Analysts fear Debswana's Resumption will Dampen Recovery
Des Kilalea, an analyst with RBC Capital Markets, says the resumption of production at Debswana mines poses a concern to diamantaires because prices will be suppressed by the increased supply.
In an interview with Miningmx, Kilalea said "a main threat to recovery in rough prices is the resumption of production (at) a number of major mines that had been shut down earlier this year such as De Beers' huge Jwaneng operation in Botswana".
"The impact of higher sales by De Beers now that the Jwaneng Mine has been returned to production after a 50-day shutdown is a worry to diamantaires", he said.
"At full production, Jwaneng produces 16 million carats a year valued in a normal market at around $2 billion. If the mine's production all finds its way to market, it could add some $110 million monthly to potential rough supply, assuming prices have fallen 35 percent.
"That is a lot for the market to absorb even if liquidity conditions have improved. It may also be worth noting that traditionally, cutting centre activity slows into the northern hemisphere Summer and this could result in the increase in the pace of activity to slow (down)."
In 2009, Debswana will cut production to less than half its usual levels in a bid to keep the company profitable through to 2010 after which it expects a recovery in diamond demand.
The decision to cut production by a drastic 60 percent or more was announced last month when the company resumed production at its three mines that have been closed since February in a bid to save cash by reducing production costs.
Production resumed at Orapa, Letlhakane and Jwaneng Mines while operations at the fourth and smallest mine, Damtshaa, and at Orapa No. 2 Plant, will remain suspended until the end of 2009 because demand is expected to be depressed for much of this year.
In an earlier interview with Business Week, Debswana Group Public and Corporate Affairs Manager Esther Kanaimba was reluctant to give exact production figures for this year, but indicated that it will be in the region of under 15 million carats.
"In the past few years, we have been procuring just over 30 million carats a year and this year we will produce just under half of that," she said. "Our production will depend on demand.
"If there are indications that demand will improve quickly, then we will increase production. But as things stand now, DTCB have indicated that they might only be able to sell between 18 million carats and 20 million carats this year, hence our decision to cut production to such levels as we also have some inventory left from the bad sales in November and December last year."
Earlier in the year, market sources had speculated that Debswana might cut its production to 13 million carats in 2009 - a 62-percent decline from last year's production.
Late last year, as demand for diamonds sank to its lowest, Debswana forecast it would cut production by only 20 percent in 2009.
Kilalea further commented: "The recent recovery in rough diamond prices may be presenting an illusion that there has been a significant recovery in demand for diamond jewellery. Infact, most retailers report quite the opposite.
"The major concern in cutting centres is that polished prices, though higher, are not leading the recovery. The surge is being driven by inventory re-building and this will slow unless there is pull through at the retail end of the jewellery market''.
He pointed out that rough prices were responding to the drastic action taken by major diamond producers De Beers, Alrosa and Rio Tinto in chopping production, thus temporarily starving the market.
He said the May tender of rough from Gem Diamonds had realised around US$1,600/carat, compared with below $1,100/carat of the previous two tenders. But inspite of the improvement, these prices were still well below levels of $2,500/carat realised in the first six months of 2008.
"While the rough price recovery may not be sustained at current levels, the marginal impact of prices which are around 20% higher for many diamond mines will be significant and present the first opportunity in nearly nine months for cash generation," Kilalea said.
In an interview with Miningmx, Kilalea said "a main threat to recovery in rough prices is the resumption of production (at) a number of major mines that had been shut down earlier this year such as De Beers' huge Jwaneng operation in Botswana".
"The impact of higher sales by De Beers now that the Jwaneng Mine has been returned to production after a 50-day shutdown is a worry to diamantaires", he said.
"At full production, Jwaneng produces 16 million carats a year valued in a normal market at around $2 billion. If the mine's production all finds its way to market, it could add some $110 million monthly to potential rough supply, assuming prices have fallen 35 percent.
"That is a lot for the market to absorb even if liquidity conditions have improved. It may also be worth noting that traditionally, cutting centre activity slows into the northern hemisphere Summer and this could result in the increase in the pace of activity to slow (down)."
In 2009, Debswana will cut production to less than half its usual levels in a bid to keep the company profitable through to 2010 after which it expects a recovery in diamond demand.
The decision to cut production by a drastic 60 percent or more was announced last month when the company resumed production at its three mines that have been closed since February in a bid to save cash by reducing production costs.
Production resumed at Orapa, Letlhakane and Jwaneng Mines while operations at the fourth and smallest mine, Damtshaa, and at Orapa No. 2 Plant, will remain suspended until the end of 2009 because demand is expected to be depressed for much of this year.
In an earlier interview with Business Week, Debswana Group Public and Corporate Affairs Manager Esther Kanaimba was reluctant to give exact production figures for this year, but indicated that it will be in the region of under 15 million carats.
"In the past few years, we have been procuring just over 30 million carats a year and this year we will produce just under half of that," she said. "Our production will depend on demand.
"If there are indications that demand will improve quickly, then we will increase production. But as things stand now, DTCB have indicated that they might only be able to sell between 18 million carats and 20 million carats this year, hence our decision to cut production to such levels as we also have some inventory left from the bad sales in November and December last year."
Earlier in the year, market sources had speculated that Debswana might cut its production to 13 million carats in 2009 - a 62-percent decline from last year's production.
Late last year, as demand for diamonds sank to its lowest, Debswana forecast it would cut production by only 20 percent in 2009.
Kilalea further commented: "The recent recovery in rough diamond prices may be presenting an illusion that there has been a significant recovery in demand for diamond jewellery. Infact, most retailers report quite the opposite.
"The major concern in cutting centres is that polished prices, though higher, are not leading the recovery. The surge is being driven by inventory re-building and this will slow unless there is pull through at the retail end of the jewellery market''.
He pointed out that rough prices were responding to the drastic action taken by major diamond producers De Beers, Alrosa and Rio Tinto in chopping production, thus temporarily starving the market.
He said the May tender of rough from Gem Diamonds had realised around US$1,600/carat, compared with below $1,100/carat of the previous two tenders. But inspite of the improvement, these prices were still well below levels of $2,500/carat realised in the first six months of 2008.
"While the rough price recovery may not be sustained at current levels, the marginal impact of prices which are around 20% higher for many diamond mines will be significant and present the first opportunity in nearly nine months for cash generation," Kilalea said.
