Bloomberg News

De Beers CEO Says Diamond Prices May ‘Stick’ After 35% Gain

October 19, 2011

(Updates with relocation of sales unit in final paragraph.)

Oct. 19 (Bloomberg) -- De Beers, supplier of about a third of the world’s rough diamonds, said prices of the gems may “stick” at current levels after demand from India and China spurred a rally of more than 35 percent this year.

Rising wealth in the two countries is enabling consumers to buy more diamond jewelry, compensating for slower growth in the U.S., the biggest retail-gem market. Demand from East Asia has caused a supply shortage, which pushed up prices this year, Chief Executive Officer Philippe Mellier said in an interview.

“We’re now reaching a new plateau from which prices are going to oscillate,” Mellier, 56, said by phone yesterday. “I am expecting this new level of pricing to stick.”

Rough-diamond prices advanced 49 percent in the first half, accelerating after two straight years of more than 30 percent growth as stagnant output failed to meet Asian demand, according to data from PolishedPrices.com. De Beers was among producers caught on the back foot after idling mines as the global economic crisis eroded gem sales.

Retail demand in India and China is “very, very strong” and sales in the U.S. are growing, defying expectations of a decline, Mellier said from London. “All the numbers we are receiving from the U.S., from our partners, from our own stores, are telling us that the sales are up, not hugely up, but up,” he said.

New CEO

Mellier, a former Alstom SA executive, was appointed to head De Beers in May, marking a break with tradition as the Johannesburg-based company previously promoted from within. De Beers is 45 percent-held by Anglo American Plc, 40 percent by South Africa’s Oppenheimer family and 15 percent by Botswana.

De Beers estimated in February that the U.S. bought about 38 percent of diamond jewelry in 2010, with India making up about 10 percent and China and Hong Kong a combined 11 percent. “We don’t see any softening of the demand,” Mellier said.

De Beers should post record or near-record sales in 2011, Des Kilalea, a London-based analyst at RBC Capital Markets, said in a note earlier this month. Sales at De Beers’s trading arm will be about $6.4 billion this year, its second-highest result, according to RBC forecasts.

After rising from January to July, prices probably dropped as much as 25 percent, having “simply risen too far, too fast,” Kilalea said. Prices may hold steady in the next few months, he said.

‘Strong Demand’

“Our feeling, without sounding too optimistic, is that retail is generally strong,” Mellier said, in reference to global sales. De Beers expects “a pretty good start next year because there is strong demand from Asian customers.”

Russia’s OAO Alrosa, De Beers’ biggest rival, said yesterday that average sales prices rose 30 percent to $109 a carat in the first half, compared with $84 over the whole of 2010. Alrosa had sales of $2.1 billion in the half, while De Beers’s trading arm had $3.5 billion.

De Beers posted record earnings before interest, tax, depreciation and amortization of $1.4 billion in 2010 following a 57 percent surge in trading-division sales to $5.08 billion.

The company will probably produce 33 million carats to 35 million carats this year, compared with 33 million carats last year, Mellier said. A carat is equivalent to a fifth of a gram.

“It’s going to take some time for the industry to reach the production level of 2008, the last big production year before the crisis,” Mellier said, adding that it may take two to five years.

De Beers mines diamonds by itself and in joint ventures in South Africa, Canada, Botswana and Namibia.

Last month, the company agreed to move its diamond sorting and trading operations to Botswana by the end of 2013, ending an arrangement for sales in London that’s been in place since 1888.

De Beers hasn’t seen any “overreaction” to the plan from clients, many of whom already have operations in the southern African country, Mellier said.

--Editors: Vernon Wessels, Amanda Jordan

To contact the reporter on this story: Carli Lourens in Johannesburg at clourens@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus