DTC Supply Cut Stirs Industry

A week ahead of the last Diamond Trading Company (DTC) Sight, clients received their ITOs (Intention To Offer) for the first half of 2007, with a letter that told them that their supply will be reduced. While each Sightholder suffered a different size of reduction, the market estimates the reduction at anywhere between 15 to 30 percent.

The wild range probably reflects the fact that Sightholders receive different goods, and that the cut being promised will affect only specific items. While U.S. Sightholders, who generally get an allocation of bigger and nicer goods, have noted a deep cut in their allocation – 30 percent and more – Indian Sightholders have reported a minimal reduction, if any, in their upcoming supply.

One explanation for the reduction, according to DTC Sales Director Des Cavanagh, is the commitment to provide goods to Botswana. A number of Sightholders opened or are in the process of opening polishing plants in that country, and the DTC will supply them with a separate Sight. This new Sight will come at the expense of other Sightholders, and it begins to explain why some were hit harder than others.

It is not known how big the total allocation in Botswana will be, but estimates range from $150 to $300 million.

Another partial explanation for the reduction is lower prices. While an official reduction was not announced, a de facto reduction is expected to be created by an improvement in assortments. One insider estimated a price improvement of up to 5 percent.

With an estimated supply of $3.25 billion of rough diamonds during the first half of 2006, a $50 million reduction in supply from Alrosa ($100 million annually), a $150 million supply to Botswana (taking into account the top estimate of $300 million annually), and a five percent reduction in price ($162.5 million), the cut is under 12 percent. This is an average reduction by value for the first six months of the year and, as stated above, will vary among Sightholders. If De Beers' mining arm DBCM expects a slowdown in production, this reduction might increase to 15 percent.

One big question is the state of the ex-plan. Currently there aren’t any extra goods supplied beyond the ITO. But if the market recovers, De Beers MD Gareth Penny might reverse his decision, and allow ex-plan supplies, which of course will raise output to the market.