This kind of phenomenon is set by nature: in the springtime everyone turns very convincing. People start talking a lot delivering pathetic harangues. And the future, as a rule, is painted in rosy safe colors.
Surprisingly, it does work for the market as well. Speeches uttered by diamond manufacturers are increasingly resembling auto-training or sessions of mass hypnosis. "Supply falls short of demand." "Prices will rise, but not much." These words sound like a gentle lullaby - the only question is if we are really going to be hushed.
Rough prices
DTC skipped its sight in April - due to the holidays it will be kicked off in early May. But in April the company made several statements which foretell the future of the market much more than any tender.
Varda Shine again said that demand from India and China continued to "drive" the market, but output was still unable to catch up with this drive. Nevertheless, according to Varda Shine, rough prices are expected to grow this year at a rate not exceeding that of the last year (27%).
Other marketers hold to the same assessment. Namakwa Diamonds forecasts that rough prices will rise by 15-20% a year for another 2 or 3 years. Gem Diamonds expects prices to increase by 25% this year.
At first glance, the growth they promise in 2011 does not seem too crucial. Especially if such a rate is "spread over" 12 months in several steps.
Here one may recall the old joke about counting the average salary based on the salaries of an office cleaner and a general manager. Maybe the growth rate in prices for all rough categories will really reach 20-25%. The problem is that prices for some quick-selling categories rose by that percentage already back in the first quarter. For instance, fine goods slated for India were up 25-30% at the March sight of DTC alone. And it is unlikely they will stay inert for the rest of the year.
At its April tender, Gem Diamonds trading goods from Letseng posted absolutely crazy results. Rough diamonds were sold at an average price of $4,742 per carat - up 79% (seventy-nine!) compared with the first quarter. Yes, this mine in Lesotho is yielding unordinary gems, but this shouldn’t be sufficient reason for a two-fold hike in such a short period of time.
Firestone Diamonds held a similar tender for diamonds mined at B11 in Botswana and had a 30-percent markup (to $230 per carat) compared with the previous tender in December. It is noteworthy, that the traded lot contained mostly small-size diamonds, according to the company’s representatives.
On the backdrop of these tenders, the 20-percent increase in prices predicted for 2011 seems too moderate and restrained. But we should not suspect people making such forecasts of trying to hoodwink the market. Perhaps this is just an attempt to calm it down a bit. "Prices will not jump too high, so please do not snatch away everything now otherwise the growth will indeed will come out of control."
Victims of deficit
And the market really needs to calm down. Most of its participants say that rough supply is still very well behind demand, and due to this a rise in prices is obvious and inevitable.
In this case, the classical laws of the market say that price growth could be slowed down by increased production. Well, this is just another confirmation that the diamond market does not function by the "law book." ALROSA increased its diamond output by 16% in the first quarter of 2011 - up to 10 million carats. De Beers has also ramped up its production, albeit modestly - by 5% to 7.4 million carats. The impression is that the market is ready to "swallow" absolutely any volume of supply at absolutely any price.
Currently, India accounts for more than half of the global diamond consumption. Due to cheap labor, India is quite a convenient place for diamond cutting. If what Russian diamond cutters say is true, a good specialist in India is paid less than the subsistence minimum in Russia. And taking into consideration the local specifics of giving credits to diamond businesses in India one can practice diamond dealing operations as long as he or she sees it necessary, funding one and the same lot of diamonds several times.
It would be pointless to deny that major prospects for growth in rough demand are associated with this country. And reaching for high prices, producers are ready to adapt to its needs. DTC is now reviewing its list of sightholders for 2012-2015, and it is obvious there will be made certain concessions. Firstly, according to the local media, Indian companies will form a major part of sightholders. Secondly, De Beers reduced its "entry threshold" to sightholders: the required volume of diamond trading for applicants will now make $50 million in the last 3 years.
The only question is in what way they will use diamonds, which India is buying now and which it will probably be buying more. It is believed that thanks to their great credit resources it is Indian companies that are most frequently and actively engaged in dealer trade. And now that India's role is once again significantly prominent, it would be very difficult to believe statements about moderate price growth and absence of "bubble" in the market.
Polished prices
Trying to weather rough price hikes appears a hard task for players in the polished market. But everyone here understands that prices will just continue to go uphill. In this regard, the market froze in anticipation of the May sight to be launched by De Beers (which is expected to push rough prices up again) and is in no hurry to sell off old stocks at a discount.
Polished prices continue to lag far behind rough prices by their growth rates. According to Harry Winston, polished diamonds rose by less than 10% in price from the beginning of the year. It is clear that in retail it may take several months to change prices and we have yet to see the effect. But it is just as clear that rough prices and polished prices are once again in disproportion, and in comparison with rough diamonds polished diamonds are greatly undervalued.
Elena Levina for Rough&Polished
