Market update - While inventories swell, a new kind of buyer's market emerges

Our survey of the market this week has found that while demand for polished diamonds is improving, the number of transactions remains lower than usual for this time of the year. In response to high inventories, we are seeing new buying and selling behaviours in the market – from manufacturers buying run of mine diamonds, to traders self-financing and offering longer payment terms.

An atmosphere of caution coupled with keen supply has created a buyer’s market which is placing downward pressure on diamond prices. Most diamond markets are currently quiet although an improvement is noticeable in Hong Kong in anticipation of the Chinese New Year.

The good news is that manufacturers and rough diamond traders can afford to purchase rough diamonds and they are buying with consideration, at reduced prices as opposed to speculatively at high prices. When on offer at lower prices, these rough diamonds offer an opportunity for profit as polished stones and manufacturers are, seemingly miraculously, finding the funds to buy them, despite any current cash flow pressure they may be experiencing.

I believe the rough diamond market is now entering a new phase. It is a phase in which manufacturers are buying predominantly rationally rather than emotionally. They buy when they see a profit, to fill a gap between inventory and demand – all while diamond-manufacturing factories are currently operating at about 65 to 70% of their capacity, according to polishers. 

It would be easy for some to see the uplift in transactions in the market as a signal of business as usual, but this is clearly not the case. Diamond traders and manufacturers as well as other sectors of the diamond industry are still worried by the surplus in polished diamond inventories. As usual, it is the manufacturers, the midstream of the diamond pipeline, who are carrying the burden of this overhang, which is composed mainly of higher quality and colours of diamonds. 

The result is reduced demand for better qualities of rough diamonds in the market which leads to logical purchases of rough, with manufacturers looking to buy at prices that will actually produce profits.

Because of the uncertainty in the market, and concerns over which polished goods manufacturers should invest in, manufacturers appear to be heading in two main directions. One option manufacturers are choosing is to buy specific boxes of rough diamonds sourced from major miners which yield well-defined polished diamonds that are known to be in demand. The other option is buying unsorted goods, those known as Run of Mine. When buying the mixed, unsorted Run of Mine goods, manufacturers spread their risk, provided they can buy them at a low enough price to enable a profit.

Another trend we are seeing in the rough trading market is a growing tendency to self-finance due to diminished bank financing and the slow movement of polished diamonds. 

An increasing number of financially sound rough diamond traders who make their profit from selling rough on short payment terms have recently changed their policy. They are now offering longer payment terms under certain conditions. This grace in payment terms is allowing the secondary market some air to breath, while also giving sellers a better chance to boost sales and collect payments on time.

The first cycle of rough supply from the major producers in 2015, which we reported about in our previous market update, is now complete and purchases are happening in the open market. Various sources in the market say the attendance at tenders for rough diamonds has been rather weak lately and prices achieved are lower compared to prices in the last quarter of 2014.

All eyes in the diamond pipeline are now on Valentine’s Day and the Chinese New Year, with hopes for a decrease in inventories and fresh cash flow to inject momentum into our industry once more.

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.