Since the beginning of this year, prices for rough diamonds flew forward as a run-away train in some action movie. They were flying, as it seemed to many, without being based on any convincingly objective grounds.
But everything comes to an end sometime. And now the locomotive dashing onward at full steam is slowly but surely turning into a subway train on a circular route. Looming ahead is a price correction.
Delayed reaction
The need to adjust prices for rough diamonds was long overdue. The market was expecting it back in the early summer, when prices slightly slowed down offering buyers a relief. In turn, diamond producers raised prices by another 10-20%. But are consumers ready to pay the price? Not all of them, that’s for sure.
It all started step by step. In early August, India spread news that rough prices in Mumbai fell by 10-15%. True, in those days the whole world was expecting a default in the U.S., so the price cuts were written off on "global economic instability." But the default in the United States did not happen leaving the sales problems unsolved. At the Arjav Diamonds auction in mid-August less than half of the lots offered were sold. This is despite the fact that Indian goods never suffered any lack of demand - since the beginning of this year, this kind of rough rose in price most sharply posting double digit hikes every month.
However, by the end of the month two "loud chords" followed one by one.
At the August site of DTC ($800 million) diamonds, some sources said, went up by 4-8% depending on the category of rough. In comparison with the price movement demonstrated by De Beers earlier, the 4-8% hike is nothing. According to the sources, DTC boxes in the secondary market were traded strictly by the price list and sometimes even at a discount.
BHP Billiton has gone further cutting its rough prices by 10-15%.
The market faced what all feared so long ago, but carefully brushed aside the thought - a shortage of liquidity. Diamond cutters - the real consumers of rough - turned out to be clamped in a vise. To keep up with rising prices for rough diamonds at a constant volume of purchases, they need more and more money. But they are getting less and less money since the polished market is not growing as fast and does not keep pace with rising prices for rough, while waiting for refunds from retailers takes up several months. As a result, cutters ask dealers to reduce prices. And the dealers in this situation have to agree, because the alternative is either to sell cheaper, or not to sell at all. Many market participants are now hand in hand celebrating the change in the behavior of sellers: if earlier dealers were peremptory and flatly asserted that future rough will be even more expensive, now they began to listen to the arguments of buyers and bargain.
It is from the dealers that the current price correction is stemming from. So far, diamond miners are in no hurry to curb their prices. De Beers has already announced that the company's policy remains unchanged and DTC will not lower its prices.
At the crossroads
It is quite possible that major diamond miners pin their hopes on the demand generated from other rapidly developing markets, Hong Kong in the first place. But so far customers in Asia are no less wary than the rest of consumers. Price volatility and expected price correction force them to buy less and less.
In this situation there are only two possible remedies coming to one’s mind. The first is associated with a dramatically rising demand for diamonds making retailers to return increasing amounts of money to diamond cutters within a short time, which will give the cutters an opportunity to buy rough from dealers despite the rise in prices. It is a splendid option if there were no "but": there is nothing the demand for polished diamonds can grow on. The whole world now expects a second wave of the crisis, which is mismatching any increase in purchasing power and the desire to acquire luxury goods. From the standpoint of investments, diamonds are, alas, far from being an attractive commodity, like gold, due to the lack of transparency in pricing. And so far the dynamics of growth is clearly in favor of gold: right now riding on another wave of hysteria, gold has already surpassed the price of platinum, and is obviously not going to stop. Diamonds are not getting cheaper, it's a fact. But unfortunately they are not able to become more expensive quickly.
The only possibility to increase the demand for polished diamonds is to lower their price. But then not only cutters, but retailers as well will face a deadlock. Prices for polished diamonds are now often equal to the prices of rough they are made of. Reduced prices for polished stones, while maintaining rough prices, will automatically make a good half of the diamond pipeline run at a loss.
So this brings us to the second “remedy” – to make prices lower not only at the level dealers, but at the level of mining companies. However, for them to take this step means to reject profits. Such decisions are hard to take, but this is where they have to face price correction coming into play.
However, diamond mining companies will not have to feel frustrated for a long time. The future is on their side, which means there is objective depletion of diamond reserves in the world on the backdrop of though fluctuating, but ever-growing demand for diamonds. The accumulated "fat" in the form of unscheduled income will help the big four to stay afloat for some time without any sales, thus balancing the interaction between the rough and polished markets. In the end, they all pursue just one goal – to make polished diamonds gain in their value.
Elena Levina for Rough&Polished
