Who would have guessed? With 2016 approaching its mid-point, the diamond industry has seen rough sales of around $5 billion. Is it justified in terms of retail sales which must pull diamonds through the pipeline with higher sales? The answer appears to be a fairly resounding 'no', so what exactly is happening in the rough market?
There are several possible reasons to explain the strong sales figures, but first a look at what has been happening since the beginning of the year. After De Beers and Alrosa reduced supply to the market in the second half of last year and permitted clients to leave goods on the table, manufacturing stocks started to decline. The producers also reduced prices, helping to make rough goods more attractive at the start of this year as manufacturers sought to build up inventories, according to many reports. An 18 percent drop in rough prices in the second half of 2015 and a reduction of supply to the market helped stabilize it.
De Beers' fourth sales cycle of rough diamonds for this year in mid-May indicated that there is stronger-than-expected demand during what is usually a weaker quarter. The company said it sold $630 million of diamonds in May, and $666 million in the previous sale, $617 million in the second sales cycle, and $545 million in January. As of the start of June, De Beers had sold $2.46 billion of rough stones in 2016.
In addition to inventory shortages, De Beers sightholders enjoyed an approximate 7% price cut in January which gave manufacturers increased margins, and that underpinned demand. It can be seen that demand this year shows how low inventory levels were for the midstream operators following cautious stockpile management heading into the last holiday season.
Many midstream clients have seen liquidity positions improve in recent months as their inventories have been cut relative to last year, enabling their bankers to provide them with credit for new purchases.
The figures are all the more impressive because demand for rough diamonds tends to slow in the second quarter of the year, but sales and prices suggest demand continues to improve. “Well into the second quarter, it is clear that diamond sentiment is still strong,” said one industry figure on the sidelines of the World Diamond Congress in May. “It is quite a surprise to many people that the industry is still building up stocks.”
But it is not just De Beers that is selling strongly. Russian mining giant Alrosa, the world’s largest rough diamond producer, recently reported that both revenues and profits soared in the first quarter. In the first three months of this year, revenue jumped 37% on the year-earlier quarter to around $1.6 billion while profits were even more spectacular – more than doubling to $760 million on the year in the quarter. Significant demand let to a 34% rise in diamond sales in the January-March quarter from the year-earlier period. And that also enabled the miner to reduce its inventories which had built up in the second half of 2015, commented Andrey Zharkov, ALROSA’s chief executive officer.
Alrosa forecasts that demand for polished gems and jewelry will be stable this year and the company aims to maintain price levels as the market recovers. “Cutting prices doesn’t mean increasing demand in this market,” Zharkov said in an interview in May. “The price-over-volume rule is the basis of our pricing policy.” Alrosa has kept prices unchanged at its 2016 sales, unlike De Beers who raised them slightly at its April sales cycle. Zharkov said the reason for this was that reducing them would result in losses for clients who previously purchased stones, with the likely result that they would then look again at their stock levels and possibly destabilize the market.
Between them, De Beers and Alrosa, which account for around two-thirds of global supply, sold approximately $4.2 billion of rough stones in the first five months of this year. Extrapolating from this, the global market has bought around $5 billion of rough in total when taking the other producers into account.
However, despite the vigorous demand for rough so far this year, it must be borne in mind that January to April is typically the strongest season of the year for the rough market. With polished goods resulting from the rough bought in the early months of this year heading into stores in the coming months, it will be instructive to see how much demand there is from retailers.
Needless to say, there are members of the industry who claim that the strong sales are a result of speculation as has happened in previous cycles. With De Beers reducing prices six months ago, there are companies that bought the goods in hopes of making a strong return down the line and not because they believe that there is particularly strong retail demand currently to justify the purchases.
In Israel, many diamantaires are mystified about where the large amounts of rough being bought are going. "It's true that inventories were run down to some extent in the final months of last year, but there were still billions of dollars of goods in offices in Ramat Gan, Mumbai, Hong Kong and New York," said one leading trader. "Retail demand isn't exactly shooting off the charts. The US is stable and showing some growth, but the rest of the world markets are very slow and difficult."
And what of the retail sector? Looking at the latest reports, demand cannot be said to be particularly strong. Sales at specialty jewelry stores in the United States increased by a very modest 3 percent on the year to just over $2.1 billion in March, according to the latest data from the U.S. Census Bureau. Jewelry sales overall at all stores showed a rise of 4.2 percent to $4.65 billion in March, the last month for which figures have been released.
Meanwhile, in recent weeks, important chains such as Tiffany & Co, Signet Jewelers, Chow Tai Fook Jewellery Group and Luk Fook have all reported either falling sales or figures that were below expectations.
What are we likely to in the coming months? As ever, crystal-ball gazing is pointless: who foresaw the strong rough sales that have taken place this year after a rough 2015? As an Israeli trader commented: "If there is one thing that we have learned since the financial crisis in 2008 and the recession that followed, you simply cannot second-guess this market and you cannot take any chances. You have to be extremely cautious and only order what you need. I am concerned that we are heading into another glut of polished goods. Is the diamond industry making the same mistakes again?"
By our Israel correspondent Abraham Dayan
