Diamonds and Oil.

Overview by Benoit de Carbonnières, Regional Corporate Manager (Rawbank, Katanga)

DIAMANT

020bf0ff-8e77-4851-ac09-7b2e39d332b7China and the dollar. Like the majority of commodities, these are the two pitfalls that diamonds encountered in 2015. De Beers has just announced a price reduction of 9% to support its market. Even the strongest of the ups and downs in 2009 – 2012 had not been so intense. Botswana is reducing its production, while it is growing in Russia and the Quebec Renard project should raise Canada’s ranking on the world diamond scene.

If the appetite for average sized stones logically follows that of restrained economic vitality on certain markets, the appetite for exceptional stones seems to be boundless – a South African Blue Moon will be on offer early in November at Sotheby’s in Geneva for somewhere between $35m and $55m.

The market continues to consolidate in terms of operators and Angola is increasingly diversifying the exploitation of its resources. Stones that are not diamond in colour, whether blue, red or green, are also up, and represent nearly 8% of global production, while industrial diamonds continue to disappear irrevocably from the landscape to the benefit of synthetic stones (99%) and their Chinese manufacturers.

The volume of stones traded in Antwerp reached a new peak in 2014, with nearly 230 million carats worth nearly US$59 billion changing hands. In 2015, the world market is expected to be US$80 billion. Whether the share of the large houses is continuing to increase behind these figures still has to be clarified, however, and many traders see new difficulties arising in the years to come. Amongst these, the noticeable decrease in funding, as was the case in India in 2013, and the departure of the Antwerp Diamond Bank, one of the main banks in the market. ABN-Amro and Standard Chartered also announced their intention to reduce their exposure to diamonds. The financial circuit of this business must also take account of the constraints of compliance specific to banking, especially in Europe and the United States.

Higher up the chain, the major producers had a buoyant 2014 and Anglo-American strengthened its position as leader in terms of unit value with an average carat price of $198, while its main competitor Alrosa remained 14% lower at $171. 2015 has been a different story; if the Russian giant has followed the rules laid down by Moscow and has become the leading producer by value during the course of the year, De Beers has followed that of a private capital multinational and has had no hesitation in slowing the pace down when justified. Angola figures once more in the strategy of the subsidiary of the mining giant of platinum group metals.
Just as for many mining sites, the transition between opencast and underground mining can take a certain amount of time, as in the case of the Argyle mine in Australia, where production fell by 43%, consequently reducing that of Rio Tinto by nearly 12% in 2014. The production of precious stones by the Australian mining sector amounted to nearly 14 million carats, with production stable at the Diavik site and slightly up at Muroa. Revenue remained up by 5%, however, and net profit was more than US$100 million following the noticeable reduction in the cost of production and the reduction in investment. At the end of October 2014, Dominion had produced 4.14 million carats year on year for revenue in the order of US$900 million and a net profit of US$56 million. The Ekati site saw its production rise by 5.35% while that at Diavik remained relatively stable.
In terms of the producer countries, sub-Saharan Africa remains significantly ahead of the other regions in terms of value, while Russia continues to supply the majority of white stones. For its part, Canada recorded a rise of more than 9% and is investing to raise its production. The Renard project, launched by the province of Quebec, for example, should provide an annual production in the order of 1.6 million carats in addition to the country’s four existing mines – this project has been awaited for at least 20 years. Russia and Botswana are still number one and two, ahead of Canada. The Democratic Republic of Congo recovered nearly 30% of its 2013 production and became the 6th largest producer after Angola and South Africa. The authorities in Kasai Oriental, the main province of production, also planned to introduce a law prohibiting the employment of minors at the beginning of the year – a further step in the Kimberley Process.
Consumption, although expected in a period that was less euphoric than during previous years, decreased compared to the previous year, as it had done in 2012. China remains promising in global demand in the medium term – although it was only 16% in 2014, compared to 42% for the United States, it represents strong potential for growth once the turbulence in the financial markets and monetary readjustments are over. India is expected to be the driver of structural growth, as for many other raw materials, but its entry on the market is still awaited – an increase of only 3% in 2014.
2015 should therefore be a time of readjusting production and reducing stocks. The arrival on the market of new Canadian and Angolan projects could once again challenge the supremacy of Russia and Botswana.
The hopes resting on China and India, in support of the United States as the leading players in terms of global demand, remain present in the medium term, but in the immediate future, strong growth in demand for “conventional” stones is unlikely, only the Sotheby’s and Christie’s are likely to pursue new records in 2015.

 


 

OIL 

966c22df-4e2e-4ca0-be7d-6193e482567cCalm before, or after the storm? The sector, which has experienced one of the biggest phases of falling prices and high volatility over the past few years, seems to be gradually settling on an ocean of crude of as yet unknown size. The policy of Saudi Arabia, the return of Iran and Chinese demand remain the principal unknowns in an equation that is still of great concern in the short term. A market on hold and an industry in the midst of restructuring are for the moment the visible consequences of this situation. Brent, which has several times sunk to a floor of $50, showed an annual average of $50.7 at the end of August, putting it at a level last seen in 2009. This period includes the strategies of oil company restructuring and opportunism, with the largest acquisition of the last fifteen years in the takeover of the BG Group by Shell. American production, after a long rise to over 10 million barrels/day, has started to decrease in recent weeks to 9.8 million and Cushing stocks are starting to resume their upward trend.

 

$42.45 … This price sums up the dizzying descent that the price of a barrel has experienced in the last 15 months. The price of $115 of June 2014, which seemed a “reasonable” price considering a stable global supply at an acceptable cost for the diversification of production and strong Chinese demand, has experienced several factors at work at the same time. On 24 August, Brent posted the price last seen on the NYMEX in January 2009, at the height of the Lehmann Brothers tsunami and the upheavals on the crude oil market. The annual average shows the same trend.

The oil economy is in a period of expectancy, Statoil or Shell have trimmed their wings in terms of staffing levels when ENI consequently reduced its dividend. The intervening period seems to be focused on Total, which has substantially reduced its investment spending while retaining its troops and the good humour of its shareholders. This major French company has recently announced a balanced budget plan for a barrel at $45 in 2019. This bet, although it seems relatively conservative, could well reflect the long-term trend in the price of oil and related investments, such as stability of demand and a gradual erasing of the China effect. In absolute terms, global behaviour is unanimous: Brent, WTI and Dubai are tracking each other, but the $50 effect on Brent seems to trigger a mechanical upturn in demand. This has exceeded 96m bpd (1) and the trend is upwards over the rest of the year.

As regards demand by area, today the change generated by the emergence of non-conventional American oil must be pointed out, together with the gradual consequent withdrawal of the United States, whose self-sufficiency is currently set at about twenty months. On the other side of the Pacific, despite Chinese growth of 7%, which continues to slow down, with the lowest rise in 24 years, or perhaps it would be more logical to talk of adjustment, the appetite for crude does not seem greatly affected. Demand between January and August grew by 5.7% while growth year on year exceeds 9%. In 2015, the Chinese exceeded 11 million barrels/day (2). On the other side of the Pacific, the United States maintains a cap on growth in consumption in line with the economy, nearly 20 million BOE (*) are consumed daily, an increase of 3.6% compared to 2014 (3).

Europe takes a different view of the fluctuations in the price of crude – that they are in fact quite small in light of the proportion of taxes included in the price to the consumer and therefore of low elasticity of demand. In addition, the EUR/USD has dropped more than 11% since 1 January, which restricts the economic stimulus of the area even more. Despite these various parameters, increased demand remains strong and reached 14 million barrels in July (4).

The question of price took the market back to a pre 1973 stage. If competition, driven by the rapid development of non-conventional American oil for less than a decade, has triggered a Saudi Arabian equivalent of the same size, what will the outcome be with the imminent return of Iran and its cost of production at $5 a barrel (5) ? By comparison, its Gulf neighbours produce at between $6 and $8 per barrel in operating costs while the USA is at $13 and Nigeria at $16 (6). Deferred projects represent a total of 18 billion of BOE across the world, i.e. half a year of global consumption.

The United States is thinking deeply about lifting the ban on the export of crude oil. The cost of U.S. production, having declined considerably thanks to fracking and to the flexibility of its facilities, positions it in the highly competitive market of non-OPEC producers and thus makes it a key and reliable player in the future of this market.

Saudi Arabia, which has a relative majority of OPEC’s production (35%) but is much more powerful in terms of cost of production, appears to have a strategy of recapturing a market share reduced by the emergence of new entrants (USA and Iraq in particular).

Russia and certain other members of OPEC are in a more complex situation, like Venezuela, because of national budgets based on an oil price almost double its current price.

The other producers such as Canada have, for purely economic reasons, put many projects and deposits on hold ($70 per barrel for oil shale (7)) and in Norway, Statoil has announced a plan to reduce its workforce by 10%.

As for what is downstream, the sub-contractors are the main victims. Schlumberger has done away with 20,000 jobs, equal to 15% of its staff and the “previous levels” are no longer imaginable, according to its CEO. There are contrasting trends in the world of refining, according to the different regions of the globe. In Europe, the margins have started to rise in this business, which three years ago was almost in deficit. In America, this industry, which is highly strategic for both the economy and for defence, has also seen an ample increase in its margins, supported by the increase in production of crude oil on the North American continent, where the ban prohibiting exports keeps stock levels high. There too, the likely law lifting the ban on the export of crude could partially reshuffle the pack in the Gulf of Mexico. In the Middle East, where refining is down, development projects have gathered pace in Saudi Arabia and the UAE. If their domestic markets remain limited in terms of outlets, their position on the African and Asian routes gives them a definite advantage.

Freight remains at a very low level, the BDTI (**) has remained fairly stable over the past few weeks.
If the bar of $50 seems to have become the norm for a barrel, this will reinvigorate the market and production capacity will probably settle at around this price. Although the geopolitical situation in northern Iraq and Syria has not had an impact on price, what will the return of Iranian crude and an influx of American barrels on the market do to it…

 


 

*Barrel of Oil Equivalent

**Baltic Dry Tanker Index – average of prices charged on 17 crude oil transport routes

 

1, 3 & 4 – IEA – International Energy Agency – Report September 2015

2 – OPEC Monthly Report – October 2015

5, 6 & 7 – Rystad Energy/Morgan Stanley