Once the new year is in, you always want to live in a new way. From January, someone starts to lead a healthy lifestyle (or swears to do so by all means). Someone dreams of another job and someone about an opportunity to advance his or hers career. In any case, January is the month for policy statements defining how we want to live in the new year.
Business is no exception here. The first sight of De Beers is traditionally the most anticipated event in January, from which diamond industry players expect not only rough, but also some message about how this company sees the diamond market in the year ahead.
An interesting policy statement was made this time as well (though for some reason it attracted little attention). Meeting with the sightholders Varda Shine, Vice President of De Beers, almost openly said that they might face hard times.
Varda Shine remarked that liquidity will continue to be a challenge for sightholders and urged them to develop a different approach to financial management and banking relationships going forward. (Author’s Note: Hereinafter as cited by Rapaport.)
“Transparency will be crucial as banks will look to minimize their risk profile and comply with new banking norms,” she said. “Operations will need to be rationalized and finance focused squarely on diamond operations in order to reap the full benefits of the undeniably huge long term opportunities in the industry.”
When De Beers says that the market is experiencing liquidity problems, it can still be called a simple statement of fact. But De Beers does not state, De Beers “calls” upon sightholders to solve this problem. And one may read quite a clear message in this call: it looks like the company does not intend to make concessions to sightholders - at least if it does not see movement on their part.
Last year, both De Beers and ALROSA were trying to restrict sales and maintain prices in the course of several months in spite of weakening demand and a liquidity crisis among their customers. However, in autumn they still had to give in. According to Belgium’s rough import statistics, average rough prices in October plummeted by 17% compared to the previous month. De Beers did not say how much it had to drop prices limiting its pronouncements to "adjustments in accordance with demand." However, it can be concluded that this reduction was not significant: after the December sight, clients said that prices offered by De Beers were on average 10% above the market.
De Beers’ January sight was estimated at $ 550 million - about $ 100 million less than usual for this month. Officially, the company says that this year demand is not as great as usual, and diamantaires are not so eager to replenish stocks. But it is hard to say what’s the cause and what’s the effect. The market is swept by rumors that De Beers has once again increased its prices by adjusting the product range – however, these rumors are unproven. Most likely, De Beers continues to systematically limit supplies. If so, then this practice is paying off: according to sightholders, DTC boxes are already trading at a premium of 3% to 5% in the secondary market - due to the fact that now they are not easily obtained. Do you remember when DTC boxes were traded at a premium last time before January?
Similarly, the market hit by shortage starts to offer premiums for goods supplied by ALROSA and BHP. This means that rough prices begin to rise again, even though at a small pace.
But back to diamond cutters.
Rising prices are good for diamond miners, and even for dealers, but they are unlikely to promise something pleasant for those companies which are directly engaged in manufacturing. Polished prices are still reluctant to embark on an upward trend, and besides, demand for polished diamonds is growing not so fast as some time ago. So, any increase in rough prices will tacitly "bite off" some margin earned by diamond manufacturers, which they just started to get during the last couple of months in 2012. The Surat Diamond Association has already begun to sound the alarm about this situation (in a recent publication in The Times of India).
These days, diamond cutting and jewelry manufacturing is not the kind of business where you can earn big money. Harry Winston’s exit from the jewelry retail segment, which was also announced in January, looks very symbolic. Harry Winston is not a small diamond-cutting company, it is a premium brand with a long history (it is enough to remember that the catch phrase of Marilyn Monroe, "Diamonds are a girl’s best friend," was said about this kind of jewelry). So it makes it much more amusing to read comments from banking experts that "the jewelry business for Harry Winston was just an investment, from which the company is now happily withdrawing" - unfortunately, banking experts are far less versed in the diamond market than in finance.
If the management of Harry Winston is giving up a world famous brand and for this sake is even ready to change the name of the company, it can only mean that they no longer see prospects in any business further downstream after the sale of rough diamonds. What is there to say about small-scale diamond cutters from Surat?
It is in these circumstances that De Beers is offering diamantaires to develop "a different approach to financial management" as a means to find a way out. I think it will be rather difficult for a manufacturer to change its relationship with a bank having a loan due back to the issuer, if the latter is insistent on good sales and profits. I hope very much that the printed text simply does not convey the true tone of the message and only due to this De Beers’ cited statement may seem unnecessarily tough. Because so far it looks as if the liquidity crisis experienced by manufacturers is now not a problem of the entire industry, but the problem of manufacturers only, faced with this crisis.
Polished diamonds must be expensive, and it would be silly to argue with this thesis. It is a long standing tradition, when a young man is saving every dollar to scratch up money for a diamond ring for his bride to show her the seriousness of his intentions. But this does not mean that diamond manufacturers have to feel being such a young man every time it comes to buying rough.
Elena Levina for Rough&Polished
