Market update - Price pressure deepens

Despite suppliers’ best attempts to keep prices high while shifting their inventories, the rough diamond market this week saw downward pressure on prices and a disappointing sixth edition of the annual Antwerp Diamond Trade Fair.

Many who participated in the trade show in Antwerp last week reported sales were very weak with exhibitor and visitor numbers down on last year. They said that buyers attempted to make purchases at below market prices. Hopes remain that this week’s Israel diamond trade show will yield more upbeat results. The upcoming Hong Kong and BaselWorld shows being held this March will be important markers for the industry in the short term.

While polished diamond sales in January started slowly, they have improved in New York and Hong Kong since the second half of January in anticipation of Valentine’s Day and the Chinese New Year. Yet despite the rise in demand, polished prices have remained under pressure and retailers have not yet started reordering to replenish their inventories, according to most market sources who claim prices have declined by 20% since January 2014.

The majority of sales have been in the under 1 carat polished diamond sizes in medium and cheaper qualities. Diamonds larger than 1 carat are still moving slowly, placing pressure on manufacturers’ cash flow against a backdrop of pressure from banks. Stones larger than 3 carats are in stalemate and transactions between traders are only happening at bargain prices.

Primary sources of rough diamonds have remained expensive despite the correction made to their prices, according to manufacturers. Many would like to see an additional correction in rough diamond prices even though this could put even more pressure on polished diamond prices.

Companies holding contracts with primary sources claim they rejected an estimated 30% of goods offered to them. However, as a tradeoff large amounts of rough diamonds were presented and enabled clients to make their own selections. 

Manufacturers say they prefer buying either the smaller and cheaper goods or Run of Mine - a full range of sizes and qualities produced by a mine. Cheaper goods allow them to keep their factories working with a relatively low capital investment, while buying Run of Mine allows them to produce a wide range of polished diamonds. While it has become difficult to predict what type of diamonds will be easier to sell, having a whole range of diamonds in their inventories splits the risk, enabling them to potentially sell the diamonds which are most in demand.

It appears that primary sources are set to auction an unusually large amount of rough diamonds, estimated at $100 million. It will soon become clear whether the market will be able to absorb so many goods and whether the auctions will enjoy the same strong results as other recent tenders.
As mentioned in my market update last week, activity in the secondary market is a function of manufacturers’ needs to fill the gap in their inventories created by lower supply from the main miners. 

This is causing suppliers to keep prices high and many buyers have reported that goods are currently “not cheap”. With primary sources considered expensive by manufacturers, many of them are finding refuge in rough diamond tenders. Most of the tenders have done relatively well. After prices at tenders came down by a high single digit during the fourth quarter of 2014, it seems prices have stayed stable in early 2015. 

Recent tenders, especially those held in Gaborone, have enjoyed relatively high attendance and achieved reasonable prices. Producers were positively surprised as prices achieved have been above the reserve prices which they lowered due to market conditions.  Smaller South African tenders have not had many diamonds to show and quite a number of the offered lots were withdrawn, according to participants. 

Manufacturers are reporting that they have reduced production capacity by 40% to 50% in carat weight terms. Their inventory volumes are high in value terms because it has become difficult to sell the larger sizes and higher qualities of diamonds. Having to carry a high value inventory has resulted in poor cash flow. They now prefer to buy smaller sizes and cheaper rough diamonds in order to keep their factories in production. If they only buy cheaper goods then their effective turnover is 60% to 70% lower in value terms. With this lower turnover while assuming they make the same margins as usual - which one could easily doubt - on a much lower volume of business, those margins might hardly cover their expenses. 

I am confident that the wheel will turn and the diamond pipeline will be cleared of this inventory overhang. But for now a key question remains: How long will it take before business thrives again? Only one thing is certain - buying rough diamonds at the highest possible price either from primary sources and/or tenders even when justified by the current market situation, and then pricing the polished diamonds as low as possible to make a sale either in the open market or through electronic platforms, is not the right formula for a healthy business in the long run.   

Ultimately, market forces are likely to lead to a reduction in rough supplies and cause price adjustments, leading to a much needed return to a dynamic and healthy diamond industry pipeline.

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.