Adjustments would ensure profitability for manufacturers and raise market sentiment.
Rough-diamond prices are too high, and reducing them is a must. Not only is such a move necessary to ensure profitability for manufacturers, it would also raise market sentiment, which has been uncharacteristically weak for a first quarter.
In the long term, miners would gain from a correction as well, as it would stimulate demand and prevent a market freeze that is inevitable if rough prices don’t come down. That happened in late 2015, when the mining companies, after record sales the previous year, tried to maintain rough prices until manufacturers started to reject goods at those unsustainable and unprofitable levels.
The current market is reminiscent of those days, even if rough supply has been subdued. Polished and rough trading has been cautious in the first three months of 2019, usually the busiest time of the year. Polished-inventory levels are still high, due to a bottleneck created in 2017-18 that, in turn, led to a decline in De Beers and Alrosa sales during the first two months of this year. We believe the mining companies will have to lower their sales expectations for 2019, as outlined in last month’s Rapaport Research Report.
In this March edition of the report, we stress the need to accompany lower supply with lower prices. Rough prices need to go down by at least 10% to restore profitability in the manufacturing sector. While reducing prices will lead to lower sales for the mining companies this year, it will stimulate trading again. Ultimately, it will set the miners up for healthier growth moving forward. Besides, if prices stay as they are, we expect manufacturers will start to reject more rough supply or start to leave the business.