Indian Demand Weak at $475M De Beers Sale

RAPAPORT... Manufacturers were concerned about profitability at last week's De Beerssight, and expressed hope their new supply agreement with the miner would easethe situation.De Beers had proceeds of $475 million during the October sales cycle amid weakdemand for smaller rough diamonds, the company reported Tuesday. Sightholders described lastweek's sight as difficult, as they felt compelled to buy unprofitable goods tomaintain bank credit and secure future allocations from the miner. "Peopleare buying boxes for various reasons, [including] to preserve bank lines," abroker who requested anonymity told Rapaport News. "De Beers recognizesthat demonstrated demand on its own is far from ideal." SupplyflexibilityDe Beers will continue to base its allocations on purchases made in theprevious year - a policy known as "demonstrated demand" - during the next contractperiod, which begins on April 1, 2019. But it will also include attempts toimprove flexibility of supply, David Johnson, De Beers' senior manager formedia and commercial communications, told Rapaport News Monday. Theminer recently allowed sightholders to defer supply on weaker categories, andstarted letting them exchange unwanted boxes with each other in a process knownas ITO swaps, he said. "We've tried to improve our understanding of different sightholders' businessaccounts so we can cocreate with them opportunities for improvement," Johnsonexplained. "We've introduced different mechanisms that allow distributionefficiency to work better, and we're going to consult with sightholders on howwe can develop those a little bit more in the next year and half or a bitmore." Thenew agreement will run until the end of December 2020, marking a shift to acalendar-year schedule, management said in a presentation during the sight inGaborone. The company extended the current three-year contract - which began in2015 - for an additional year to March 2019 to allow sightholders more time tomeet its financial-compliance standards. Thenext contract will be available for current sightholders that follow thoserules and show the required demonstrated demand, Johnson added. It will notaccept applications from new customers, as it would for an entirely newsupplier agreement. Rupeeslide impacts demandArecent drop in Indian demand for smaller goods has heightened the need amongmanufacturers for more flexible supply. DeBeers reduced its rough prices by an average of 1% at the October sight,sources who spoke with Rapaport News estimated. Premiums also fell onthe secondary market, with boxes selling for about 2.3% above De Beers' prices,meaning many dealers struggled to make a profit after the various sight fees,according to a report by Dudu Harari of brokerage firm Bluedax."The strengthening of the US dollar over the Indian rupee is also making itdifficult to sell polished in Asia and in the local Indian market," Harariadded. "Price drops in the smaller, cheaper goods continue, and we believethere will be a price correction at the source." The rupee depreciated 7% in the last three months to INR 73.5 to $1 on Thursday,impacting demand for lower-value categories, De Beers CEO Bruce Cleaveracknowledged. However, "we continue to see steady overall demand for De BeersGroup rough diamonds, reflecting ongoing consumer demand for diamond jewelry inthe US," he added.De Beers' rough sales amounted to $4.41 billion over the first eight sights ofthe year, in line with last year, according to Rapaport calculations.Image: De Beers sight boxes. (De Beers)