AL Cook replaces Bruce Cleaver as CEO of De Beers at an uncertain time in the diamond industry. While prices are high and some diamond producers are making 50% more on like-for-like goods compared to a year ago, the critical US market could weaken. That’s because the US Federal Reserve has clearly moved to limit spending.
It has led Bank of America to a minor volte face. Having sounded bullish on diamonds in August, it’s now moderating its view, forecasting a 10% correction in rough diamond prices equal to a 1% earnings downgrade to Anglo American’s 2023 Ebitda numbers. Anglo owns 85% of De Beers.
“Globally, we consider recession risks and continued Covid headwinds in Asia,” it said of its adjustment on Anglo. “Energy and higher rates also put the consumer under pressure in our view,” it said. The US market comprises 50% of total diamond sales.
More hopefully for Cook, diamond prices are forecast to have long-term support owing to fundamental problems in new supply. Diamond producers have been banging on about limited new resources of diamonds for years; now, it’s finally happened. In 2009, mined supply totalled about 104 million carats before growing to 157 million carats in 2017. Since then, depletion and mine closures, such as Rio Tinto’s Argyle mine in Australia, have reduced global supply to 107 million carats.
Russia remains a wildcard in all this. Its production accounts for about a quarter of all supply. Weak demand for its goods, owing to self- and offical sanctioning, could bifurcate the market with low prices while non-Russian goods could attract a premium. Cleaver, CEO of De Beers for the last seven years, was ‘iffy’ on the subject when the Financial Mail asked him about it in August. “I’m not convinced provenance alone is going to give rise to a premium,” he said at the time.
In any event, Cook takes on a leaner, more agile company, thanks to Cleaver. De Beers has tighter criteria for its buyers, is more flexible about how it sells to them, and is more mindful of partner demands for a greater shares of the rough diamond supply chain. This is likely to be demonstrated in a new supply contract between De Beers and Botswana (joint venture partners in Debswana) which will most likely result in Botswana enjoying a greater share of downstream revenue.
It’s critical De Beers keeps Botswana happy given the role diamond production plays in Anglo American’s overall investment story. Forecasting a doubling this year in its contribution to Anglo’s Ebitda (from 5% to 10% of overall), Goldman Sachs said recently the increase in exposure to the luxury consumer gave Anglo “a differentiating factor from diversified mining peers”.
“We see diversity of Anglo’s portfolio as a key positive during a period when investors remained concerned with demand in the near term feeding into uncertainty over short-term commodity prices,” the bank added.