There is a continued disconnect between rough and polished diamond prices. Therefore, any expectations that polished prices will increase on the back of recent rough price hikes are an illusion. Polished suppliers should not expect to successfully raise their prices due to rough market trends and those traveling to next week’s Las Vegas shows with unrealistic price expectations will leave disappointed.
The polished market is flat at best and buyers are lacking any sense of urgency to buy. Demand is selective and prices have remained basically stable throughout the year in most categories. Demand for 0.30-0.40 carat goods has bucked the trend with strong price increases. But overall, trading in Vegas is expected to be okay, not extraordinary.
Polished suppliers were therefore perplexed when De Beers raised prices by approximately 4 percent on average at its May sight. The increase followed a reported 3 percent price rise in April. Rough markets have come under pressure and trading has significantly declined since the May sight. Should the trend continue sightholders will start to reject goods — if they haven’t already.
“Polished suppliers were therefore perplexed when De Beers raised prices by approximately 4 percent on average at its May sight. The increase followed a reported 3 percent price rise in April.”
While De Beers contended that the increase to its price list was a more modest 1 percent to 2 percent on average, the company also changed assortments, leading to the perception of even higher priced boxes. The boxes included a double intake of goods from the Victor mine in Canada, which tends to yield better color and quality rough than other De Beers mines.
For sightholders, the bottom line was that they paid more for their boxes. Besides, they argued, the Victor mine doesn’t have the volume of production to influence overall box values to such an extent. Regardless, they were not impressed by the sight and the negative sentiment spread from London throughout the rough trading centers of Antwerp, Mumbai and Ramat Gan. It echoed in Moscow when ALROSA reportedly implemented similar increases, according to Rapaport sources.
[two_third]Trading of goods on the secondary market subsequently reduced significantly. De Beers boxes are currently selling at around list price, which, sightholders note, means that they’re losing money on the goods given the broker fees and other costs associated with the sight. Weaker categories are selling at discounts of up to 5 percent. Some sightholders are keeping goods off the market and contemplating polishing rough that would otherwise be allocated for trading. Then again, it’s difficult to profit from manufacturing when rough prices increase while polished prices don’t.[/two_third]
“Sightholders note that they’re losing money on the goods, it’s difficult to profit from manufacturing when rough prices increase while polished prices don’t..”
And sightholders just started to make a bit of money on their De Beers goods. For about two months prior to the May sight, boxes were trading at around 5 percent premiums. Those premiums have now been eroded, along with the confidence they inspired. In addition, while diamond manufacturers enjoyed slightly better profit margins in the first quarter of 2013, they’ve now been forced back into a defensive position.
The timing could not have been worse.
The second quarter is considered a quiet period in the polished diamond sector. Indian factories are either closed or operating at reduced capacity during the May summer holiday period, while the U.S. and Far East markets are stable but out of season.
The rationale, it seems, is that demand will improve by July–August when the current rough supply comes to market as polished. It’s a big assumption and markets are likely to remain under pressure until then. Therefore, all eyes will be on sightholders at future sights to see whether they are prepared to sustain current rough prices.
Already, reports surfaced that one or two sightholders left the high-priced goods on the table in May. De Beers spokesperson Lynette Gould declined to comment on refusals at any sight. However, she explained that sightholders have a right to refuse boxes and that they can reject up to 10 percent of each box. These so-called “buy-backs” are often made available to other sightholders of the same type of goods via auctions or ex-plan, Gould explained. There was no ex-plan at the May sight.
De Beers will do what it must to avoid facing rejections at the coming sights. It can ill afford to face mass refusals of goods, which would force it to correct prices, as happened in the third quarter of last year.
Already, the mining company is under pressure and facing lower sales in 2013. Sightholders’ intentions to offer (ITO) for rough during the annual sight cycle that runs from April 2013 through to March 2014, are about 20 percent below last year’s ITOs. Cumulative sales at the first four sights of the year fell 5 percent year on year to $2.35 billion, according to Rapaport estimates.
De Beers, in its first year under new majority owners Anglo American, will need to drive its price levels in order to buoy sales. To avoid refusals, the company is therefore expected to maintain stable prices in the near term and will likely keep the upcoming sights relatively small. ALROSA has the advantage of selling to the state treasury, Gokhran, when it is unable to gain its desired market price. Igor Sobolev, first vice president at ALROSA, responsible for mining operations, confirmed in a meeting with the trade press this week that the company hasn’t taken up that option this year as it did in 2012, and doesn’t expect to.
Ultimately, it will depend on the polished market. The mining companies seem to be betting on the market picking up in the next few months to justify their rough price increases. But it is a gamble indeed. Even as consumer confidence and retail jewelry demand is expected to improve in the second half of the year, polished dealers remain cautious and manufacturers under pressure. They’re frustrated that rough prices are persistently one step ahead of the polished, narrowing their margins and further tightening cutting center liquidity.
Diamond mining companies should be aware that as long as that pressure persists, such high rough prices cannot be sustained. The disconnect between rough and polished prices can only stretch so far.