In mid-October, one of the top managers of ALROSA taking part in a conference call was asked to describe the state of the diamond market. The top manager was quick to coin a succinct phrase saying "Everyone is waiting for something," and this, perhaps, was the best way to describe the current situation rather than plunge into a lengthy talk. It’s not the first month the market is in a state of "transition period" and nervous wait. There is no one around to cast light on what will happen next. And let people say that "time is the best healer" – but for God's sake, this waiting burden is pretty exhausting.
Like in a movie
Due to the abundance of public holidays in October this month has always been shadowed by higher trade seasons. But the October of 2011 is more often than not is called by marketers as "dead" or "frozen" rather than merely quiet. Trading volume is still negligible, and there are a few reasons for that.
The main reasons ensue from the continuing "manual control" exercised by the diamond market leaders, ALROSA and De Beers. The Russian monopoly has once again abandoned the open market - in October, the company did not sell rough on the spot market and at auctions. ALROSA does not want to trigger a drop in prices: at auctions customers will ask for a discount even to reserved prices. These are the realities of the current market. It is rumored that Diamdel, an auction subsidiary of De Beers, probed customers for prices they would be willing to pay if it will auction rough diamonds at a 10-percent discount compared to prices at the sight - and there were no offers coming in even under such terms.
DTC, which put up an unusually small amount of diamond goods worth about $400 million for sale at the September sight, is now rumored to be about to cut the size of its sight due in early November down to $300 million. It is difficult to say for certain what it appears to be – regulation of rough supplies “from the top” or a step provoked by customers refusing to abide to their contractual obligations. Theoretically, the latter is also not excluded: ALROSA, for example, is now drawing up a list of "stand-by" customers in case someone from the "first-string" line-up will wish to abandon the long-term agreements. The company’s CEO Fyodor Andreev has already mentioned that desire to renegotiate the agreements is evinced in particular by Russian clients, but it is difficult to say what the outcome of such talks will be.
The truth is that the monopolists are not the only factor. Essentially, from the very start of the year, diamantaires were gradually calling a "low season" into being for this late fall. Having grasped the rate of price growth, many bidders began intensive operations to replenish their stocks and place orders to manufacture polished diamonds reasonably anticipating that prices will continue to strive upwards, while profit margin in their business will pick up a completely different trend. As a result, the bulk of economic activity has shifted to the first half of the year, and now the already quiet October is almost deprived of deal making. People buy only what is needed to fulfill current orders. Reports coming from around the world and distributed by Rapaport can be read with a sense of déjà vu: “Customers are facing uncertainty, they are concerned with the state of the global economy and take their time waiting for further developments." If I am not mistaken, this is what is called "suspense" in a movie.
Like in life
It remains to understand what kind of movie we are dealing with. And at this point evaluations are as much uncertain as the "state of the global economy."
Top managers of the companies involved continue to irradiate unanimous optimism. De Beers says that rough prices have stabilized and reached a "plateau", from which they will oscillate in the future. And in general there is nothing wrong in that the market has slowed by that much: it was expected to do so at some point and this “point” has just been reached.
ALROSA is no less optimistic. In any case, the company states that market participants have accumulated diamond stocks exceeding even the level of 2008 (according to some experts, the stocks are worth nearly $2 billion, though this estimate is obviously very tentative), but so far this is not a cause for concern.
Moreover, ALROSA is persuading the market that there is a good potential for growth in rough prices in a fairly short run. The company is discussing the possibility of a diamond-secured investment fund with banks - after the rough sold to Gokhran in the crisis period went up in price by a few tens of percent. Strictly speaking, these percentages are only on paper, because Gokhran has not sold the stock, and if it makes a try to sell it now, the price will be quite different. But in any case most of the investment vehicles cannot even dream of this magnitude of return.
Apropos, a few words about Gokhran. There is another rumor - that starting from the next year this agency plans to sell out the stock, which ALROSA sold to the state in the previous crisis. And this is – just imagine for a sec – a stock of rough worth nearly $1 billion. In an environment where major market participants are trying to prevent a price collapse and overstocking, the prospect of injecting large amounts of rough is quite frightening. It is hoped that if these rumors are true, then any steps towards selling these stocks will be correlated with the state of the rest of the world trade.
Against the backdrop of confidence emitted by the companies the position of an ever growing number of experts looks at least "cautious." Though it would be much more honest to call it panic. The words "bubble" and "2008" are increasingly often present in market analyses. Rumors about some coming price drop at some coming auction are increasingly often afloat. And increasingly often people are offered apocalyptic theories as to how much stock indices charts coincide with those that we already saw a couple of years ago. And increasingly often you may hear the words that at the moment ALROSA and De Beers are the main hope for mending the situation. Backed up by the state or no.
Meanwhile, according to some experts, the price "correction" has already reached almost 30%, but nevertheless current prices are still much higher than they were before the crisis last year. And in just the same way before the diamond pipeline crisis in 2008 sales were shifted to spring. And in just the same way the monopolists started to regulate the market manually by the end of the year. And in just the same way mass hysteria provoked massive consternation. It is high time to ponder over the fundamental question of "What came first, the chicken or the egg?" Is it that the market is facing a new crisis or is it that the market was so afraid of the old crisis to be back searching its ghost everywhere that inadvertently made it reappear?
Sad as it may seem, but to get an answer we shall all have to be patient. And perhaps, in this case, rather than sit and wonder, it is better to go and see some real movie. Even if it’s full of suspense.
