Wisecrackers say that "statistics is an inaccurate science." As for accuracy I do not have any complaints, but I dare say that statistics is an unhurried science. Quarterly data on production, sales, exports and imports in the first three months of the year - in short, all the figures by which you can analyze the state of the industry - are published only in early May. Therefore, the current April report will be a bit more turned to the past. However, you may give an outlook for the future only based on previous experience.
Overall decline in production
According to market participants, DTC raised prices for rough diamonds by an average of 7% from the start of this year. It’s a sufficiently brisk price movement, given that we are talking only about 3-4 months. In fact, this figure is even higher: if you remember, DTC started January by reducing prices for their goods, but now they won them back. At the May sight, De Beers continued its "price adjustment" raising prices for some types of boxes, while bringing down for others.
De Beers maintains the price level by decreasing output. In the first quarter, De Beers reduced its rough production by 16%. The company said that it is a planned measure associated with the desire to focus on expansion, repair and maintenance of its mining operations. De Beers began to reduce the supply of rough to the market since last fall, reducing the volume of sights, and it is logical that in this situation it is not appropriate for the company to maintain production at the same level, thus building up stocks.
Since last fall, ALROSA, too, reduced supplies to the market by stopping auction and spot sales and focusing only on the fulfillment of long-term contracts. Starting from this spring, the Russian company resumed auctions (for instance, having conducted already two rounds of auctions for special-size diamonds). However, in April there were rumors that the company could also reduce its output this year. According to media reports, this is due to engineering and geological difficulties in developing the company's mine fields. Officially, ALROSA did not confirm this information. But frankly speaking, a decline in production would be a logical step for the Russian company. It would be hardly appropriate to maintain prices mining for the company’s stocks, while selling diamonds to Gokhran, Russia’s State Repository (as was the case in 2009), is after all an extreme measure and it makes no sense to use it now, in a more or less stable market.
Not only diamond mining majors see their output go down. BHP Billiton posted a fall in diamond production by 21% in the first quarter due to deteriorating quality of ore at Ekati. This old Canadian mine is already close to depletion, and it is unlikely there is a possibility to increase production there in the next few years. It seems that among majors higher output this year is expected only by Rio Tinto, which has expanded its underground operations at Diavik and also is more successful at Argyle compared to the last year, when its production plan for the first quarter was not met because of the strong rains and floods in Australia.
Thus, prices are moving upward due to growing shortage of rough in the market. The only question is whether this growth is commensurate with the growth in demand from diamond cutters, with the growth in demand for jewelry, as well as with the financial capacity of buyers.
Diamond cutting and jewelry sector
Sometimes it seems that behavior of those operating in the diamond market is a bit recursive. Simply put, they are apt to walk twice into the same water. During the past few years, speakers of various levels repeatedly stressed that demand for rough diamonds must be dictated by demand for final products, whereas prices for rough diamonds must be commensurate with the growth of prices for polished diamonds. But so far it looks more like a mantra than a real state of things. This spring is no exception. On the one hand, DTC describes the results of its recent sights as very successful pointing to growing demand for different categories of rough. The same kind of talk is heard from Diamdel, which registers a steady demand from emerging markets. But market participants do not seem to share the enthusiasm. "The reaction to the price adjustment was not favorable, because people are squeezed out of their margins. It is not to say that they are operating at a loss, but now diamonds don’t look a great money earner," they say. And if there is any ring of truth in the RapNet Index, prices for certified diamonds went down by 2.7% in the first quarter. In a recently published report, Rapaport noted that although retail inventories declined, companies were very reluctant to restock and do not venture to make large-scale purchases, fearing the uncertainty of the situation in the international market, as well as crisis phenomena in the global economy. The instability of the economic situation leaves its mark on consumer behavior: they still tend to buy smaller diamonds of poor quality at affordable prices.
Small diamonds are mainly produced by the diamond cutting industry in India. Let’s see the statistics released at the end of April.
In March, India's polished exports totaled $2.117 billion, or 4.264 million carats. The official statistics compares this with the amount of exports in March 2011 - and it turns evident there was a slump (by an average of 50%). However, strictly speaking, it is not quite correct to compare the March of this year and the March of the year past, since we are dealing with two completely different markets: the rapidly growing market of 2011 and the wary market of 2012 recovering from a fall in prices. Compared with February 2012, India boosted its polished imports in March by more than 40% both in carat and dollar terms. Part of this increase is probably due to the seasonal rise of trading before the holidays, but I do not think all the 40% can be attributed only to this factor. Production and sales of Indian diamonds are growing on their own, responding to the demand from consumers for small stones. This kind of dynamics is confirmed by the data on trading in other countries. For instance, Japan’s imports of Indian diamonds in March were up 52%.
Prices look curious as well. In March, India’s polished exports rose by 41% in carat terms and by 45% in price terms. That is, the higher value of diamonds exported from India was almost entirely due to an increase in their quantity. Of course, we do not see all the characteristics of sold rocks, so we cannot make definite conclusions. But judging by the fact that dynamics is about the same, we can assume that prices for Indian diamonds in March on the background of overall increase in supply went up only slightly or did not go up at all. It should be said that India’s rough imports in March was up 9% by value. This time, foreign trade statistics does not contain any data on rough imports in carat terms, so it's hard to say which part of this trend is due to a build-up in volume and which to a straight rise in prices. But generally, the trend of recent months was that under the influence of high demand "Indian goods" rose in price more quickly than large size rough.
If rough prices are once again significantly outstripping polished prices and buyers’ wallets, one may ask for how long the market will be able to absorb rough at its current price. Indian diamond cutters and jewelers, who consume a huge amount of rough diamonds, are currently in a difficult situation due to the introduction of a number of customs duties and excise taxes in the country (including those on gold and diamonds). In April, the whole diamond industry in India went on a three-week strike to protest against these fiscal measures, and experts now estimate that as a result the country will lose about 10% of sales of precious stones and jewelry containing these gems. Initially it was assumed that this market in India will reach $50 billion in 2012.
On the one hand, the strike of Indian jewelers will reduce the overall supply in the same way as it happens with De Beers and ALROSA in the rough market. Demand for jewelry goods will increase: for example, jewelry sales in the United States, now the largest consumer of these products, upped 18.7% to $2.69 billion in February, while in March, before Easter, they jumped to $14.7 billion, according to preliminary data. In the face of growing demand this should result in higher value of diamonds and diamond jewelry one way or another.
On the other hand, if all the employees engaged in the industry go on strike for three weeks, instead of doing their work, it means that the degree of their dissatisfaction with the situation is very high.
By the way, either I suddenly lost all my abilities to search for information, or Israel just ceased publishing foreign trade statistics. Anyway, somehow I cannot find official information about Israel’s rough imports and polished exports for any month in 2012. And such data could make the situation around cutting larger diamonds a little bit more transparent.
Elena Levina for Rough&Polished
