Market update - A sluggish start to 2015

I’d like to be able to say that diamond traders and manufacturers are in an enthusiastic and upbeat mood this January as is usually the case at the start of the year. But the reality is they’re not feeling it, and while diamond inventories build up, I predict a tough year ahead.

A seemingly controversial rough diamond price policy adopted by the main suppliers and slow polished markets, coupled with poor cash flow has prompted a mood of uncertainty that now looms large over the diamond market. Despite a slight improvement in demand for polished diamonds in New York and Hong Kong, and some trading activities mainly in India and Israel, the general sentiment is that 2015 has set off to a sluggish start. 

The polished diamond pipeline is overloaded with goods. According to our estimates, about $8 billion worth of polished diamonds are on offer on trading platforms and an estimated additional $2 billion worth of polished diamonds are in the hands of gemological laboratories, awaiting grading. This high inventory level is, in my opinion, one of the reasons that most companies are now financially in a tight position. Until these diamonds are sold, cash flow remains a major issue holding the diamond market back from an upbeat mood.

The January sight was first estimated by brokers and sightholders at around $450 million, a relatively smaller sight considering sightholders were allowed  to defer up to 40% of their allocations (up from the usual 20% deferral). Boxes deemed too expensive were rejected, This brought the estimated final value of rough diamonds purchased by sightholders this month to under $450 million, according to De Beers brokers and clients. 

The deferrals will probably become a burden of upcoming sights. If market trends don’t change by then, sightholders will most likely have to absorb these goods.

Nevertheless, sightholders and brokers reported that prices were indeed lowered on average by 3 to 4%.  But in their view, it was a case of “too little, too late”. Several boxes were sold to the secondary market and some of them sold at below sightholder cost, according to rough diamond brokers.

The market moved in the direction as envisaged in our January 19 market update, with a small correction of rough diamond prices and reduced volumes. We estimate the average monthly supply of rough diamonds in the last few years at $1.3 billion. Indian manufacturers, whose manufacturing levels have been down 35% in the last 2 to 3 months, say the market would be able to absorb no more than $850 million worth of rough diamonds in January. 

There are no indications that other main suppliers will lower prices. Major suppliers are expected to offer this month an estimated $150 million worth of rough diamonds in January, according to their clients. An additional $150 million comes through tenders and other sources, according to our estimates. This brings the total supply of rough diamonds from all sources in January to around $700 million, a gap of $150 million between supply and demand of rough diamonds. Just what the market needs to lower inventories - and the cash tied to it - while waiting for cash revenue from polished sales. 

It seems traders and manufacturers are not willing to pay more to bridge the gap in supply. They are only willing to buy rough that is priced low enough to justify the expenditure. Evidence of that are the rough trading transactions that are only for goods priced right and only to close the manufacturing gap. In my opinion, no purchases are expected beyond the current lower manufacturing capacity, not even at substantial discounts.

Rough diamond prices have been rising since late 2011, early 2012, following a large price decline of more than 25%. In the first half of 2014, prices rose significantly only to soften in the second half of the year, posting an estimated 5% year on year increase. 

While manufacturers deem prices too high, I envision a difficult 2015 ahead. However, beyond the short-term, the market fundamentals remain strong – a rise in demand and declining supply leading to stronger prices in the long term. 

As regards polished prices and demand, the prospect is conservative. After a difficult year in 2014 when prices declined in mid to high single digits in the final quarter of the year, the outlook for 2015 is cautious. American retailers are not expected to make large purchases to replenish their inventories after a sluggish holiday season, dashing hopes that the January/February period would see improved loose polished sales. 

Further, gemological laboratories resolved a bottleneck that created a very large backlog, and at a very short period, almost at once, the market had an overhang of smaller, commercial goods. 

For now, it seems that manufacturers are acting cautiously by buying only what they need. We see very rational premiums with long credit terms from the secondary market, something that confirms the polished overhang and liquidity crunch even when the rough supply hasn’t met the reduced manufacturing capacity.

As we reach the close of the first diamond cycle of 2015, it remains to be seen how effectively and how quickly these huge polished diamond inventories will be cleared out of the diamond pipeline. All hopes are now pinned on Valentine’s day and the Chinese New year to give the diamond trade the boost it needs.

The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified advisor. Nothing on this website can be construed or constitutes an offer or a recommendation to sell or to purchase diamonds or the solicitation of an offer to purchase any diamonds nor does it constitute an offer or a recommendation to sell or to purchase any security or financial product or the solicitation of an offer to purchase any security or financial product.