Winter holidays are over, and diamond marketers are coming back from vacations starting to probe ways about purchasing and restocking. January is a traditional month for not so much buoyant activity as rather for in-depth analysis and search of trends governing the coming year.
Events
The main event of January was the sight run by Diamond Trading Company (DTC) estimated at nearly $ 650 million. To the surprise of the market, the sight appeared stable and predictable not only in its volume, but in rough prices as well. After a successful Christmas season (holiday sales in the U.S. were reportedly up 3%) most of the participants expected a significant price increase for all rough grades, but in the end price growth was registered only in some minor categories. However, market participants are yet far from being optimistic and believe that since De Beers did not raise prices in January, this should certainly be expected in February.
In the middle of the month there came a report about the first major deal this year - Petra Diamonds in team with its partners within the BBE program has signed an agreement to purchase the Finsch Mine in South Africa from De Beers for about $ 210 million. Finsch, the second largest diamond mine in South Africa and one of the largest in the world, is expected to bring Petra 1.5 million carats of diamonds in the first year of operation, thus increasing the company's output twice. This is not the first deal struck by Petra with De Beers – in much the same way a few years ago Petra emerged as a keen bargainer to buy the Cullinan Mine, famous for its large diamonds, from the diamond giant. Petra’s recent acquisitions (as of today they include already 8 mines) show the market a well-advised strategy moving the company from mines producing "piece goods” to mines increasing its production volumes. The new deal will bring Petra’s resource base up to 300 million carats and make it the third largest diamond mining company. The market will obviously see emerging a new player, which may have an impact on global rough supplies.
Meanwhile, the Kimberley Process continues to address the issue of diamond exports from the disputed area of Marange in Zimbabwe. The local authorities have repeatedly declared that they intend to sell the Marange rough stocks accumulated over the previous years, but most experts are rather skeptical in regard of their volume. The restrictions imposed by KP on diamond export from Zimbabwe are still in force, but according to the incoming information, the Kimberley Process tentatively agreed to the terms stipulating resumption of deliveries from this country.
Sales
Global sales of diamonds in January were quite stable with major markets showing growth.
There is an upward trend in demand within the United States: after the Christmas sales retailers are switching over to seasonal trade in wedding jewelry and gearing up for Saint Valentine's Day forecasted successful in terms of sales.
In Belgium, there is a high demand for all product groups, but there is a shortage of some items, which makes customers less protected from price hikes. Demand for rough is also quite high, despite substantial premiums for DTC boxes.
Early in the year, trade in Israel is sustained by strong demand from the Far East, as well as by growing demand in the United States. As the trade goes on, the amount of high quality diamonds on the market is decreasing, which prevents vendors from selling large quantities.
The start of the year in India’s diamond market was noted for stable demand, as well as for significant presence of foreign buyers. However, high prices and goods shortage on the market suggest that local manufacturers have not yet recovered to a level sufficient to offset the decline in stocks.
The Chinese market has slowed down temporarily as most marketers made a pause before the Chinese New Year (starting on the 3d of February). A number of transactions are carried out mainly in Hong Kong. Incidentally, projections for sales during this holiday season are also quite optimistic. Reduced sales in the local market may result in leaner inventories of high quality diamonds.
Forecasts
As a rule, from the January meeting of De Beers with sightholders the market expects not only the size of the first sight and price level data (to say nothing of the cocktail party), but also the traditional "keynote speech" from which to draw conclusions about the state of the market to fly by next year. This January, Varda Shine drew attention of those present to the fact that the year started successfully thanks to the support which the industry received due to the restocking last year. However, in 2011 restocking will apparently be less prominent, while economy will remain uncertain and the industry will have somehow to live in this volatile environment.
According to Varda Shine, the main remedy for instability in the diamond market is to be flexible, ready for change and have clear-cut business strategies. And judging by what we see in the diamond market in recent months, it is moving toward a major conceptual change in its history: from the state of a "gray" and closed market to a state of openness both for its participants and investors.
Diamond giant De Beers was once traded on the exchange, but now is a closed and non-public company. Russia's ALROSA announced its plans to be transformed into an open joint stock corporation and venture an IPO, but this will probably happen not earlier than 2012. However, the desire to be floated on the exchange and become more open is visible among smaller companies. The above mentioned Petra Diamonds is listed at AIM in London, but after buying Finsch expects to get on the main floor of the exchange. In recent years, the company was several times successful in raising funds in the market floating its shares (by the way, it attracted funds to buy Finsch in the same manner) and believes that once its output and resource base will grow so will investors’ interest in it.
In addition, in February, yet another company is going to join AIM and this is Botswana Diamonds which has licenses for operations in Congo. Gem Diamonds which has already been listed, or Gemfields may be added to this row. In short, there is a trend to generate public market-based mid-tier companies. On the one hand, it is clear that these companies will not be competitive to “giants” in terms of rough output or sales. On the other hand, if the company is focused on several assets this will guarantee to buyers clear and stable amounts of rough to be sold, its grades and prices. The requirements imposed by the exchange prevent the buyer to be left without this information. In an uncertain market such transparency might be useful for some of the buyers.
The sufficiently limited amount of supply on the backdrop of growing demand is another emerging trend this year. On the one hand, De Beers plans to increase its output to 40 million carats in 2011 - but this an optimistic scenario. On the other hand, due to technological peculiarities in its current operations ALROSA this year is unlikely to increase its supplies to the market significantly. The company’s efforts are now focused on transition to underground mining and the latter’s effect in "carat terms" will not become evident until 2012. Therefore, scarcity of certain grades of Russian rough may well be expected. Furthermore, it should be kept in mind that in 2010 the company was aggressively selling stocks accumulated during the crisis. Now its stocks have reached a "working" pre-crisis level.
The situation is also unclear as far as diamond sales by Gokhran are concerned (in particular, this refers to $ 1 billion worth of rough diamonds which ALROSA sold to the state in crisis). Proposals to start selling these stocks to close the deficit in the market have been aired for a long time already, but it is unclear whether or not some final decision has been taken. There is reason to believe that sales of these diamonds will begin not earlier than 2012, if only because Gokhran needs a lot of time sorting and evaluating the purchased rough.
Increased demand on the background of limited supply has already led to a significant increase in rough prices. And there are fears that in the foreseeable future the market will face a repetition of the "2008 challenge": its participants will once again have to demonstrate whether they can resist the temptation to gamble and inflate prices. Polished prices in 2010 rose 10%, while rough prices went up at a much greater pace, and some experts say this price growth is out of control and there is a new "bubble" shaping up. Everyone knows the end of this story in 2008, and judging by the massive shift to long-term contracts and all the talk about the need for price restraint everybody learned this lesson well.
Elena Levina for Rough&Polished
