The only positive aspect about the unprecedented crisis currently reigning on the diamond market is the dramatic upsurge in marketers’ activities searching for new solutions and patterns which would allow its efficient re-structuring to meet contemporary challenges.
The joint initiative of the Leader Management Company and ALROSA to organize a market of investment polished diamonds may become one of such creative drives. Despite the obvious difficulties related to the necessity of creating a ramified infrastructure of such a market virtually “from scratch,” this idea looks highly attractive since it permits to bypass certain objective limitations, which make it impossible for polished diamonds to play the role of an exchange- traded commodity, and to obtain full-fledged stock market instruments in the form of closed unit investment trusts (UIT) whose units will be collateralized by polished diamonds of investment quality. It is regretful that such a program was not implemented a couple of years ago, when the sustainability of the upward trend in prices for rough and polished diamonds could not give rise to any doubts on the part of prospective investors. However, today investors’ attitude to diamond UITs can hardly be predicted in such an unequivocal fashion.
The major argument in favor of an investment diamond market is that prices for large-size stones (of 3 ct and above) possessing good characteristics were virtually permanent in their growth within a visible historic retrospect, which means that such assets are exactly the cherished “safe haven” for investors. With insignificant reservations - as for instance, concerning the necessity to correlate growth of prices for rough and polished diamonds with the level of inflation - this argument may be considered true. But what was the reason behind this permanent growth? The major reason, which was most likely the only one, was the utterly specific organization of the world diamond market – shaped as a one-way “diamond pipeline” with a possibility to regulate pricing by way of trimming rough supply at its input. The rejection of such a pattern has sufficiently quickly – in a matter of several years – led to inflating enormous speculative bubbles, emergence of unruly stocks, and a paradoxical situation when rough outstripped finished products in price. It wouldn’t be too exaggerated to say that the reason behind the current crisis on the world diamond market was not so much the world economic crisis as the destruction of the canonic one-way system. The fact that these two negative events coincided in time produced a resonance effect and this is why the diamond market today looks much worse than all the other commodity markets.
Many experts pointed out that the rough diamond market has currently sagged much more than the polished diamond market – if the first one cringed by about 70%, the second judging by various estimates dwindled by 20%-40%. Prices are estimated to have dropped by 50% and 15% accordingly. Such disproportion in the rates of negative development is justly explained by the influence of various prevailing factors: the rough diamond market feels the pressure of accumulated uncontrolled stocks, whereas the polished diamond market is influenced by lower purchasing capacity of the population - due to the growing economic crisis - in those countries which happen to be major consumers of diamond jewelry. At the same time, this misbalance is a sharp evidence of destructed integrity in the “diamond pipeline” and final transfer of the rough and polished diamond markets into a chaotic state. Indeed, can the polished diamond market feel essentially better than the rough diamond market? And how much time will such a striking picture stay?
The major diamond mining companies have already cut down their supplies virtually to zero either by actually halting their production (De Beers) or by channeling their rough into the state-guaranteed stock (ALROSA), while junior miners are practicing desperate damping. So far there is no sign of any market recovery. The financial support given by the Russian state budget to ALROSA, preferential credit lines extended by Anglo-American to De Beers and safety margin of national budgets in such diamond-dependent countries as Namibia, Botswana and Angola will be exhausted by the end of this year and then rough supplies to the market are slated to go up. Will the accumulated stock be “pumped through” the market by this time? Judging by the current rate, it will not. Besides, the stock accumulated in 2009 by the Russian Gohran Agency may be injected into the market at the slightest signs of higher prices for rough diamonds if prices for energy products will continue their descent (which is quite probable) and Russia will have to seek all possible ways to offset a growing budget deficit.
This is why even on the assumption of the most optimistic estimates it is hairy to expect the rough market getting stable before 2011. On the contrary, its further dive and stagnation is more than probable. And one and a half or two years will be quite enough to bring the polished market into a sad balance with its rough counterpart truncating it by another 30%-40%. Due to this reason any attempt by major rough market players to starkly strengthen their presence on the polished market with a view to boost their profit rate will look like just a more or less lucky palliative since the implementation term for such a decision will be commensurable with the term of decline of the polished market.
Taking into account such an outlook, the work to establish an investment diamond market is possible on one condition – there should be recovered a reliable driver for price growth taking the shape of a special framework regulating the market of rough diamonds. It is evident there is no way back to the previous pattern of De Beers monopoly mainly because of the great change in relative “weight” of other market participants. The most realistic way to solve the problem is to sign an intergovernmental agreement between Russia, Botswana, Namibia and Angola (the countries whose aggregate share in world diamond output appears to be dominant and where bankruptcy of diamond mining companies will definitely trigger social disruption) to establish an authorized agency to register and evaluate extracted rough diamonds, monitor their movement and study demand and supply dynamics.
Such a joint and authorized agency will have to draw up a list of recommended prices. Virtually, it should be an analogue of the London Gold Fixing (introduced in 1919 to stabilize gold prices after the First World War), although executed not by a group of authorized banks, but by major producers of rough diamonds. Such a system will comply with the most rigid requirements of transparency which is so obviously missed by the rough market; this system will be able to serve as a mechanism to establish fair prices for rough diamonds bringing the risk of large scale speculation to a reasonable minimum.
Establishing such a mechanism simultaneously with an infrastructure of investment diamond market will permit to reach a drastically higher level of reliability and profitability of diamond assets and hence boost the attractiveness of stock market instruments secured by such assets. In its turn, this will guarantee an inflow of investments so much currently needed by the markets of rough and polished diamonds.
Sergey Goryainov, Rough&Polished expert
