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Market Update: Rough Going in Zimbabwe

Market Update: Rough Going in Zimbabwe

2015 is looking up to be year in which rough diamond production sees a slight upticks, although it seems that one of Africa's major suppliers is all tapped out. 

“There are no more alluvial diamonds in Zimbabwe,” according to Zimbabwe’s finance minister, Patrick Chinamasa, who was answering a question about diamond revenue. Digging deeper for diamonds requires a higher level of capital investment, something that most of the licensed mining companies in Zimbabwe apparently do not have. Global rough diamond production in 2015 is forecast at around 135,500,000 carats with a value of $14 billion, according to analysts. The figure represents a year-over-year increase of 1.8% in value and 3.4% in volume

If nothing changes, we are going to see on average a supply of $1.4 billion worth of rough diamonds every cycle (a cycle is about five weeks, ten annual occasions when the major producers supply rough diamonds to the market). This is a small increase in per cycle supply compared to 2014. 

Manufacturing volume has been cut by around 40% in carat terms and around 70% in value. What will a supply of $1.4 billion per cycle do to rough and polished diamond prices in light of this reduction in manufacturing? Was this issue brought up at the producers meeting in London two weeks ago?.

 

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Zimbabwe

 

Ponying Up for Rough Diamonds

Meanwhile, it seems that there is a shortage of rough diamonds at proper prices in the secondary rough diamond market, according to market sources. The Alrosa sale, which took place last week, has been absorbed easily in the market although no changes of prices have been noted, according to some of the company’s clients. 

Manufacturers and rough diamond traders are willing to pay more than they did in February for certain items, namely goods that result in polished diamonds they can move. These include rough resulting in 0.20 carat to 0.90 carat polished. They also need these goods to fill the gap created between the supply from primary sources and the real needs of the industry.

Manufacturers bought more from primary sources compared to last month. They noted a gradual improvement in rough prices as well as the banks' preference to finance purchases from primary sources. They are able to do so now that their cash flow improved thanks to cost-saving measures, reducing expenditure on rough diamond purchases, continued (albeit slow) polished sales and new sources of financing.

 

Rough Diamond Dealers Converge on Israel

The International Rough Diamond Week is scheduled to take place at Israel Diamond Exchange between April 12 to16 and will include rough diamond tenders by Alrosa, De Beers, Rio Tinto, Fusion and Tsophiov. These tenders will offer large specials and fancy color stones and it fits well into a growing number of tenders taking place regularly. 

Participation in tenders keeps going strong. Manufacturers like being able to choose only what they really need and getting it directly from the miners. In some of the tenders, the same companies are buying 50%-60% of the goods offered. As tenders became more commonplace over the years, some companies have perfected the art of winning the goods they need. They offer very accurate prices, focus on the goods they know how to manufacture and sell, and do so systematically. 

How can a manufacturer make a profit by buying through tenders? It is common knowledge within the industry that in order to win a parcel you have to place the highest bid. However, when you place your polished diamonds on an online platform after manufacturing, you need to be very competitive. Otherwise, you risk not selling your goods. It might be that the reason for the high level of participation in tenders is again to keep the factory running while waiting for better times. Or perhaps the manufacturer does not have a direct access to primary sources.

 

Trade Shows competition and Hopes

Trade shows have become a way of life in the diamond industry. Huge halls, long corridors, thousands of exhibitors presenting their diamonds - from the simplest small and cheaper goods to the most extraordinary. 

I wonder if trade shows are the proper sales venue for such a precious, unique and rare product like a diamond. After the huge efforts put into purchasing rough; recruiting and training the work force; the skills that are taught; the capital investment poured in; the sophisticated advanced equipment used; the complex taxation involved; and the extensive, financing, we bring our inventories to exhibit in hangars. Is this the way to sell a diamond?  

At times, the competition between exhibitors becomes intense. Well-established diamond manufacturers who are strictly regulated and closely supervised on ethical issues while also faced with high overhead costs, investments in R&D, and an expensively trained work force might find themselves in the same hall with a small manufacturer that has hardly any chance to cover his costs. The small manufacturer is hopeful, wanting to break into the big dog’s area, and he knows that he have very little overhead back home. So he offers lower prices. A buyer may not care if his supplier has a large and sophisticated facility or small and rackety one, since the buyer only wants to spend less. 

This is an unhealthy situation. When the two can only compete over price, everybody loses: the small company will lose because it will never recoup its show costs, the larger company will lose because it is forced to sell as if it was in a Bazaar. Therefore, the major company might have to offer longer credit terms or a buy-back procedure of some kind. Clients lose because they will never get decent service and do not stand on their own feet, relying on inner-industry credit. Were these issues discussed in the producers' London meeting?

 

Recovering from Hong Kong

The Hong Kong fair was not one of the better ones, but it was not a disaster. Exhibitors reacted with mixed feelings to it and some reported that they have achieved reasonable prices in many areas and created a price base line to go forward. 

Many expect the Basel show to do better in the range of larger and better diamonds. Basel will help crystallize the price of those items and complete the picture - Hong Kong for the smaller size ranges and Basel for the large size range.

 

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Hong Kong diamond and jewelry trade show

Have Diamond Prices Touched Bottom?

Two weeks ago, leading industry indices saw an unusual increase. It may have been related to a decision by a group of Indian traders that decided to post its goods on the trading platforms at list price, rather than the usual discounted prices. 

“Let the client call me to ask for a price,” one of them said. “Why should I let everybody know how much I want to sell my diamonds for?”.

Polished diamond price lists published by the major pricing platforms were in disagreement on many items last week. While one was showing a relatively steady price, the other indicated a major reduction in prices for most price points in the size range of 0.30 carat to 3 carat. It seems strange to find out that the reduction has been applied to the most sellable type of goods. Those are the goods resulting from one to 10 carats in rough. There is a strong demand for those rough diamonds in the secondary market and only very few of them were refused at the last primary sources sale events. So why a price reduction? 

Manufacturers and traders are trading these goods at serious discounts off the benchmark price list platforms. Prices seemed low enough allowing accumulating goods, waiting for an improvement of the market and selling at a profit. The current reduction of benchmark prices is a double hit, first serious double digit discounts and now benchmark prices reduction, this caught them all off guard. Is this current price reduction based on prices retailers are ready to pay? 

Alternatively, was it based on discounts applied by traders who grabbed the opportunity to buy at much cheaper prices than a few weeks ago? With the frequent trade shows in our industry the mood in one trade show, like what we had in Hong Kong, has an immediate impact on the next one. Should we not be careful to not carry one mind set from one event to the next?

The good news about the current price reduction is that it may create a buzz. Traders and retailers may believe that it is the right moment to buy if they think that we touched bottom. 

 

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Polished Diamond

Polished diamond Centers and Markets

American traders are looking for an improvement of the market. They are not expecting it to improve soon and therefore many are adopting a “wait and see” attitude. Fancy shapes continue to be in demand in America as well as smaller than 1-carat round diamonds, especially 0.23-0.29 carats SI quality in the G-M colors. Some jewelry chain stores are looking into the possibility of making jewelry with small total weights and lower sizes of solitaires in order to conform to current market demand.

Business in Hong Kong has started slow this year as many left for the New Year vacations abroad and the Hong Kong show did not make a real difference. Demands for 1-3 carats, especially over size items such as 1.30 carat or 2.30 carat goods in D-G colors VS-SI qualities, have been reported in the market.

According to Chow Tai Fook, in the two weeks before the Chinese New Year and in the first few days of the holiday, retail jewelry sales increased well in Mainland China but declined in Hong Kong. Is Hong Kong losing its predominant role of a distribution center? Are toughened regulations in China and a less-than-friendly attitude of banks in Hong-Kong towards diamond traders causing the decline of sales in Hong Kong?

For their own stores, they reported that retail sales growth in Mainland China was 22%. In Hong Kong their sales fell 24% in the fourteen days prior to and the first four days of Chinese New Year. Same store sales in Mainland China +11%, in HK -29%. In terms of volume, same store sales in Mainland China increased 9% and fell 30% in HK. 

This is indicative of a better average price point in Mainland China, which is not surprising because sales of gem-set jewelry in Mainland China jumped 62% while gold products declined 2%. In Hong Kong, sales of gem-set jewelry declined 17% and sales of gold fell 38%.

The conclusion is that despite many complaining about a decline in China, it seems that diamond jewelry sales are doing very well, and improving. The long-term view for China may be very positive. 

In India, rough has gone up in demand in certain areas. It is apparently not due to increasing demand for polished diamonds in any meaningful way. The two main reasons for the demand and the price increases of rough are stock reductions of polished diamonds leading to shortage in polished and rough in certain areas and manufacturers trying to protect costs. 

 

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.

 

“Clash of Civilizations”
Market Update: A Pivotal Week

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