Market Update - A State of Confusion

In last week’s Market Update, it was suggested, “It’s never a good sign when ‘slow’ becomes a buzzword.” Is it any better when the buzzword is “confusion”?

It seems that the sales results from the Chinese New Year period contributed to the confusion. There were some good signs of activity, according to many traders. Still, the outcome was a limited success due to the pressure applied by local traders and retailers on polished prices. Polished buyers - both traders and retailers - are looking for “bargains.” 

Market players are complaining that polished diamond prices are in a “confusion mode” as asking prices are quite far from what buyers are willing to pay. Manufacturers and traders are selling at a reduced price range when liquidity is badly needed.

Standstill in Asia

Asian polished diamond markets are in a relative standstill due to the Chinese New Year holidays. Most traders and retailers are saying that they are waiting for the Hong Kong diamond and jewellery trade fair that will take place March 2-8. 

Lower colours in the 1-carat and larger sizes, medium sizes round and fancy shapes (0.20-0.50 carats in polished terms) with GIA dossiers (partial certificates) and light fancy colours of 1-carat and larger are all in demand. Fancy colour (Pink, Blue, etc.) in all sizes are in steady demand. 

High colours and qualities in all sizes are moving slow. Traders are reporting more demand for polished diamonds coming from Japan. Is Japan back in the game? This remains to be seen.

Valentine’s Day upswing

The US polished diamond market is enjoying a somewhat improved mood after satisfying Valentine’s Day sales results from jewellers’ perspective. 

There is higher demand for 1-carat stones of medium and low qualities, as well as for medium-sized round and fancy shapes (0.20-0.50 carats in polished terms) with GIA dossiers. Here, too, buyers are looking for “bargains.” 

Stones larger than 1 carat are less in demand. Diamonds sizes 2-4 carats are in moderate demand at reduced prices. For diamonds of 5-carats and larger, traders are maintaining prices at the highest possible rate. There are expectations that lower energy prices may increase consumer spending, according to Wall Street economists.

In Israel, manufacturers and traders are keeping their prices at relatively high levels, which in turn leads to a limited number of transactions. Most of them say that they are waiting for the Hong Kong trade fair to help pull them out of the confusion and identify current market prices. Many say that when looking to buy a particular stone, it is rather difficult to find one at a decent price - if at all. 

Traders are reporting robust demand for high colours (D-F) in the VS2 and lower clarities in most sizes, but only rare transactions in the better qualities. The most popular shapes are Round, Pear Shape, Oval and Emerald.

The market in Antwerp is experiencing a slowdown. Concerns about liquidity, financing and the HSBC affair are the main topics of conversation. The upcoming Hong Kong trade fair and the Basel Show do not appear to be having a positive impact on the pessimistic mood. European retailers are reporting a lull in consumers’ interest.

Stagnation in rough diamond market

Confusion also abounds in the rough diamond market, where most manufacturers are reporting stagnation. In normal settings, capital of approximately $16 billion is used by the Midstream (manufacturers) and it permits it to run business smoothly. 

The capital is needed to pay for rough diamonds, which would then cover the costs of manufacturing, grading, owning an inventory varied enough for marketing purposes, extending credit to clients. Banks in Belgium, India and Israel are currently lending $11.16 billion, according to bank reports, while the rest is financed by equity. 

Lower cash flow

In years past, rough-diamond purchasing was financed by selling polished diamonds. These days, with polished sales on the decline, it seems that the Midstream does not generate enough sales to create the needed cash flow. With many of the manufacturers using their credit lines and equity to the fullest, there is not much left to generate new rough diamond purchases. This compels them to be very selective in the sizes and types of rough they are willing to buy with their limited resources. 

Manufacturers say they prefer to either purchase from primary sources - transactions that are financed by the banks - or buy either in the open market or at tenders only what they really need, and at prices they are able to pay so that their factories continue to turn and cover most of the expenses. They buy rough diamonds only to fill the missing gap of volume needed to run their factories, as mentioned in last week’s Market Update. 

At times, manufacturers might refuse to buy a parcel - even if the asking price is very close to what they are ready to pay - and it is likely that they will keep looking for cheaper goods. The main sizes in demand are the Melees (yielding mainly 0.07 to 0.19 carats in polished terms) and smaller. These sizes require lower capital insertion resulting in a very low turnover. According to some of the leading manufacturers, running the factories at 50% capacity in carat terms and -70% in USD terms at current rough diamonds prices does not allow them to cover expenses, especially in large operations that have high overhead.

Manufacturers say that buying the rough even at reduced prices does not guarantee a profit as polished is selling very slowly and at much lower prices. Many believe that lower/current polished prices won’t change for a while and therefore prices of rough diamonds will fall. More optimistic manufacturers say that polished sales will prevail and polished diamond prices will increase. Both scenarios can leave manufacturers with a profit. 

The entire market is waiting to see if the primary rough sources will pour large quantities of rough diamonds into the market or smaller quantities as they did in January. Another burning question is this: Will they reduce prices?

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.