Will upbeat rough demand slow the diamond market recovery?

Avi Krawitz

Rough diamond trading was surprisingly buoyant in April given that polished demand is restrained and inventory levels continue to rise. After a good first quarter, in which rough and polished trading was driven by restocking of the midstream, concern deepened this month that an oversupply of polished diamonds will pressure the market.

De Beers recorded its highest level of sales so far in 2016 at last week’s sight, despite raising prices by an average 2 percent. ALROSA sold most of its offering after marginally reducing prices. This means that close to an estimated $1 billion worth of rough entered the market in April between these two firms, after the duo supplied about $2.4 billion worth in the first quarter.

The magnitude of rough purchases in the first four months led analysts to offer a positive assessment of the diamond market and raise their outlook for the mining sector in 2016.

[After] a detailed review of the diamond market outlook for the short, medium and long term, we have concluded that 2016 is likely to mark a significant recovery [that is] driven by substantial industry restocking through the pipeline,” analysts at VTB Capital wrote in an April 11 note about ALROSA. “We therefore expect a marked pick-up in rough sales as cutters and manufacturers are increasingly pressured to reverse unprecedented destocking in 2015.”

VTB analysts projected the recovery will be “more material” than expected given the continued need to substantially refill inventory across the diamond pipeline. The researchers upgraded their forecast for ALROSA’s sales volume by 26 percent for this year and 14 percent for next.

Such optimism is supported by comparisons from a very low base in the second half of last year when manufacturers focused on reducing inventory and rough sales slumped.

However, in this column’s view, rough sales in the first quarter should be sufficient to refill the diamond pipeline. Given the experience of last year, one would expect diamond manufacturers and dealers to exercise caution in producing too much polished inventory in 2016. While polished prices have firmed since November on lower stock levels, a slowdown in rough demand is now projected in the coming months if not for the remainder of the year, if the recent polished uptrend is to be sustained.

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Source Rapaport