Diamond Profits Plunge; Stock Prices Follow
With economy in lengthy recession, De Beers' woes deepen concerns. SOUTH AFRICA
AN unexpected reversal in the fortunes of South Africa's key diamond industry has sparked a sharp fall in the Johannesburg stock market and dealt a harsh blow to the country's ailing economy.
"The worldwide economic recession has finally taken its toll on the battered South African economy," one stock broker says.
Tumbling platinum and gold prices exacerbated what is now regarded as the most sustained economic recession here since World War II. Gold hit a low of $334 an ounce on Friday, pushing at least 10 more mines into marginal status and endangering a further 80,000 jobs.
An estimated 500,000 jobs have been lost in the industrial and commercial sectors during the current recession.
De Beers, the diamond arm of the mining and industrial conglomerate Anglo American, took the markets by surprise on Aug. 11 by announcing a 26 percent earnings drop and a warning that the final dividend could be cut.
"The current outlook would indicate a significant reduction in the final dividend," Anglo American chairman Julian Ogilvie Thompson said.
De Beers, the world's leading diamond supplier and South Africa's biggest company in market capitalization, is regarded as a barometer of investor confidence.
The De Beers' share price fell 20 percent last week to 60.50 Rands ($21.78), sparking a similar trend among blue-chip stocks. The fall wiped SAR36 billion ($12.96 billion) off overall market capitalization and saw the overall index of the Johannesburg Stock Exchange (JSE) fall by 7 percent. It has dropped 16 percent in the past three months.
JSE analysts say the De Beers' warning of a dividend cut contributed to the fall in the gold price.
The warning from Mr. Ogilvie Thompson came only three months after he had predicted that diamond sales for the second half of 1992 would exceed sales for the same period for 1991.
It is now estimated that sales for the second half of this year could fall below the $1.8 billion sales recorded during the first half of 1992.
Only a month ago, De Beers said that the diamond market had improved, resulting in increased sales at the fourth and fifth sights (sales) of the Central Selling Organization (CSO), the international cartel that is De Beers' marketing arm.
Despite unease over the effects of sustained recession in major diamond markets such as the United States and Japan, most analysts accepted the forecasts because of the credibility of the De Beers chairman.
But now some JSE analysts blame De Beers for trying to attract investors by making optimistic predictions which did not square with the statistics.
Ogilvie Thompson has denied that he misled analysts when he told a visiting delegation earlier this year that De Beers, final dividend would not be reduced.
He said that De Beers had re-assessed the outlook because of two developments: the slowdown in the Japanese economy and the lack of improvement in Europe and the US, on the one hand, and the increase in the volumes of diamonds being smuggled out of Angola, on the other. But analysts argue that they have been accounting for these factors since January.
A De Beers spokesman said it was the collapse of Nikkei and the dismal US employment figures which had changed the market outlook since the beginning of June. Japan and the US combined accounted for 59 percent of retail diamond sales in 1991.
Some analysts hold that the outlook for diamonds could get worse before it gets better.
There are signs that Russia, the other major producer of diamonds, will soon start demanding more participation in the cutting, polishing, and selling of diamonds rather than being merely a supplier to the CSO.
"The Russians want a bigger share of the action," a Johannesburg mining analyst says.
Recent prospecting in Canada's British Columbia province have indicated rich deposits of diamond-bearing rock.
In Angola, even the crippling regional drought has contributed to the discovery of more diamonds. A river in the country has run dry, exposing large quantities of alluvial diamonds which have attracted tens of thousands of diggers.
Ironically, De Beers opened a SAR 1.1 billion diamond mine in the northern corner of Transvaal province on Friday. In a speech, Ogilvie Thompson expressed confidence in the future of the mining industry.
De Beers has been stockpiling diamonds for the past four years and stocks currently represent around 77 percent of CSO sales. This is still well short of the 1982 high of 130 percent.
But De Beers insists that the current increase in stocks is being financed by capital rather than credit and that the situation is not comparable.