JOHANNESBURG (miningweekly.com) – Diamond producers may have to cut prices further to revive dampened demand, with rough diamond prices likely to remain under pressure over the next 12 to 18 months, Moody’s Investor Services noted in a sector paper on Tuesday.
Prices dropped by about 18% during the first eleven months of 2015 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.
“However, the latest drop in prices, which were down about 28% from a peak in 2014, may be insufficient to revive demand and we think producers may have to cut them further as these challenges continue into 2016,” said the agency.
Miners would, meanwhile, benefit from weak production currencies, which would ease pressure on margins in the next 12 to 18 months.
Price cuts and lower production volumes were weakening miners’ operating performance; however Moody’s stated that production facilities outside
the US would continue to benefit from lower costs owing to the depreciation of currencies such as the Russian rouble, Australian dollar and rand against the dollar.
This would help offset the impact of lower revenues on operating cash flow and profitability.
“Production and sales reductions will eventually help rebalance the market.
This reflects the fairly concentrated structure of the market, where Alrosa, De Beers and Rio Tinto supplied 64% of the world's rough diamonds in 2014,” it said.
As a result of miners' actions on production and sales, rough diamond prices had fallen far less than other bulk commodities, such as iron-ore, where some lower-cost producers have increased supply.
“The sector has solid long-term fundamentals. Depletion of existing diamond mines and modest production additions will help prevent supply from outpacing demand over the longer term.
“A lack of new discoveries means that global production will start to
decline from 2023, which should support the pricing power of rough diamond producers,” Moody’s concluded.