-term fundamentals. Depletion of existing diamond mines and modest production additions would help prevent supply from outpacing demand over the longer term. Global production would grow modestly at a cumulative annual growth rate of about 2% over the next five to seven years, while a lack of new discoveries could mean that global output would start to fall from 2023, which should support the pricing power of rough diamond producers, Moody’s advised.