The official unemployment rate in the United States reached 9.5% - a record level for the last 25 years. It should be taken into consideration that the Clinton administration changed the method of calculating the unemployment level and if we use the “Reagan” standards then the U.S. unemployment in June 2009 would be assessed as 16.5%. This is an unprecedented figure since the end of the Second World War. Unemployment in the European zone has also reached 9.5%, a ten-year high. In Japan, the unemployment level was 5.2%, a five-year record. The unemployment trend remains negative, while positive assessments are already given if it slightly slows its downward slump.
Totally, the United States, Japan and Europe consume about 80% of diamond jewelry with the middle class once giving the law to this market but now appearing as most affected by growing unemployment. The growth of unemployment and situation on the diamond market are in stable correlation – in the first six months of 2009 the United States curtailed its diamond imports by more than 50% compared with one year ago, while Japan cut its imports by more than one third.
So far there are no grounds to say that the economies of the United States, Japan and Europe will recover to their pre-crisis levels in the nearest eighteen months to two years. On the contrary, there is a stable trend towards revising forecasts in favor of pessimistic scenarios, since it is already quite obvious that massive layouts and reduction of wages will be quickly followed by a cutback in production moving in this manner along one spiral turn after another down into the abyss. The attempts to spin off by pumping liquidity into the banking sphere have so far served only to slow down the motion but failed to find a pivotal solution to this problem – hence there are more often voices saying the second wave of crisis is coming this autumn on the back of impetuously growing deficit in national and corporative budgets.
On this background any talk of some foreseeable recovery on the diamond jewelry market seems to be a clumsy joke. In reality, this market has already cringed by 2/3 and which is regrettable continues to decrease as it is witnessed by mournful voices of many owners of jewelry brands commenting their losses in the first quarter of 2009. Hopes for growing consumption in China and India are too illusive since unemployment there is also quickly expanding and at best we may talk about short-lived compensation of several percents lost by the markets in the United States, Japan and Europe, while the Middle East now looks negligibly on the backdrop of these losses.
The collapse of the diamond jewelry market has not been left unattended by financial agencies – today it is almost impossible to find a high-profile bank which would agree to credit rough and polished diamond operations on terms providing at least for a minimal profit margin of such transactions: banks either offer crediting at sky-high rates or do not offer at all. Liquidity has leaked from the diamond pipeline and probably for a long time: not without reason pragmatic bankers believe that the diamond jewelry market will be the last to recover after the crisis is over. Since consumers in the first place have objectively many other priorities outweighing diamonds and in the second place, the grave situation in the industry is inevitably affecting its ability to shape and maintain consumers’ conviction that it is necessary to buy diamonds. In this sense it seems revealing the discrepancy in evaluation of time needed for the market to come back to its pre-crisis levels: if diamantaires discuss the term of eighteen months to two years, financial experts give more conservative estimates saying no less than 4-5 years will be needed to recover the market.
Some revival of the rough market displayed by the De Beers sight in June is hardly indicative of a pivotal turnaround. The $450 million sales were reached mainly due to a serious price correction and this factor played its role to attract demand for rough which is dissonant with the data pointing to a sales drop in pace-setting retailers on the diamond jewelry market. The relative success of the June sight cannot obscure the fact that on the whole in the fist six months of 2009 De Beers’ sales reached less than 30% of the level one year ago and taking into account that the first semester is traditionally more generous for rough merchants we may put aside any illusion – the market continues to sag and the bottom is not yet reached.
It is possible to stimulate demand on the falling rough market by lower prices up to a certain limit determined by costs and some profit margin which depends on how a miner’s shareholders view the profit-earning capacity of their enterprise. Some part of this margin will be inevitably spent to convince end consumers in the necessity to buy diamond jewelry – this is a mandatory condition to which the modern rough and polished diamond market owes its existence.
In the first quarter of 2009 De Beers cut its output by more than 90%, while ALROSA virtually did not reduce its output selling it all to Gokhran, but its first quarter results produced net losses to the amount of 13.434 billion roubles versus 1.156 billion roubles of net profit in the similar period of 2008. On the whole this proves that real prices for rough diamonds fell below output costs and there is no more any substantial reserve to be allocated for promoting diamond jewelry to revive demand among end consumers. This is why it seems that the encouraging statements in February concerning powerful marketing programs jointly performed by De Beers, ALROSA, Rio Tinto, BHP Billiton and Harry Winston within the frames of the mysterious SteerCom have been consigned to oblivion.
To be fair it should be noted that with the existing rate of unemployment in the United States, Japan and Europe no marketing efforts will be able to influence the declining demand on the diamond jewelry market in a big way. Consequently, the short-term and long-term vital capacity of diamond-mining companies which are the basis of the whole diamond pipeline depends in the first place on their capability to cut production costs. De Beers’ chances for successful movement in this direction look much more preferable than those of ALROSA mainly due to more modern technology and expert management: it will be sufficient to point out that in 2008 De Beers’ rough sales outstripped those of ALROSA 2.5 times while the De Beers staff was less than that of ALROSA by 30%.
According to SPARK, a Russian market analysis agency, there are sings of ALROSA bankruptcy: two indicators (working capital ratio and own working capital) out of four pointing to possible bankruptcy are in the red according to the first quarter results in 2009. The uncollateralized external liabilities of the Russian company are estimated at $3.3 billion (according to Fitch), while its Eurobonds have virtually turned into “rubbish.” ALROSA has already closed some of its unprofitable alluvial and primary minefields and some experts say that system errors made in the design of the Udachny, Internatsionalny and Mir mines will not permit them to have any profit margin at current prices. Virtually, the only money-earning enterprise in the ALROSA Group today is OAO ALROSA-Nyurba (its sales in 2008 reached $595.7 million), while the Group’s second-largest company, OAO Severalmaz, remains a chronic money-loser from its inception up to this day.
It is quite possible that a sober evaluation of the future awaiting the rough diamond market together with quickly melting state funding will make ALROSA’s shareholders to resort to rehabilitating the company dividing its assets into “toxic” (admittedly incapable of generating profit in the nearest five years) and promising. Cancelling the “toxic” assets will be financed by the state at a level avoiding social cataclysms in the mono-cities of Western Yakutia. As a result, the Russian diamond-mining industry will decrease by 70%-80%, but its surviving part will be quite competitive. It is not excluded that the replacement of ALROSA’s president was caused exactly by such a decision of the company’s shareholders.
There is no way to argue that such a scenario would be an absolute victory for De Beers over its competitor since the historic leader of the diamond market will have to resort to similar measures following the decline in demand. We may only speak of changes in the size of controlled market shares, since ALROSA will most likely “fall” faster and deeper than De Beers due to specifically Russian factors. However, in any case it is evident that this time the drop in demand on the final link of the diamond pipeline has been caused by unbiased reasons, independent of diamond marketers. So everyone has to adapt.
