Rough trading slows amid liquidity concerns.
The De Beers August sight closed last week with an estimated value of $715 million as the company maintained steady prices despite liquidity concerns in the diamond manufacturing sector.Rough trading slowed on the secondary market and premiums on De Beers boxes declined, with boxes selling at average low single-digit percentages during and after the sight.
“The market is in a tough space because polished trading resumed after the summer break on a weak note,” said one sightholder. “The secondary rough market is very weak and liquidity is scarce.”
Nigel Simson, the senior vice president of global sightholder sales for De Beers, explained that August through September tends to be a very tight time of the year for manufacturers as they’re focused on preparing for the fourth quarter holiday season, even though retail demand has not yet begun.
“The midstream is at maximum strain at the moment and some businesses are able to deal with it better than others depending on their liquidity situation,” Simson said. “Stock levels tend to be higher during this period than at other times of the year and liquidity is stretched because we haven’t started to see [polished] sales come through and money coming back in.”
Simson stressed, however, that De Beers still projects that 2014 will be a positive year overall as global gross domestic product (GDP) growth targets are fairly stable and consumer demand for diamond jewelry tends to closely follow those economic indicators. “That gives us a fair degree of confidence that we’ll have a positive 2014,” he said. “It’s really a matter of lifting your head above this seasonally quiet period and understanding where we are heading.”
For now, however, sentiment among manufacturers declined in August. Mike Aggett, the CEO of H. Goldie, a broker for De Beers sightholders, explained in his blog that the combination of slow polished sales, reduced polished prices, growing rough and polished inventories, set against a backdrop of ongoing shortages of liquidity, all contributed to the cautious mood and growing concerns of the industry.
Simson and others explained that the downturn is partly due to the cyclical nature of the trade. Sightholders noted that the short time between the July and August sights, which were the two largest De Beers rough sales of the year so far, added to the liquidity pressures among manufacturers.
As a result, sightholders who spoke with Rapaport News expect the remaining three sights of the year to be relatively small. The August sight pushed De Beers rough sales for the year to date above the $5 billion mark, according to Rapaport estimates, representing a 23 percent increase compared to the same period last year.
While they anticipate De Beers list prices to remain stable, sightholders forecast further softening of prices on the secondary market in the coming months. They question whether there will be enough of a correction in rough prices and a simultaneous rise in polished prices during the fourth quarter to enable better profit margins and ease their liquidity concerns.
“The rough and polished markets are in a state of imbalance and I don’t see that changing in the short term,” said one sightholder. “There are only three sights left this year so there’s a limit to how much rough prices can still be affected.”
De Beers this week opened registration to apply for sights in the new three-year contract period that begins on April 1, 2015. Simson stressed that the focus on financial strength and transparency from sightholders in the new contract period would help the industry navigate periods of short-term volatility and slower periods of the year.
The next De Beers sight is scheduled to take place on October 6 to 10.