The “Diamond Rush” that has for so many years been both a feature, and integral part of the rough diamond cycle has been distinctly lacking in 2015, making it one of the poorest starts for the industry in several years. It was against this backdrop that Sigtholders attended the first Sight of the year in Gaborone with a mixture of anticipation and ongoing concern.
To the credit of De Beers, the announcement in the first week of January which offered Sightholders the opportunity to defer up to 25% of their allocation was welcomed, and acknowledged that De Beers themselves had taken this unusual step in recognition of the serious problems faced by the industry. There were no Ex Plan allocations.
As a result we estimate the January Sight was announced at around $450m.
In terms of pricing, boxes were adjusted by around 4% on average, which while not being in itself the solution to the disparity between rough and polished prices, will hopefully be part of the process that the industry must now go through in the coming 2-4 months in order to see a return to more favourable business conditions. For the majority of companies a more significant price reduction would have been catastrophic for the business, however with the reduced rough inputs coupled with moderate price adjustments, clients now have the opportunity to self-regulate in terms of their decision making and the flow of rough into manufacturing while waiting for an inevitable degree of restocking by retailers and the resultant firming of polished prices.
The reaction to box prices was still generally negative in terms of value, with particular criticism levelled at the 4-8grs sizes, Small Z’s -3grs and a few of the cheaper ranges. The trading markets have seen some activity this week with most sellers offering terms of 90-120 days. When looked at on a cash basis almost all are still trading with losses.
With 4 consecutive small Sights, an American sales season behind us in which consumer sales are believed to have surpassed those of 2013, and isolated gaps starting to appear in polished inventories, there is cause to believe that we have reached the bottom of what has been a long and drawn out downturn. However despite the optimism regarding the longer term, it is clear that in the immediate future the industry still faces significant challenges and the recovery is going to take some time.
Confidence remains a major issue. Until it is perceived that a “floor” has been reached in polished prices, the restocking of the retail sector will be on hold, rough prices will be uncertain, and manufacturing will remain factory driven. Similarly a number of Sightholders commented that De Beers must hold firm on prices in the forthcoming Sights in order to stem the expectation of further price reductions.
The fact that rough is in relatively short supply and stocks are low, factories in Surat have reduced production by around 30-35% in volume, the GIA stock is diminishing, other leading producers are not believed to have sold significant volumes (or reduced prices), polished stocks have been reduced through seasonal sales, which in turn will ease the pressure on finance, should all contribute to a steady return to better business.
Despite many complaints amongst Sightholders, most agree that for De Beers to price rough and inject profitability in the current market where prices have been falling is near on impossible. What De Beers have managed is probably all that could be done in terms of their available options.
There is also concern in some quarters that the reduction in manufacturing in India that has been forced on the industry due to the conditions over the past 6 months might have lasting repercussions, specifically in terms of workforce. Many have been obliged to leave the business, and significant growth in other economic sectors could result in fewer workers returning to diamond manufacturing.
The ongoing challenge that has been mentioned in this report over many months remains one of liquidity. Sightholders concur that this will remain one of the biggest issues during 2015, and is certainly one of the reasons why financial accountability and good governance form an integral part of the De Beers contract starting in April.
We believe there were some boxes refused during the Sight, but not to the same level seen in December. This however has to be seen as a result of factory requirements rather than perceived value within the boxes. There were a few targeted requests for additional boxes made during the Sightweek, where manufacturers needed to meet specific requirements or orders and we believe that on a very limited scale these were met through the recycling process.
Mike Aggett, Managing Director