Rough diamond prices are expected to soften in January with a high level of refusals anticipated at next week’s De Beers and ALROSA sales. In fact, analysts expect rough prices to decline throughout 2015 after the mining sector enjoyed a bumper year in 2014 – despite the fragile polished market.
“I’d be surprised if rough prices end 2015 where they started the year,” said Des Kilalea, an analyst at RBC Capital Markets. “The extent of the decline will be determined by the behavior of De Beers and ALROSA and a lot will depend on the economy in China.”
Manufacturers’ profit margins have been squeezed as polished prices fell in 2014, largely due to slowing Chinese demand, while average prices of rough from direct supply increased. Liquidity also came under pressure as the banks reduced their financing to the industry.
Since cash flow has dried up, Kilalea expects a high volume of goods to be rejected at the January De Beers sight, which should influence De Beers to drop prices – if not next week, then at the following February sight.
“Since cash flow has dried up, Kilalea expects a high volume of goods to be rejected at the January De Beers sight.”
De Beers has responded to the weak market by telling sightholders that they can defer up to 25 percent of their allocated January supply to February or March. That bends its usual deferral policy, which generally allows sightholders to postpone taking a box from one sight to the next, but no later, once every half year. Furthermore, sightholders can generally refuse up to 10 percent of the carat volume of each box, which is then held in inventory for the next sight.
David Johnson, head of midstream communications for De Beers, said that De Beers acknowledged that there is some short-term “indigestion” in the midstream resulting from issues relating to inventory levels and liquidity.
He added that De Beers still expects a steady level of retail restocking in the months ahead as the company predicts that there was decent consumer demand for diamond jewelry during the holiday season.
While that inventory replenishment tends to take place in January – thus stimulating polished demand and price increases in the first quarter, as it did last year – Johnson noted that the restocking is expected to come a bit later this year. “Our strategy is focused on supplying to demand, so we felt this deferral opportunity to be an appropriate step,” he explained.
Enabling inventory reduction
Sightholders welcomed the move. Mike Aggett, CEO of H. Goldie & Company, a De Beers accredited broker, noted that the deferment decision signaled a recognition from De Beers that there is a problem in the midstream. Until now, he explained, De Beers was very optimistic, but we see there’s a possibility they got it wrong and that the market needs to be brought more into balance.
That means that either polished prices need to rise or rough prices need to decline, Aggett suggested. However, Aggett, and others, cautioned that a dramatic rough price reduction might further upset market confidence and devalue polished inventories.
Russell Mehta, managing director of Rosy Blue India, a Mumbai-based diamond manufacturer that is a De Beers sightholder, suggested that he’d prefer De Beers to maintain its rough prices as polished prices have already significantly declined.
“A dramatic rough price reduction might further upset market confidence and devalue polished inventories.”