The rough diamond market is now at a tipping point and De Beers must reduce its prices by 10 percent to 20 percent if the miner has any chance of restoring its own growth prospects – never mind diamond manufacturing profit.
As rough prices have remained at unsustainable heights through 2015, market sentiment has dropped to six-year lows.
While reports of bankruptcies, a lack of credit, tight liquidity, and even industry-related suicides are reminiscent of the global financial crisis, this time it’s different. Then, the diamond market slumped on macroeconomic influences. The dire conditions of the past year have been primarily trade-driven – and largely from the supply side.
Sightholders should therefore be lauded for refusing an estimated 65 percent of goods offered at the De Beers July sight. This column has been calling on manufacturers to reject unprofitable rough for most of the last 12 months (see editorial Rough Price Correction – Part 2, published on January 30). So while De Beers, and ALROSA, for that matter, have made slight price corrections in the first half, they haven’t been far reaching enough.
De Beers has been holding out for an expected stoking of demand in the second half of the year. By keeping supply low – enabling sightholders a 25 percent deferral option throughout the year – the company has hoped that manufacturers’ rough and polished inventory levels would be sufficiently depleted to resume buying for the holiday season.
“Sightholders should therefore be lauded for refusing an estimated 65 percent of goods offered at the De Beers July sight.”
Manufacturers, however, are in no mood to buy if the goods are not profitable. It’s Economics 101. They’re making their rough buying decisions based on (declining) polished valuations rather than long-term supply concerns. If the price of rough is not aligned with the polished, they’ll continue to refuse goods at the next sight scheduled for the week of August 24.
Stocking the holidays with overhang
[two_third]There’s still some question whether a sharp price cut will be enough to stimulate rough purchases. Perhaps manufacturers are content to stay out of the rough market regardless of price as they try to diminish their large polished inventory. As one sightholder told Rapaport News, jewelers will be getting their supply [for the holiday season] mostly from polished overhang, rather than from rough, as there is almost no rough in the system.[/two_third][one_third_last][/one_third_last]
” Jewelers will be getting their supply mostly from polished overhang, rather than from rough, as there is almost no rough in the system.”