After the unexpectedly large DTC sight market participants were overwhelmed by uncertainty. There was neither understanding of whether there has been a sharp decline in prices, nor any confidence as to what kind of response to be expected from other players. This is why we were marking time prior to issuing our market report for October waiting for export-import statistics from Belgium and India, so that based on these data we could draw some conclusions.
So far, the conclusion may be as follows: the updated prices gave diamond manufacturers a chance to get their margin and this may promise an early stabilization in the sector. But this may only happen if the market will not make any hasty steps right now.
Phantom of stabilization
Export statistics of India (GJEPC) has not yet been published, but there is statistics from the AWDC. According to these data, the average price of rough diamonds imported to Belgium in August amounted to $119.378 per carat, a decrease of 17.3% compared with September.
Monthly prices of rough diamonds imported to Belgium can be traced by the table below (the first number in a column indicates the imports value in $ million, the second number indicates the imports volume in millions of carats, and the lower number - the average price per carat imported):
Thus, the average carat value of rough imported to Belgium in October was at a minimum level for the year. From the beginning of the year, the value of diamonds imported to Belgium declined by 12.6%, whereas compared to the maximum level recorded in May - by 26.3%.
Altogether, such behavior of prices confirms the suggestions put forward by market participants last month. In early October, DTC did not just have a large sight in terms of volume in carats - whatever the appearances, rough prices were reduced at that sight. There is reason to believe that De Beers was not alone to act like this and that Russia’s ALROSA did likewise, all of which gave such a perceptible decline in import prices in Belgium.
A much more interesting picture emerges if you look at prices of Belgian diamond exports (see the table below based on the above pattern):
As the table shows, in recent months the average price of rough imported from Belgium behaves quite differently compared with the average price of imported rough. Despite a 17-percent drop in price for rough imported in October, one carat of diamonds exported from Belgium in October was worth an average of $123.9 – up 5.6% versus the previous month.
This discrepancy can be seen more clearly on the next diagram:
It is only in October that the graphs tracking export and import prices finally "meet" at one point.
What does it mean?
The value of rough exports from Belgium, apparently, can be used as an indicator of the average price at which diamond manufacturers obtained their rough supplies. Or as an indicator of the rough price on the secondary market. Obviously, since July, after another price hike for rough on the part of mining companies, the value of diamonds turned to be too high for the "end" consumer (in this case - for the industry’s manufacturing segment; so far we do not take into account the market for polished diamonds). As a result, rough was moving from mining companies to the market at high prices, but it was traded among market participants at a discount. The above graphs are only visual confirmation of the data that was coming from bidders in the last few months, while the attitude towards these metrics was ambiguous.
However, in October lower prices from diamond miners seemed finally to have balanced the market ...
Again rupee
Here it should be separately said about the reasons for the price decline placed on record.
In order to reduce prices for diamonds, it is not at all necessary to revise the price list. It is enough just to change the product range of traded rough. Prices for stones of the same size, but varying in clarity and color, may differ by orders of magnitude. If in your sales pattern you want to increase the share of melee or pique rough, which is usually low-priced, then you can attain a drop in the average selling price per carat. And in this case there is a chance to demonstrate high total sales since these goods are in great demand due to their low price.
Apparently, changing the product range was the measure resorted to by diamond miners in October. And this measure was primarily aimed at Indian diamantaires.
If you look at the behavior of the Indian rupee exchange rate, you can see that the reasons behind the October high sales were not only in reduced prices.
Since the spring of this year, Indian diamantaires suffered from a liquidity crisis caused by the weakening of the rupee, because of which it was problematic to carry out export-import operations. In September and especially in October the rupee rate turned significantly stronger, due to which Indian companies could get more dollars from currency conversion transactions and thus increase their purchases of rough.
However, starting from November the Indian currency once again began to turn feeble and now is around 55 rupees to the dollar. This means that since November Indian diamantaires started again to experience difficulties, which, of course, will be offset by changing the product range, however not completely.
How to resist temptation?
Once again, it is now the time when the main thing for diamond miners is to avoid any sudden moves. And the temptation to make them is greater than ever.
Judging from media reports and corporate reporting, the both largest diamond miners, De Beers and ALROSA, are in trouble. ALROSA has currently a considerable amount of debt, which is comparable to its pre-crisis liabilities. Over the next few months the company has to show high enough sales of rough: ALROSA sold $3.175 billion worth of rough during nine months and is still set to “secure a footing” within the $4.5 billion target. Some part of the remaining $1.3 billion the company intends to get from sales to Gokhran, but it is unlikely this will be a great amount - according to media reports, obtaining government support remains an open issue. Of course, ALROSA’s sales are now organized much better than in 2008 due to the transition to long-term contracts. Nevertheless, the challenge for the company is still not an easy one.
The situation in De Beers is no less complicated. As it was noted in previous market reports, the company is far behind last year's sales level, and one large sight is not enough to compensate for this lag. In addition, there are signs of discontent from the company’s main shareholder, Anglo American, towards De Beers’ performance (just remember Cynthia Carroll’s dismissal).
In this situation, for diamond miners it is tempting to continue supplying the market with large amounts of rough at low (possibly even declining) prices.
This was the message, though rather veiled, recently voiced by De Beers’ representative Nigel Simpson, who said that while not all of the goods sold at the October sight “will translate into actual polished for the season, sightholders need to continue to run their businesses and buy rough to keep a steady flow of goods through manufacturing."
By this wording De Beers states that some part of cheap rough sold in October went to stock. But the company calls to continue large-scale purchases.
Indian diamantaires (who still account for more than 75% of consumed rough) are now not in a position to accumulate large stocks of rough, even if it is cheap. To stabilize their business, they need some time to work with small amounts of diamonds: they have to cut them quickly enough and sell resulting polished diamonds, so that they are able to buy rough diamonds again and thus show permanent turnover of goods to their crediting banks. One way or another, it will take some time to process the accumulated stocks. They will also not benefit from any changes in the value of their existing stocks - in fact, it does not matter whether it will go up or down.
The increased proportion of "Indian goods" offered by diamond miners can be seen as a step to meet the needs of the market. But it probably would be better for the entire industry if diamond miners stopped at this point and did not change prices, while maintaining stable sales. This will give diamond manufacturers an opportunity to do business predictably instead of trying to adapt to new market conditions every coming month.
If we take our mind off the short-term problems, we can see that the diamond market still has good prospects because consumption of its final product - diamond jewelry - continues to grow. Even if this growth is not as high as in 2011.
Jewelry companies and luxury manufacturers, which issued their reports for the 3rd quarter of 2012, posted an increase in their sales. Blue Nile, which sells diamonds and jewelry, increased its revenue by 20% in the third quarter; PPR scaled up its revenue in the luxury segment by 12%; Titan Industries (Tanishq brand) pushed up its jewelry sales by 6%; while Charles & Colvard’s sales rose by 76%.
It can be expected that this growth will only intensify in the coming months due to the advancing holiday season: Diwali, Thanksgiving and Christmas. Experts expect that consumption growth will also be spurred by resolved political uncertainty due to the U.S. elections which finally took place and the change of leaders in the Communist Party of China.
Increased consumption of diamonds will result in speedy recovery in the diamond cutting industry. And having recovered, diamantaires will once more be able to increase their purchases.
And then, perhaps, it will again be possible to speak of a rise in prices for rough diamonds.
Elena Levina for Rough&Polished
