De Beers H1 Profits Slump As Consumer Demand Falls

De Beers reported that its total revenue decreased by 17% to $2.6 billion (30 June 2018: $3.2 billion), with rough diamond sales declining by 21% to $2.3 billion (30 June 2018: $2.9 billion).

Consolidated rough diamond sales volumes decreased by 13% to 15.5 million carats (30 June 2018: 17.8 million carats), while the average rough price index decreased by 4%. The lower rough diamond sales reflected higher than expected polished stocks at retailers and the midstream at the beginning of 2019, with overall midstream inventory levels continuing to be high throughout the first half. The average realized rough diamond price decreased by 7% to $151/carat (30 June 2018: $162/carat), driven by the reduction in the average rough diamond price index and a change in the sales mix in response to weaker conditions.

Markets

Demand for rough diamonds was subdued in the first half. In late 2018, US retail results were impacted by stock market volatility and US-China trade tensions which resulted in both retailers and the midstream starting 2019 with higher than anticipated stock levels. During 2019, demand outside the US continued to be impacted by US-China trade tensions, the Hong-Kong protests and a stronger US dollar, particularly affecting China and the Gulf. In the US, retail store closures and destocking have also impacted demand for polished diamonds and, in turn, midstream demand for rough diamonds. Underlying GDP growth remains supportive of consumer demand growth and is expected to bring midstream and retailer stocks back to more normalized levels as we move into 2020, subject to an improving macroeconomic environment.

Mining and manufacturing

Rough diamond production decreased by 11% to 15.6 million carats (30 June 2018: 17.5 million carats), primarily driven by a reduction in South Africa (DBCM) and Botswana (Debswana). As a result of weaker demand experienced in the period, additional production was not ramped up to compensate for Venetia’s transition from open pit to underground.

In Botswana (Debswana), production decreased by 3% to 11.7 million carats (30 June 2018: 12.1 million carats). Production at the Orapa Regime was 16% lower following a planned shutdown brought forward from the second half of 2019, partly offset by a 9% increase at Jwaneng, driven by higher throughput and a deferred plant shutdown.

In Namibia (Namdeb Holdings), production decreased by 22% to 0.8 million carats (30 June 2018: 1.0 million carats). Output from the marine operation declined by 15% due to a planned in-port for the Mafuta crawler vessel. Production at the land operations decreased by 37% to 0.2 million carats (30 June 2018: 0.3 million carats) as a result of transitioning Elizabeth Bay onto care and maintenance in December 2018.

In South Africa (DBCM), production decreased by 55% to 1.0 million carats (30 June 2018: 2.1 million carats), due to lower ore volumes mined at Venetia as it approaches the transition from open pit to underground. Voorspoed production ceased as the operation was placed onto care and maintenance in the final quarter of 2018 in preparation for closure.

In Canada, production decreased by 6% to 2.1 million carats (30 June 2018: 2.3 million carats), due to the planned processing of lower grades at Gahcho Kué. Victor production decreased by 2% as it reached the end of its life during the second quarter of 2019.

Brands

De Beers Jewellers continues to progress by upgrading and expanding its network and integrating its online and store presence into an improved combined offering. The overall sales performance has been adversely affected, primarily in high jewellery, by global trade tensions.

Forevermark™ (available in around 2,400 retail outlets globally) continued its expansion in Europe with the launch of the brand in Italy.

Operational outlook

Rough diamond trading conditions in the midstream are expected to continue to be challenging in the short term as a result of high polished inventory levels. Longer term, the outlook remains positive in light of the expected growth in consumer demand and a reducing supply of diamonds.

Production guidance (on a 100% basis, except Gahcho Kué on an attributable 51% basis) has been revised to around 31 million carats, at the lower end of the previous range of 31-33 million carats, in response to the weaker trading conditions described above.