A happier year ahead?

Avi Krawitz

Diamantaires were happy to see the back of 2014. After all, it was a tough year in which polished diamond prices declined, accelerating the general downtrend evident since mid-2011. Therefore, there is understandably some uncertainty about the trade’s prospects for the coming year as many of the core challenges facing the market persist.

To labor the point made by this column last week, banks are being more stringent in lending to the industry, liquidity is tight and profit margins are even tighter (see editorial, “The Diamond Story of 2014,” published on December 26, 2014). Given the steep declines in polished prices in December and through most of 2014, dealers and manufacturers can be forgiven for being cautious.

There are also positives. U.S. demand is stable and the economy is showing signs of strength. There is also a sense that the diamond industry is slowly getting its house in order, particularly with regard to financial compliance issues and marketing. Those processes are certainly a step in the right direction and necessary for the long-term health of the industry, even if they will inevitably endure some growing pains.

Therefore, it’s very difficult to forecast how the diamond market will evolve in the coming year. However, it’s worthwhile to keep an eye open for the stories and trends that are expected to shape the market. Here’s a look at some of the developments that we’ll be looking out for in 2015 – in no particular order:

De Beers contract & rough prices

In theory, rough prices should decline in the first quarter of 2015, unlike in 2014. Last year, rough prices rose in the first quarter spurred by polished inventory replenishment and after rough prices had declined in the fourth quarter of 2013 – at De Beers sights and on the spot and secondary markets. The fourth quarter correction enabled manufacturers’ improved profit margins at the beginning of 2014 as polished prices increased.

This year hasn’t brought the same fourth quarter rough price adjustment. While prices have corrected on the secondary market, De Beers has held its prices relatively steady, including in December. As a result, profit margins and liquidity remain tight among the large manufacturers, who consequently rejected a larger proportion than usual of De Beers goods at the December sight.

Meanwhile, inventory levels remain high across the distribution chain and the extent to which demand will be driven by inventory replenishment in the first quarter – as it was in 2014 – remains to be seen.

If liquidity is being squeezed, one expects manufacturers to continue to reject high-priced rough to force the mining companies to reduce their prices.

In practice, however, that probably won’t happen. De Beers, for one, is tweaking prices on a sight-by-sight and category-by-category basis, rather than implementing far-reaching reductions. The company is also negotiating new three-year contracts, effective from April 1, with sightholders who might be reluctant to jeopardize their position by refusing to take goods – even if De Beers has simplified the selection process to ensure that existing sightholders are virtually guaranteed renewal.

Furthermore, De Beers will be introducing mechanisms to raise the competition for rough that will help defend its prices. The accredited buyer system during the next contract period presents the potential for De Beers to supply more non-sightholder companies with rough.

More manufacturers, and retailers for that matter, will gain contracted rough supply in 2015 as more of the major mining companies are offering long-term supply deals – De Beers, ALROSA, Rio Tinto and Dominion, among them.

Therefore, the divergence between contracted supply and the spot and secondary rough markets will likely become even more apparent. We’ll be watching out for manufacturers’ ability, or willingness, to pay high rough prices in both areas during 2015.

Financial compliance & bank credit

De Beers has simplified the application process for its new contract. Applicants must simply demonstrate sufficient demand for rough, comply with De Beers Best Practice Principles on ethical performance, and with international financial reporting standards (IFRS).

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Source Rapaport