Alrosa halts allocation of rough diamonds in September and October
De Beers reduces rough diamond availability, invests $20m in marketing
Prices are unsustainable – ODC MD
Second half of this year is not looking – Stanchart
Implications for export earnings, revenues, FX reserves,
Finance Ministry revises GDP projections to 3.8% in 2023
Absa says growth of 4.1% is achievable
Q1 2023 GDP printed a 5.4% growth mainly mining-driven although the economy was broad-based; activity came from the mining and non-mining sectors. Mining activity recorded the second-highest growth rate (10.8%) and an overall contribution of 19.6% to total growth.
While the picture looked good, Galeboi Sennanyana, the Head of Treasury Markets at Standard Chartered Bank projects that “the second half of this year is not looking too good because of the dependency on diamonds”. Diamonds are the leading contributor to total exports. “So far data coming out is telling us that prices are not looking so good,” Sennanyana said when giving an economic outlook during the bank’s results presentation.
ODC record sale
The market had picked up in February 2022. This is when state-owned Okavango Diamond Company (ODC) reported its record sales, the largest single-day auction in the world – US$182 million. Immediately after that sale, “we saw a rapid fall in the prices by the end of 2022,” ODC Managing Director Mmetla Masire said when giving an industry outlook recently. “Profitable sales were becoming a challenge. We were operating close to breakeven, single-digit numbers in terms of margins having been in double digits for most of the other two years,” Masire told reporters as he was also presenting the company’s financial results.
The inexorable decline in diamond prices
The government budget strategy paper shows that diamond prices continued to show a decline in 2023 from 2022 levels. The paper found that the diamond index fell by 16.9% to reach 137.1 in March 2023, from its record high of 165.0 the same month in 2022. Prior to this, prices declined by 2.7% in December 2022. The trend continued in 2023 as prices fell by 10.8% and 13.8% during the first two months of the first quarter of 2023 and “are likely to continue with the downward trend owing to the ongoing weak demand for rough diamonds”.
In his presentation, Masire explained that in the first half of last year, a rapid decline in the prices was for a “certain range of goods”. “Small goods and the large goods were mainly the ones that were profitable,” Masire told journalists. “Most of the carats between 1 – 5 carats were not really doing well.” In the 3rd this year, he observed that the small stones had started to show signs of weakening. “Maybe that is what influenced some of the sellers to decide not to hold sales,” he told his audience lamenting “too much inventory in the various parts of the value chain”. “It will take time patience and responsible supply before we can see the market coming back.”
Industry leaders halt sales auctions
Rapaport News reported in September that Alrosa, the largest producer by volume had “decided to temporarily halt the allocation of rough diamonds in September and October 2023”. Rapaport quotes a note from the Russian group of diamond mining companies to India’s Gem & Jewellery Export Promotion Council (GJEPC) which reads: “We believe that this approach is going to have a stabilising impact by strengthening the market’s supply-and-demand balance. This will aid the prevention of overstocking, especially with manufacturers closed for Diwali”.
At its 8th sales cycle, De Beers “reduced its rough diamond availability and made sales of $200 million as the industry’s midstream rebalances certain areas of stock accumulation. Al Cook, the CEO of the miner said after its 8th Cycle Sales the conglomerate will continue to support its Sightholders to help re-establish equilibrium between wholesale supply and demand by providing full flexibility for rough diamond allocations in Sights 9 and 10 of 2023, suspending De Beers Group online rough diamond auctions for the remainder of 2023, and investing an additional $20 million in natural diamond marketing to help drive consumer demand during the holiday season.
The range of goods affected
According to Masire’s slides, in the 3 months to July, small stones of 0-0.5 carats, showed price increases. Sellers were getting an upside of 3% higher than one month, the next month 2% and the last month printing a 1%. “Although small goods were declining, they were still holding on,” Masire said.
For goods ranging from 1-2 carats, the market saw drops of 1% drop, 2%, 1%. Larger goods of 4 carats and above did drop, broke even the next month and then went up 1%. “Those two extreme ranges are the ones that are performing better. In the middle, it shows drops from month to month,” Masire said. “So you can imagine that if this is continuing the whole year and you are losing 1% or 2%, by the time you get to the end of the year then the percentage drop is quite significant.”
Implications for export earnings, Government revenues, GDP
Budget Strategy Paper shows that rough diamond sales through De Beers Global Sightholder Sales (DBGSS) totalled USD2, 832 million in the first six cycles of 2023 compared to USD3, 777 million during the same sight sales in 2022, representing a decline of 25.02%. “The likelihood of slowing growth and possible recession in the USA (which accounts for about 50% of the diamond jewellery market ) and elsewhere – brought about by persistent high inflation, reduced real incomes and tighter monetary policy – may adversely affect diamond sales in 2023, with implications for export earnings and Government revenues as well as foreign reserves,” the paper reads.
Sennanyana also worries that “we might see GDP slowing down in the second half of the year”. Ministry of Finance anticipates that the performance of the economy will be slower in the H2, as growth in the mining sector moderates. On the back of this, real GDP growth is revised downwards by 2 percentage points to 3.8% in 2023 from the 4% that was earlier projected in January 2023. “This growth profile could be revised down depending on the dynamics of the Russia-Ukraine conflict, regional economic developments, particularly in South Africa among others,” reads the budget strategy paper.
Furthermore, it notes the recent power outages due to recurring plant shutdowns at both Morupule A and Morupule B could also limit growth prospects, especially for other sectors of the economy. “The non-mining sector is however anticipated to continue contributing positively underpinned by, among others, Government interventions aimed at accelerating economic transformation and building economic resilience.”
Evenso, First National Bank Botswana (FNBB) maintains its view that over the coming 3-5 years the mining sector will remain Botswana’s key growth driver. The bank said this should be supported by the expansion of local copper mining activity, with additional copper mines expected to come onstream during 2023. “On the diamond mining front, both Jwaneng and Karowe mines are expected to transition from open cast to underground mining through to 2026, prolonging the life of both mines,” the bank said. “Underground mining activity is anticipated to extend operations to 2035 in the case of Jwaneng and to 2040 for Karowe.”
Absa Bank Botswana expects the new deal between Botswana and De Beers Group will support the outlook going forward. “Notwithstanding, downside risks remain considerable, particularly adverse weather conditions and the global backdrop that threatens the mining sector and is likely to depress other exports,” the bank said emphasising that it believes that economic growth of 4.1% is achievable this year, considering the strong first quarter performance and a lower inflation environment.
“Overall, we expect GDP growth of 4.1% in 2023 driven by a weaker global backdrop that threatens the mining sector and will potentially depress exports together with adverse weather conditions that could negatively affect output in the agriculture sector,” Absa’s MD Pheko Moshagane said.
Outlook
FNBB economist Gomolemo Baele projects growth will be between 3.7% and 3.9%. “Post 2023, global diamond demand should start to pick up.” Lucara Diamonds which owns the Karowe Mine views that the longer-term outlook for natural diamond prices remains positive, anchored on improving fundamentals around
supply and demand as many of the world’s largest mines reach their natural end of life over the next decade. “The longer-term market fundamentals remain unchanged and positive, pointing to strong price growth over the next few years as demand is expected to outstrip future supply, which is now declining globally,” the company wrote in its Q2 2023 results.
Soft prices impact Lucara
Lucara reported total revenues of $41.1 million in Q2 2023 compared to total revenues of $52.3 million in Q2 2022. The change in quarterly revenue was driven by 3 factors including “softening of the market in H1 2023 compared to multi-year highs experienced in H1 2022”. “A softer diamond market in the first half of 2023 resulted in lower achieved prices when compared to Q2 2022 when prices reached a multi-year high,” the miner said.
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