MAJOR EVENTS – WEAK MARKET SENTIMENT
Two major diamond-marketing events have taken place over the course of the last two weeks - the Baselworld trade fair and the De Beers Sight (De Beers’ rough diamonds sales event). Both occurred under a cloud of weak market sentiment.
Many participants have described the Basel World trade fair as “weak.” Exhibitors report some sales but most transactions have been made between exhibiting dealers believing that prices are low enough to jump in and buy, hoping for better times. The good news is that prices of polished diamonds seem to have been adjusted and that they have been arousing interest. Have prices reached bottom? That is not certain.
Courtesy of Baselworld
STATE OF CONFUSION
Confusion among the leaders and market makers of the diamond industry is contributing to the lack of confidence among all the industry sectors. The industry is hearing contradictory statements about the near future of the diamond market and its status and about current diamond prices.
How could it be that two price benchmarks have shown, in a weak and falling market, an increase in asking prices? Is it all due to a few traders that uploaded their inventory lists to the platforms with unrealistic high prices, consequently skewing the benchmarks? If this is not confusing, then what is?
Speaking of confusion let us read some of the statements issued by different sources, often contradicting each other - De Beers’ leadership here and reality as reflected by the industry press here Or listen to an interview in the general press here.
According to Martin Rapaport, Chairman of the Rapaport Group, high rough prices hurt the diamond industry: “Too much money goes to the mining companies who deny profits to distributors and retailers. This results in not enough money for marketing and promotion. No one is supporting generic diamond demand. The mining companies are too sharp for their own good. They are takers, not givers, and are destroying future demand in return for short-term profits. At the end of the day, rough diamond prices must come down to the extent that diamond manufacturing and marketing is once again a profitable activity.”
Alternatively listen to an interview with the CEO of a major mining company talking about “firm rough diamond prices”
Are rough prices firm? If they are, should they stay firm? Here is another interview of the same CEO. Or should we all listen to the sound of reason, as expressed here.
Is it confusing enough? Or are the mining companies simply disconnected from reality while firmly entrenched in their comfort zone?
Downturn in Asia
The lack of confidence is leading Asian retailers to look for cooperation with diamond manufacturers. They expect diamond manufacturers to “lend” goods on “memo,” which they intend setting into the retailers’ jewelry and split profit when sold. Should the industry adopt the American model of goods in memo and annihilate the last market usually tended towards cash transactions? Will the pressure to sell cause diamond manufacturers and traders to succumb?
Advertisement campaigns, Asian culture and traditions which have always led the local consumers to buy diamonds are apparently not enough anymore to bit a Strong USD Dollar, weaker local currencies, new banking regulation, tighter governmental controls and lack of confidence, all of which gather up to slow sales down.
Retailers are buying only when they have a client call for a specific diamond. Despite the wealth accumulated in Asia, high-profile buyers are watching the market closely while “sitting on the fence” to see where it is heading before jumping in to buy some more diamonds.
There is bad news. According to market sources, the accumulated capital losses due to bankruptcies range between $60 - $70 million for the last few months. The two most recent results were disclosed while we have been writing this update - one in Hong Kong and the other one in Israel. Are these bankruptcies really the last ones?
India – The Jewel in the Crown
The very good news out of Asia is the fantastic growth of the Indian economy. India is the major diamond manufacturing center but also one of the most important diamond consuming markets.
Despite the recovering economy in the United States, reduced spending on luxury items is impacting diamond and jewelry consumption. How is it that with a bullish stock exchange market, a strong dollar, lower unemployment and a stronger economy, we still have sales in the USA mainly in the lower range of sizes and qualities? Why is the American consumer not showing more of an interest in purchasing high-end and larger diamonds? Is the USA economy back to business as usual? Or is it still fragile? which may explain why the central bank is hesitating to bring interest up.
Another upcoming show that is creating some expectations is the diamond and jewelry show in Las Vegas, which will take place starting May 29 to June 1. One may wonder how selling diamonds in a bazaar-style event can inspire optimism. Are the frequent trade shows and the diamond industry reliance on it another sign that most trading occurs between traders? Market analysts are assessing that 40% of polished diamonds are sold in trade shows and 17% of US diamond sales in 2014 occurred online, where you have to be the cheapest to sell. Is this the way to maximize revenue and profit?
The Las Vegas show is anyhow still a ways away. It remains to be seen whether it can bring any good news or an improvement of polished diamond sales.
ROUGH IS TOUGH
According to De Beers’ clients, last week’s sight was probably one of the most difficult ones in many years. With +$730 million worth of rough diamonds offered at the sight which was heavily populated by deferred, unwanted rough diamonds from previous sights, they were facing a huge dilemma as we mentioned in our last week market update: “To buy or not to buy?”
According to market sources, since November 2014, De Beers’ clients have been returning goods at a volume varying between 5%-15% in value terms. However, according to market speculation, during last week's sight, some 35% of the goods by value were refused. This includes goods of all sizes and qualities.
ITO's (Intention To Offer) for the forthcoming contract period have been announced based on Sightholders full acceptance of the March allocation. Refusal of goods may impact their ITO for the upcoming contract period. This was the reason for the pressure to buy as much as possible.
Many Sightholders say that they expect to have been offered an option to refuse goods without being punished. Others expected reduced prices and have been disappointed. Some told us that they have reached a point where after months of negative sales and high prices paid for rough, they simply returned goods without being overly concerned if their actions would result in a reduced ITO and the forming of the new contract. Many wondered what would be the reaction of the three new Sightholders to the prices they will have to pay for goods that the veterans have refused.
If 35% of a sight of $730 million was refused and only around $475 million of goods were bought, does this mean that manufacturers will once again turn to tenders and the open market to fill the gap between the supplies from primary sources and the real needs of the industry? Is there a gap? Does the industry need more goods?
Despite reduced polished prices, manufacturers are concerned - some in a major way - as they have not managed to sell substantial volumes of polished diamonds. Those of who are self-financed can afford to make logical commercial decisions: They buy rough which turns into sellable polished diamonds if they can buy it at a defendable price. Those who are financially leveraged by the banks are often making decisions in view of the need to keep showing commercial activity. Hence, they are making “political purchases” regardless of their real manufacturing capacity or sales results and often at too high a price.
The Survival Business Plan
All agree that the diamond industry needs to clear off the polished pipeline. To do so it has to be supplied with lower volumes of rough at current prices or if supply volumes are high as it currently is the case, there is an urgent need to reduce rough prices. This has to happen in order to cover losses on inventories and enable a new start. It seems that the business plans of all sectors of the diamond industry are about having minimum capital loss to a point of survival as their goal for 2015. Is this the way it should be? Will General Motors or Ford make cars and charge a price that its sales agents will not be able to pass on to the public whilst making a profit? Will their car sales agents have a survival business plan?
The polished diamonds pipelines are full at all levels. Whether they are the retailers, wholesalers, or manufacturers, they are all stuck with too many polished diamonds. With all the pipelines full of polished, the first outcome has been some reduction of both polished and rough diamonds prices. However, polished prices have been suffering constant price reductions while rough prices have not been reduced sufficiently.
With not enough of polished sales, financial difficulties and high volumes of rough supplies at too high a price, many De Beers’ Sightholders have started to both defer and refuse boxes of goods.
Then the next logical decision was to reduce manufacturing capacity, which is currently down by at least 40% in value terms. As a consequence, rough diamonds have been accumulating while waiting for a revival of demand.
Now rough diamond prices have to come down according to prices achieved for polished.
The last extreme and drastic measure may be to reduce the rough diamonds production. After all, mother earth is the best and safest place in which to keep your valuables.
The announced closure of the Antwerp’s Diamond Bank and the credit reduction policy in some of the other banks that traditionally finance the diamond industry may have proven to be a blessing in disguise.
Apparently, there is no vacuum. Indian banks and one of the Israeli banks stayed firm in their commitment to the diamond industry. Recently it has been announced that Dubai banks have also stepped in to fill some of the gap created in the financial needs of the industry.
Some of the financial needs of the diamond industry have been provided by financially strong diamond traders who tend credits to their clients by selling both rough and polished diamonds for longer credit terms than before.
Recently Bloomberg reported that there is another bank believed to move and take a share of the financing of the diamond industry:
“Barclays Plc has started lending to diamond dealers as the British bank seeks to expand in southern Africa, according to people familiar with the situation.
The U.K.-based bank is financing buyers of rough stones in Botswana and South Africa, the people said, asking not to be identified, as the move has not been made public. Barclays’ customers include buyers of gems from the Botswana government, the biggest producing country…”
Could we say that the financing issues of the diamond industry are resolved?
We probably cannot say that, but there is definitely a breath of fresh air pumped into the liquidity pipes of the diamond industry. This may explain how rough purchases continue despite small volumes of polished are sold.
It remains to be seen if this additional financing power will be used in a rational way or in the same old ‘good’ emotional fearful way. It is going to be very interesting to follow the three new Sightholders.
Will this new midstream generation take its commercial decisions rationally or emotionally?
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.
Diamond industrialist Ehud Arye Laniado is a man passionate about diamonds. From his early 20s in Africa and later in Belgium honing his expertise in forecasting the value of polished diamonds by examining rough diamonds by hand, till today four decades later, as chairman of his international diamond businesses spanning mining, exploration, rough and polished diamond valuation, trading, manufacturing, retail and consultancy services, Laniado has mastered both the miniscule details of evaluating and pricing individual rough diamonds and the entire structure of the diamond industry. Today, his global operations are at the forefront of the industry, recognised in diamond capitals from Mumbai to Tel Aviv and Hong Kong to New York.
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