If you want to understand the problems of the diamond industry, look no further than the rough diamond trade in Belgium’s diamond center in Antwerp. It is a microcosm that paints a painfully accurate picture.
In the first ten months of 2018, Antwerp imported $9 billion worth of rough diamonds. The total weight of those imports was 74.65 million carats, according to data published by Antwerp World Diamond Centre (AWDC). Exports of rough diamonds in January-October 2018 totaled $10.5 billion. The total volume of imports was 98.3 million carats.
Antwerp is the world’s leading rough diamond trading center. Goods of all kinds come through it, the lowest cost and quality to the very top rough diamonds imaginable. The 1,109-carat Lesedi La Rona, found in Botswana and mined by a Canadian mining company was offered here. Most of the rough diamonds sold by tender are tendered in Antwerp. This is to say that Antwerp is an excellent bellwether of the global rough diamond market and the multitude of issues it faces.
A comparison of the value of rough diamond exports in 2018 to 2017 shows that the difference in value is very small and that the fluctuations throughout the year are very similar. In fact, in the first ten months of 2017, $10.14 billion of rough diamonds were exported. The year-over-year rise is 3.7%, most attributable to a single and unusual jump in exports in March 2018. Otherwise, the two years are very similar.
At the same time, something very different is lurking beneath the surface. While exports to date are just 3.7% higher, the average value per carat is far higher in 2018 – up 8.5%. The average value of imports is also higher this year, up 7.7%. This is a clear indication of the large changes in rough diamond prices this year compared to last year. Keeping in mind that the mix of goods is probably somewhat different and that the figures are gross imports and exports, so there could be some goods that were exported and then re-imported – this is still an important change.
The rise in the average value of rough diamonds is especially important in light of the ongoing decline in polished diamond prices. As we have shown throughout the last few years, prices of polished diamonds have been heading south since mid-2014.
If prices of polished diamonds are declining, while those of rough diamonds are rising, it is no surprise that manufacturers’ margins are shrinking. This is not a healthy situation for anyone. It is unsustainable and may bring manufacturers to the brink. Not only may some go bankrupt, but it will further erode the already shaky confidence of the banks in the diamond industry. It will also backfire on miners, who will lose clients and more.
Finally, AWDC’s figures reveal another issue – a buildup of rough diamond inventories held by traders. More rough diamonds are exported than imported. In value, this makes perfect sense: rough diamonds are mined in producing countries, shipped mainly by miners to Antwerp to be sold to clients. The difference in value is the seller’s margin. On average, we are looking at about $62 per carat.
However, while the difference in value makes sense, that is not true for the difference in volume between imports and exports. Whatever is shipped to Antwerp is expected to be exported from Antwerp. The only difference should come from the goods that remain for local polishing. Yet, 74.7 million carats of rough diamond were imported into the center, and as many as 98.3 million carats exported between January to October.
Every single month this past year, with the exception of August, more rough diamonds were exported than imported. A total difference of over 23.6 million carats. Where did all the additional rough diamonds come from? Overhang.
If our assessment is accurate, and traders are selling rough diamonds they have held in inventory for some time, then clearly there is a problem in the market. There are two possible scenarios here. One, rough diamonds did not sell as well, and traders were stuck with the goods, essentially sitting on capital. Or, they purchased speculatively last year, and now that prices are rising, they are selling this inventory.
The second scenario is somewhat likely. However, with a shortage of cash in the diamond market, it is hard to believe that such a huge amount of cash was temporarily taken out of circulation. Will the banks play along with this? Maybe. At least as long as they can collect interest and feel secure about the money coming back to them at a known time.
If it is the first scenario, it shows just how out of balance things can get in the market. It means that miners forced fed goods not in need by the industry. Miners do not want to sit on their goods for too long and hold them for the industry waiting for when it is ready them. They are really missing out on an opportunity, because it not only weakens their cash-strapped clients, it also means that when the goods can be sold, they won’t benefit from rising prices.
Any which way you look at it, this is a market out of balance. Unneeded rough diamonds are sitting in the midstream. Cash is tied to it although the supply of money is tight. Rough diamond prices are rising despite the decline in polished diamond prices, margins continue to shrink – and all this is just the midstream, the heart of the diamond industry. It is simply not realistic to pave a path to wellness in such a scenario. The miners should ease the pressure on the midstream, and retailers need to focus on marketing product to consumers. Otherwise, matters won’t improve.
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 adviser.
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.