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Market Update - Confusion and questions looming over the diamond industry

The mood in the diamond market is hesitant and there is a strong feeling of anticipation in the air. It’s hardly surprising when you consider the recent publication of a decrease in round polished diamond prices, coupled with Indian factories having reduced their production levels to reflect demand and rumours making the rounds that De Beers and Alrosa are set to reduce their prices.

Could the price decrease be premature and too generic? 

We are still awaiting reports about the season sale results in America. We know sales of diamonds and fine jewellery have been pretty strong, so what has been sold there? Is it SI and pique goods and if so, at what price?  If SI and pique have been in demand, doesn’t it mean stronger prices have been achieved? 

The decrease was across the board, so does it mean that the prices of VS and better goods should have been reduced more, because SI and piques were doing well? As if things weren’t confusing enough before this announcement. Are we now touching bottom prices?

Since we do not know the results of the season sales, we also do not know to what extent the pipeline has been cleaned. While preparing for the season, retailers tended to be very conservative in their purchases. Now that the high selling season has concluded, will they seek to replenish their inventories? Are there new orders for polished diamonds to be fulfilled? If there are, this may energise the diamond industry.  

Meanwhile China and Japan, two of the leading polished diamond consuming markets, have been quite weak for some time. This has led to more and more goods being directed to America where sales are relatively strong. Could this mean supply outstripping demand in America - a situation which could possibly lead to more polished diamond price decreases?

Some fear large volumes of rough diamonds will pour into the market during January. It is quite obvious that with limited financing capacity rough buyers will buy from the source offering them the best value.

Since the end of November, Indian manufacturing capacity has been reduced by 30%, according to Indian market sources. This has taken a number of different forms. Factories have closed during the weekend, working hours have been reduced and manufactures have been polishing smaller and cheaper goods which means less capital is used while keeping the factories going.

Buying capacity, confidence and market sentiment are at low levels because sales of polished diamonds are at much lower levels and bank financing has been reduced. 

Manufacturers are expecting the price of rough diamonds to fall. They are adamant to buy only at reduced prices either from De Beers, Alrosa or any other source. They are not sure what price to buy rough at, but they will be looking to spend what’s left of their positive cash flow only in return for the best possible value. 

Important questions now loom over the industry:

How big will the De Beers January Sight be? Will it be $700 million? Will Alrosa sell $250 million worth of rough diamonds in January? Will the tenders be held as planned? 

As often happens during confusing times,rumours are doing the rounds in the market. One is that Alrosa will reduce prices by an average 5% to 6% and may even adopt a deferral mechanism. Another rumour is that De Beers will lower prices by 3%. If this happens, some De Beers clients are already considering refusing their allocations in favour of more friendly alternative sources such as Alrosa or others, who will provide them with better value. 

At the same time, it appears De Beers have heard the voice of the market. They informed their clients that they might defer an additional 25% of January’s goods. This comes on top of the 20% deferral De Beers’ Sightholders are usually allowed to make. Is this the beginning of the crucial dialogue between the different sectors of the industry? Is it the dialogue that I am preaching about and long for? 

Let’s hope it is and that an open and ongoing discussion develops. We still have to wait and see what will happen with all these deferred goods. Will Sightholders still want to buy them in February or March? Will these goods be priced well enough to be welcomed by the market? The approved additional deferral is a positive gesture, but does it add to the confusion in the market?

Are manufacturers starting to grasp the power they have when they pay cash? Are they looking to make a profit and forego their fear of losing a source? They may have lost their fear to risk such sources if they realise that if they continue to make “political” rough purchases they will not survive. It seems they won’t continue to buy from sources that are trying to maximise profits by narrowing manufacturer profit margins in the midstream without analyzing repeated negative feedback from manufacturers who are voicing distress. Those manufacturers have been obliged to buy at any price to preserve their positions with the major suppliers. Their situation is touch and go.

The optimal solution may be a careful and balanced rough diamond price reduction. While this would ensure a healthy margin for manufacturers, it won’t cause severe damage to the value of existing inventories, which could have a disastrous implication. A balanced price reduction such as this could help them reduce the average price of their inventories at a moderate pace and even contribute to some positive cash flow which is now so essential.

Manufacturers are waiting to see where this leads. As it stands, many will probably leave goods on the table if new prices levels won’t provide them with a solution to their lingering problems. 

 

The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information on this website without consulting a professional qualified advisor.

 

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