Business activity in the diamond market in May is traditionally subsiding: in some countries this is a month of red letter days, in others it’s a holiday season. And then it is hardly possible to have anyone surprised by the general trend of rising prices: experts were uttering the "diamond prices rise" phrase non-stop over the past year. It would seem that the May market review could be ended right here, without any loss to reasoning. But still something important did happen. It was the first time that market participants started to talk about a possible stabilization of prices. And, which is most important, there are some obvious grounds for that.
In terms of figures
First, let us turn to the figures. DTC’s May website worth $600 million brought about another price hike to the market. According to market players, prices rose by an average of 2-3% across all the categories of rough goods, but for some "Indian goods" growth reached “two-digit values.”
Diamdel, which is selling De Beers boxes on the secondary market, sold all the lots displayed at the May auction and noted an upward trend in prices for Indian type rough as well as for stones over 2 carats. There is no one to disclose growth dynamics in percentage, but it is hardly possible that the picture is very different from what it was at DTC.
It would seem that nothing new is happening - prices have been steadily rising for the past few months. But the puffer seems to slow down its movement. Diamdel customers say that "prices for goods of near gem quality are turning steady compared with the recent high levels."
Signs of stabilization can be found even in the outcome of the DTC site. Remember that in April the company skipped auctions, and therefore the current growth movement is de facto covering two months, not one. A rise of 3% in 60 days is much slower than those rates which the market displayed in the first few months of the year. And even a 10-percent rise in prices for small-size goods in a month is not the 25% which DTC demonstrated earlier. So far there is not even the faintest sign of a price rollback, but growth is definitely starting to slow down.
This trend is felt and confirmed by the diamond companies themselves. For example, Petra Diamonds announced that it expects a price correction in the coming months.
In terms of facts
There are really few substantiated reasons for diamond prices to go up right now. Polished output (by manufacturers which appear in fact to be the only "industrial" diamond consumer) is significantly behind the miners’ output of rough. Diamond merchants, on the one hand, say they see that demand is increasing - after all, the consequences of the crisis are gradually being overcome and more and more people can afford luxuries. But on the other hand, if we proceed from the current diamond prices, polished production and polished sales yield zero returns. Only those who manufacture and sell polished stones from rough bought this winter manage to stay on the profit side. But "winter" stocks will soon run out.
Thus, the scarcity of rough in the market proclaimed by market operators is solely due to the mismatch between the desired amount of speculative stocks and those real. But the problem is that global production of rough is also not idling – soon it is expected to go up in a big way.
We have to admit that the first quarter for the majority of miners was not the most successful one: all the Western companies were faced with natural factors due to which they reduced their output compared with the fourth quarter one year ago. But, for instance, ALROSA ramped up production by 16% over the same first quarter driving it to 10 million carats. While maintaining the same production the Russian monopolist may well provide an annual output of more than 35 million carats, which will improve its last year's figure. And taking into account the published data on reserves, ALROSA will have an ore base sufficient for 40 years while maintaining the current production levels. It should be borne in mind that ALROSA is investing in exploration much more than others and in the end of May said that it intends not only to restore the company’s existing mineral resource base to its full scale, but is also going to increase it. In particular, ALROSA expects to add additional 100 million carats to its balance sheet until 2018. Thus, the company’s proven reserves for a 40 year period will be expanded due to forecast resources and quite significantly. Given that ALROSA provides for one third of the global diamond output, diamond production growth in Russia is able to neutralize the growing demand for rough.
De Beers has no less ambitious plans to build up its output - up to 38 million carats this year. After lagging behind in the first quarter, the company will have to exert considerable efforts to catch up. But it is quite a feasible task if the company will not run into force majeure any more.
On the background of a significant escalation in diamond production generated by the both "giants", it is in fact not so important what will happen to other companies’ output. But by and large, all the market players of good standing are planning growth only.
It is clear that speculative demand has no objective limits of growth. While prices rise, market players may accumulate and resell rough to infinity. But increased supply should affect this process one way or another and "cool" the market a little bit. Perhaps we are now seeing the first signs of this phenomenon.
Elena Levina for Rough&Polished
