South Africa’s largest pharmaceutical manufacturer, Aspen Pharmacare, may have announced a relatively tepid set of annual results for the year ended 30 June 2019, but the anticipation of a reduced debt load freeing up cash flows pushed its share price up 12% the day after its results announcement.
De Beers is a victim of its own innovation as diamond sales slump
So, diamonds are not forever. They’re only until the laboratory comes up with something cheaper.
Sales of diamonds by De Beers in Botswana have slumped. So much so, that in August the company allowed customers to reject diamonds that normally they would have been obliged to purchase.
De Beers says the company is providing customers with “supply flexibility”. Alain William, metals and mining analyst at financial services group ODDO BHF in Paris, says what this really means, is the company has “no choice but to prevent diamonds from further accumulating throughout the value chain”.
De Beers, 85% owned by Anglo American, sells rough diamonds in Botswana at 10 sales events each year to customers who, in the past, accepted both the prices and the quantities laid down by the company.
But first-half profit at De Beers was down nearly 30% as diamond demand dropped, and diamond sales in August were 44% lower than a year earlier. William predicts that rough diamond trading conditions in the midstream will continue to be “challenging” in the short term.
He cites high polished inventory levels, weakened end demand due to factors such as US-China trade tensions, unrest in Hong Kong, a strong dollar and difficult access to financing. Supply discipline from De Beers and other suppliers, however, should bring midstream and retailer stocks back to more normal levels by 2020, he says.
The lab threat
There are additional factors to consider. In May 2018, De Beers launched a laboratory-grown diamond jewellery brand, Lightbox Jewellery. Ironically, the laboratory diamonds are likely to undermine long-term rough diamond demand on which the company has historically relied.
In research on the outlook for lab diamonds, which are chemically and physically identical to mined diamonds, Dutch bankers ABN AMRO argue that miners will rethink their strategy in light of uncertainty about natural diamond demand. The diamond industry seems to think that larger, higher-quality stones will not face serious competition from the labs, it says.
But lab-grown diamonds are getting bigger. ABN AMRO points to Russian company New Diamond Technology, which has produced a 103.50 carat diamond, the largest ever in a lab. Because of technological advances and the margins available, it’s “just a matter of time before the larger stones will also face serious competition from lab-grown diamonds,” says ABN AMRO.
Higher-quality lab production and better technology will drive lab-grown prices lower, the bank says. It says traders and other buyers will probably hold lower inventories and demand for natural diamonds will continue to decline.
“The industry will probably change from an oligopolistic structure to a structure with more competitors and stronger competition,” says the bank.
Consumer concerns over ethics and sustainability will also have their part to play. Lab-grown diamond producers will be able to shift to more sustainable energy sources, says ABN AMRO. Concerns over the ethics of production in Botswana, where half of the 2.4 million population lives in poverty despite diamond wealth, could also prompt consumers to demand a more equitable industry – or buy lab products instead.
The bottom line: Consumers are likely to wake up soon to the fact that they can now call the shots in the diamond market.