The rough diamond sector has had two price drivers in the past couple of months: good demand for polished diamonds accompanied by rising polished prices, and Alrosa’s announcement that it will supply fewer rough goods in the July-September period. With these two drivers waning, demand, prices and the mood in the industry has turned south in the past couple of weeks.
Demand for polished diamonds declined in August, a typical seasonal trend that takes place during the summer vacation period. Prices have also softened with the decline in demand, leading manufacturers to act cautiously to prevent a buildup of their inventory.
The slowdown in supply that Alrosa announced in June is almost over, at least in buyers’ minds, and the expectation is that that the Russian diamond giant will increase supplies. This, however, will not happen immediately.
Sight estimated at $700 million
The slowdown comes on the back of a number of large supplies by De Beers in the past few Sights, which took advantage of the willing market. De Beers simply rushed to the market in a smart way from its perspective: large supplies without price hikes.
The August Sight is estimated at about $700 million, much less than sold at the July Sight ($800 million-$850 million), yet still a large one. Prices, in general, have not changed, although a few traders noted that some of the boxes had lower assortments.
Refusals are back
The large offering by De Beers may have fuelled estimates in the market that the Sight was larger much than $700 million. However, there were refusals that bring the final count down. According to low estimates in the market, about 4-5 percent of the goods by value were left on the table. The high estimate puts the figure closer to 10 percent. The real level of refusals is probably somewhere in the middle, around 6-7 percent.
The reason for the refusals is lack of profitability. For example, one Sightholder stated that the larger goods, +10.8 carat and the 5-14.8 carat rough goods, were too pricy.
What will De Beers do with these goods now? At least in theory, they have been set aside for the yet-to-be-selected Accredited Buyers. As you may recall, Accredited Buyers are the De Beers clients that meet the high Sightholders financial reporting standards and ethical requirements, but not the high buying volume requirement. They will be offered the goods that are not in the ITO – the extra production (ex-plan) and the Sight refusals.
This, of course, has an impact on refusals. A Sightholder refusing the same goods a few times is at risk of losing that supply – or at least some of it. Therefore it is no surprise that some of them feel that they are once again buying “with a gun to their head” as one insider put it – they must buy or risk losing out in the long-term. Therefore, in some instances (or many, as some argue), goods were bought at a loss, in the name of maintaining their long-term supply.
A note about Accredited Buyers: currently the sentiment in the market is that very few companies can qualify as Accredited Buyers because of the required accounting standards. I’m not sure that the pool of potential companies is very small. After all, if there are 20 companies that qualify, that is a good number of firms that are potentially future Sightholders.
Alrosa supply $270 million
Following the June announcement of fewer supplies, Alrosa has indeed reduced its offerings. Alrosa’s August supply is estimated at $270 million, and the company is expected to supply just $300 million worth of rough diamonds in September.
According to an Antwerp-based Sightholder, the reduced supply in September will do the market good after the large supply from De Beers at the last few Sights resulted in the market swallowing many goods. In fact, it could be argued that the large supply during the summer period was more than the market can digest, adding to the current slowdown.
Without a Sight in September (the next one is in October) and a fairly small supply from Alrosa, manufacturers will have an opportunity to take a deep breath in September.
This deep breath has a lot to do with liquidity, mostly in India. The liquidity issue is once again rearing its head, and the firms with supply contracts from the two large miners need the excuse to not buy goods now.
On August 30, Alrosa announced good second quarter results, including a rise in the average price and volume of rough diamond sales – just ahead of the current slowdown. By volume, rough diamond sales were up 10 percent to 21.1 million carats in the first six months of 2014, even though it saw a 7 percent decline in production to 15.9 million carats. Yes, the figures are revealing that Alrosa sold several million carats of rough diamonds from its inventory.
The rise in the average price was due to improved assortments, up 8 percent for gem-quality goods, and not an overall increase in prices, which is surprising. The company reported that the average price decreased by less than 1 percent due to “market conditions.” This stands in contrast to rising prices at other producers and other statements regarding Alrosa’s prices.
With a large amount of goods in the market, demand has softened considerably (see the demands table below) leading to a decline in premiums in many categories. The slowdown is so pronounced that previously busy Chinese factories are suddenly actively soliciting work. According to one manufacturer, in the past few weeks he was approached by several Chinese diamond-polishing facilities looking for work and willing to charge less for their labor.
There are possibly other reasons for this availability, but at the very least, it’s important to know that there is some additional extra capacity available to the industry.
Several issues are on the mind of manufacturers looking ahead. The state of financing in Antwerp, with the sale of ADB to a Chinese group yet to be approved, is somewhat unclear. What will current bank owner KBC do if the sale does not go through? Some fear that KBC will simply close ADB. The uncertainty is not contributing to the market’s confidence.
Another issue is the constant threat that as part of the EU’s sanctions against Russia over its involvement in Ukraine, diamond imports from Russia will be banned, providing a blow to Antwerp’s diamond industry. Indian and Israeli firms are less worried because they don’t expect their governments to place any sanctions on Russia.
September is expected to be a slow month of rough diamond trading, with manufacturers mainly focused on driving turnover. The Hong Kong show will supply some answers about demand in Asia in the near future, but without a clear answer about China, as many Chinese are on vacation during that time.
Now just back from their summer vacations, traders in Antwerp and Tel Aviv are starting to get their bearings on the market, and polished diamond trading should start picking up, possibly resulting in moderately rising prices.
Historically, there is a rise in demand for polished diamonds in October, as part of the gearing up for the holiday season. This rise in demand will take place as supply of rough is set to increase, hopefully invigorating the entire market.
Demand for key De Beers boxes following august sight
|Article||Demand*||Remarks on demand|
|Fine 2.5-4 cts & Fine 5-14.8 cts||Medium demand||Lower demand compared to previous Sight.|
|Crystals 2.5-4 cts & Crystals 5-14.8 cts||Medium demand||Same demand compared to previous Sight.|
|Commercial 2.5-4 cts and 5-14.8 cts||Medium demand||Same demand compared to previous Sight.|
|Spotted Sawables 4-8 gr||Medium demand||Lower demand compared to previous Sight.|
|Chips 4-8 gr||Medium demand||Lower demand compared to previous Sight.|
|Colored Sawables 4-8 gr & Colored 2.5-14.8 cts||Medium demand||Lower demand for 4-8gr than to +2ct.|
|Makeables High 3 gr +7||Low demand||Lower demand compared to previous Sight.|
|Preparers Low 3-6 gr||Low demand||Lower demand compared to previous Sight.|
|1st Color Rejections (H-L) +11/+7||No demand||Lower demand compared to previous Sight.|
|1st Color Rejections (H-L) -7+3||No demand||Same demand compared to previous Sight.|
*Change from previous Sight