It seems that the state of uncertainty has pretty exhausted diamond marketeers. Judging by the reports published after the first DTC sight, the diamond community did not expect the usual opening address and careful assessment of market environment from Louise Prior, the head of sightholder services and communications for DTC, but rather a plain answer to the question “Are you going to change your trade policy and how will you set prices?”
And generally it is quite understandable. No one can predict the future, while anyone is able to discern market conditions; still all would like to know some basic essentials about the strategic position of a major diamond miner.
The only problem is that in this market even in quiet times it was not customary to say something straightforward. And it is neither good nor bad - it is a salient feature that needs to be used to. Or you have to get a habit of reading between the lines.
In 2008, diamond miners recurred to "manual control" to avoid a complete collapse of the diamond market. ALROSA and De Beers significantly restricted sales, although achieving this in different ways: ALROSA sold rough to the State, while De Beers reduced its output. Bearing in mind that the last time the problem was solved, the market pinned great hopes on symmetrical actions by the monopolists this time as well.
This time, both ALROSA and De Beers reduced their sales simultaneously and the market was quite confident expecting the next symmetric step - lower prices. ALROSA was the first to meet the expectations half-way: in the words of some bidders, the company lowered its prices by about 5% in January.
However, expectations for symmetric actions did not come true. DTC also announced price correction. But according to the participants of the sight, the company changed the assortment "in line with production" greatly increasing the amount of small-size goods offered for sale, which resulted in virtually flat total cost of boxes. Prices for larger goods were indeed slightly lower - but they were not subject to correction at the end of last year. Gem Diamonds recently reported that in the fourth quarter of 2011 they hiked prices for their goods (large-size transparent or colored stones up to 10.8 carats) by 4-8% depending on quality, but in general, the "large" segment went up 10% on average during the last three months of that year.
The commotion among the sightholders is justified. According to some experts, polished diamonds even went down in price over the last couple of months in 2011. And although Christmas sales of diamond jewelry seem to have shown growth, no one is confident that this trend will be long-term. As a result, according to the sightholders, prices offered by De Beers still do not allow manufacturers to have profits.
But there is a paradox. Initially, the market expected that diamond miners would switch over to manual control, and then it said that diamond prices should be governed by market rules.
There were quite enough "contra" arguments raised with regard to the January sight. Let's try to find some “pro” arguments.
First of all, there is no secret as to how much the market is prone to "emotional" outbursts. In 2008, if someone happened to lower prices, this could trigger everyone else to do the same. In 2011, mass panic erupted after a serious one-time price reduction announced by BHP Billiton. You can certainly blame DTC for the fact that their pricing policy, even after the "price correction," does not correspond to the realities of the market, but it seems that not so long ago we all talked about the dangers of any sudden moves.
Secondly, once again according to experts, the most expensive rough in the market was that of ALROSA. Thus, the "correction" carried out by DTC may have been primarily a step towards balancing prices offered by the companies. And, perhaps, this step will be followed by other addressed directly "to the market."
Thirdly, the experience of the previous crisis proves that with uncertainties in the global economy and volatility in stock markets demand for large-size diamonds declines along with consumer spending. This means that the redistribution in favor of small-size rough goods may turn out to be justified from some point of view.
Incidentally, do not write off those signals that come from India. Local diamond cutters at the end of last year were able to buy "conflict" rough from Zimbabwe, and due to its "conflict character" it is sold at significantly lower prices, with all other things held equal. Local diamantaires believe that polished goods made of this rough will be sold separately - within the country and to those consumers for whom price is more important than quality. It is not that we should be afraid of those diamonds leaking to other markets: certification will protect those buyers for whom the origin of their gems is important. But one way or another, the market is already trading "Indian" rough, which is cheaper compared to its "branded" analogs, so one should be careful about further decreasing prices for smaller goods.
And finally: since we appeal to the experience of the past crisis, let us remember that DTC did not particularly reduce prices at that time as well. Just like this time, there was a "certain correction" and redistribution of assortment in boxes.
Now there are first signs in the market that trade comes back to normal. But it would be rash to hope that everything will return to normal within one month. Alas, this will not happen, even if diamond miners will lower prices in unison and buyers will suddenly start swarming to jewelry stores. This is not going to happen if only because historically the diamond pipeline acquired very many links and in each of them pricing, supply and demand are neither transparent nor predictable.
Elena Levina for Rough&Polished
