Go Figure
February 12, 04The backs of envelopes are great places to jot down figures that don’t make sense. They provide the opportunity to come back to the subject later after doing more research. One figure that is puzzling me is the 10% compound price increase of rough that De Beers says it added on last year. Sightholders in Belgium, including large ones who see virtually a whole range of production, put the figure much closer to 15-20%.
Average price increases are always problematic because they reflect changes in the price book. At times the DTC may sell below its own Standard Selling Values (SSV) and then of course the perception in the market is that increases are steeper. Also, by adjusting some ranges that comprise fewer current goods, the averages achieved on paper may be different from those that are actually sensed in the market. It is hard to figure out.
Last year the DTC sold $5.5 billion worth of rough which, by its own admission, exceeded its target by about $1 billion. De Beers is also very confident that the goods are moving through the pipeline. In the same breath, it points out that cutting and trading center banking indebtedness has increased by 23% to some $8.5 billion. That figure is, strictly speaking, not correct. There are at least some $500 million worth of securitization of account receivables, which basically means raising public money (through bonds) to finance diamond exports. We would place the actual cutting center indebtedness well beyond $9 billion.
The logic of concluding that stock is moving through the pipeline has much to do with the perception of the level of polished stocks. De Beers monitors polished stocks in the cutting centers on a monthly basis, and I don’t really know how they do it.
But their figures are important because their allocation policies may take those figures into account to a limited extent. De Beers estimates that end of year polished stocks total $4.40 billion, up from $4.31 billion a year before. On January 1, 2000, the DTC estimated polished stocks to be $3.07 billion, pointing to a 43% increase in four years. In 2003, the increase in polished stocks was only $100 million, but nevertheless an increase. I am not sure whether a consistent unabated increase of stock levels of polished is really an indication that goods flow smoothly through the pipeline.
There is still room on the back of the envelope to look at President Joseph Kabila’s whirlwind tour via Washington and London to Antwerp. Belgium is probably more important to the young DRC President than any of the other places. The diamond figures of his country, which counts some 750,000 diggers, are indeed most intriguing.
In 2002, DRC’s informal sector, where goods are valued at about $30 per carat, was worth $317 million, while production from MIBA and Sengamines in the formal sector, with industrial quality goods valued at around $12-13 per carat, was $120 million, thus bringing the total value of official exports to $437 million.
Last year, official exports jumped to $642 million, with the informal sector being worth $520 million - a significant increase from the year before. While the value of exports increased by about 50%, the official exports in carats rose by only about 10%.
According to very reliable sources on the Antwerp street, the difference comes from higher export valuations. The country changed the company valuing its exports and, pronto, exports go up. A year earlier something not dissimilar happened in Sierra Leone, although to a much more modest extent. You change valuators and all of a sudden production rises. Pure magic.
There is little doubt that in 2003 the DRC’s diamond production exceeded $1 billion. That some 50-60% is reflected in the official exports is a remarkable achievement and something that all concerned should note with pride and satisfaction. It’s certainly better than it has been for many, many years. But as we are trying to figure out figures, the question remains how the remaining $400-$500 million ends up in the industry. Have they come in without certificates?
There are several possible answers and not enough room on the back of my envelope but it is very interesting that we see a tremendous rise in the issuance of Kimberley certificates in some places where there is absolutely no diamond production. It would be an extremely interesting exercise if some truly independent valuation office would randomly check valuation systems in the various production countries.
When one goes to a supermarket and buys a basketful of groceries one often gets the feeling that if one takes it twice through the cash register, one may get different results. There is certainly not one single universal truth - but it is an interesting exercise in itself. It’s something governments in the producing countries may wish to contemplate.
Looking at the back of the envelope, these are really all subjects that require far more thought and discussion but time is infinite and next week and the week after there is room for more columns.
Enjoy your weekend.