<div><em>The last few months have been difficult for most diamond mining companies who have reported drops in production and sales as a result of the prevailing trading conditions. <strong>Stephen Rego</strong> analyses whether this upstream crisis will help in reshaping the way in which the industry goes about its business.</em></div><div> </div><div>Two of the world’s largest diamond mining companies, De Beers and Alrosa, released their quarterly production updates last week and the figures clearly tell the tale of an industry passing through a severe crisis. </div><div> </div><div>De Beers, the oldest and best known name in the sector said that production of rough diamonds dipped by 27 per cent in the three months ended September 30, 2015 to a level of 6 mn carats. (To put this in perspective, production for the last six quarters has varied between 7.5 - 8.5 million carats). Parent company Anglo American plc stated that production was reduced “to better reflect current trading conditions”.</div><div> </div><div><img alt="" src="http://bw-image.s3.amazonaws.com/graph-1_0.jpg" style="width: 630px; height: 355px; margin: 1px;"><br><br>While Russian giant Alrosa, currently the largest producer by volume said that its rough production for the quarter was up nearly 20 per cent to 11.6 mn carats, the fact is that only 4.9 mn carats were actually sold. (Once again, to put this in perspective, the miner had earlier reported near 100 per cent sale of the 18 million carats produced in H1 2015). </div><div> </div><div>The two follow different models – De Beers aims to maximise shareholder value and not hold large quantities of unsold goods, hence cuts production in times of crisis. On the other hand, the government-backed Alrosa stockpiles unsold rough for sale at a future date when the market picks up.</div><div> </div><div>The next biggest miner, Rio Tinto Diamonds reported a 20 per cent year-on-year production increase to 4.28 million carats in Q3. However, this was 9 per cent lower than its production in Q2 2015. </div><div> </div><div><img alt="" src="http://bw-image.s3.amazonaws.com/total-diamond.jpg" style="width: 632px; height: 358px; margin: 1px;"><br><br>Rio Tinto also announced its “decision to pause final product processing in the fourth quarter at Argyle (its mine in Australia) in light of current market conditions” and reduced its projected diamond production in 2015 to 18 million carats from the earlier 20 million carats.</div><div> </div><div>De Beers, which earlier this year reduced 2015 production guidance from 32 million carats to “between 29-31 million carats”, has further cut the figure to ~29 million carats, which it says will be “subject to trading conditions”.</div><div> </div><div>Alrosa, on the other hand, has confirmed that is was not amending its previously announced production plan of 38 million carats.</div><div> </div><div>The crisis that the miners now face has not arisen all of a sudden. It has confronted other sections of the pipeline over the last 8-10 months, hitting both downstream retailers and mid-stream manufacturers quite severely. </div><div> </div><div><table align="right" border="1" cellpadding="2" cellspacing="2" style="width: 200px"><tbody><tr><td><img alt="" src="http://bw-image.s3.amazonaws.com/Stephen-Rego200.jpg" style="width: 200px; height: 200px; margin: 1px;"></td></tr><tr><td><strong>Stephen Rego</strong></td></tr></tbody></table>Retail sales in the US, the world’s largest diamond jewellery market, last Christmas were slower than expected, but the real crunch arose when China, the No 2 consumer reported a dramatic slowdown in 2015. The impact of this hit manufacturers, especially in India, who were already operating on wafer-thin margins. <br> </div><div>Though miners had reduced rough prices to an extent, many manufacturers decided it no longer made business sense to buy goods that would not move easily and at prices that would not yield profits. Rough imports into India in the first half of FY 2016 have thus fallen drastically – by a massive 26 per cent in value terms and nearly 16 per cent in volume terms. </div><div> </div><div>Over two decades ago, De Beers controlled the vast majority of diamond production and played the role of custodian at such critical times, managing supplies to the market and regulating prices in a manner that helped the pipeline ride out the troughs. </div><div> </div><div>But, the face of the mining industry has changed since then. Though De Beers is still a dominant player, it is no longer a privately held company. Alrosa is now the largest volume producer of rough diamonds, and vastly different from the company that it was in the Soviet days. The African nations where the diamonds are mined want a larger share of the pie.</div><div> </div><div>In this changed scenario, the major players in the industry came together earlier this year under the banner of the Diamond Producers Association, the first such body in its over 100 year old history.</div><div> </div><div>Last week, the body took a more concrete shape with the appointment of Jean-Marc Lieberherr (MD of Rio Tinto’s diamond business) as Chairman, Stephen Lussier (CEO of De Beers Group’s Forevermark brand) as Vice-chair, and Sally Morrison (formerly with World Gold Council) as Managing Director of Marketing. </div><div> </div><div><img alt="" src="http://bw-image.s3.amazonaws.com/diamond-graph-2.jpg" style="width: 608px; height: 229px; margin: 1px;"><br><br>In a separate development, De Beers has also relaunched its iconic “A diamond is forever” marketing campaign in the US, and announced vigorous generic promotions there over the next few months; both activities it had suspended over a decade and a half ago. Rio Tinto has also been working with retailers in India to promote diamond jewellery through its ‘Nazraana’ campaign, and recently Alrosa signed a direct sourcing agreement with Signet, the world’s largest retailer of diamond jewellery.<br> </div><div>Clearly, the upstream players have realised that the challenges they face cannot be addressed in isolation from the rest of the pipeline. It could perhaps mark the start of a reshaping of the way the industry goes about its business.</div><div> </div><div><strong><em>Stephen Rego has been a journalist since the mid-1980s, and has spent close to two decades tracking the gem and jewellery industry while holding different editorial positions in industry specific publications and websites </em></strong></div>
