Tuesday, February 8, 2011

Diamonds hit historic high in 2010

Botswana exported P20.81 billion in diamonds last year, representing an all-time high in pula terms and signifying the industry's strong rebound from a collapse lasting approximately 15 months.

At P20.79 billion, exports in 2008 come closest to last year's performance, with previous pula term values ranging from P17 billion in 2005 to P20.48 billion in 2007.

But in US dollar terms, last year's exports are eclipsed by annual figures between 2005 and 2008, with 2006 being the all-time high at US$3.41 billion. In US dollar terms, Botswana exported US$3.01 billion in diamonds for 2010.

Bank of Botswana statistics released last Friday confirm expert forecasts that diamond exports for 2010 would reach historic levels on the back of a sharp recovery in demand, following the slump in 2009.

As producers notched up record prices for certain classifications of diamonds last year, analysts explained that the high values were largely a result of low production levels during the recession and restocking by polishers and retailers.

The record prices enabled Botswana to make history in diamond exports, even in a year in which diamond production was expected to be at its second lowest level in 11 years at about 23 million.

For the decade, diamond production peaked in 2006 at 34.3 million carats and was at its lowest in 2009 at 17.7 million carats. Excluding production cutbacks due to the recession, production in 2010 will mirror levels last seen in 1999 of 23.1 million.

Bank of Botswana data shows that a weakening pula against the US dollar underpinned last year's record export figures.

In the five-year period from 2006, diamond exports hit a historic high in US dollar terms in 2006 when the pula was strongest.

The historic high in pula terms achieved last year was when the pula was weakest against the greenback. The pula averaged P5.77 and P6.90 against the US dollar in 2006 and 2010 respectively.

"The May 2005 devaluation of the pula was primarily meant to extract higher values from exports, especially diamonds which we saw in the higher US dollar values recorded from that time to the recession," one analyst observed.

"Although the pula gained marginally against the US dollar last year, it has generally been sliding in the last five years, triggered by the devaluation."

The stronger pula values in 2006 and 2007 explain why diamond exports in pula terms were muted despite the record production and US dollar values seen. Had the 2010 average exchange rate been present in 2006, history would have been made in that year because Botswana would have earned P23.55 billion from diamond exports.

Analysts expect the diamond industry to decline marginally this year as the rebound effects taper out and more products filter through to the market following production cutbacks in 2009.

Rough diamond prices could be stabilised by the fact that the world's largest diamond company, De Beers, has instituted a policy of producing according to demand and keeping the precious stones in the ground when market fundamentals do not favour profitable production.

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