Now that the Christmas shopping season has concluded, the diamond industry’s focus will naturally shift back to the rough market in the first quarter, Avi Krawitz writes on http://www.diamonds.net. Though the major retailers reported strong growth during the holiday period, feedback from the mining companies often provides greater insight into market conditions around this time of year.
That feedback generally expresses itself in the form of rough price movements. De Beers in particular makes no secret of allowing a strong holiday season to serve as a catalyst for its pricing and production decisions. The company increased prices by about 10 percent in the first quarter of 2010, after a relatively positive 2009 holiday season had calmed nerves about the recession.
One DTC sightholder recently told Rapaport News that if De Beers were to find that the holiday season brought U.S. sales growth of more than 3 percent, its Diamond Trading Company (DTC) could better justify further aggression regarding prices. And reports indicate growth well above that level. Signet Jewelers reported 6 percent year-on-year sales growth for November through December, while Zale Corporation said it had growth of 8 percent and Tiffany posted record sales, up 11 percent through the two months.
Growth at these companies lends confidence to trading throughout the pipeline and signals some strength in consumer’s penchant for diamonds. It is worth stressing that no matter how buoyant rough and polished trading may be, the level of consumer demand for diamond jewelry remains the bellwether of market conditions.
The mining companies will therefore be encouraged to raise the bar on rough once the positive news streams through from retail. This is by no means just an apparent De Beers strategy. Petra Diamonds said it expects continued strength in diamond prices, at least in the first half of 2011.
Petra explained that the major diamond producers facilitated the strong price environment by continuing to supply the market “in a responsible manner” while the relative scarcity of rough diamonds ensured increasing levels of competition from both dealers and manufacturers to secure quality goods.
By all measures, the mining companies, particularly De Beers, struck a fine balance keeping supply in line with demand in 2010. It could be argued, given the shortage of both polished and rough reported in the market, that they held back a bit too much. Rapaport estimates that global production rose by just 9 percent from the lows of 2009 to about 136.45 million carats in 2010. That was approximately 16 percent below the 2008 levels reported by the Kimberley Process (KP).
The declines against 2008 continued in 2010, as De Beers kept production about 30 percent below pre-recession levels due to cutbacks implemented through the economic downturn. Rio Tinto’s output was approximately 32 percent below that of 2008 as the company transitions to underground operations at its Argyle mine, resulting in a lag in production there.
The burning question is what will be regarded as a “responsible” supply strategy in 2011.
Indeed, if mining companies were cautious about supplying more than was necessary in 2010, when rough prices were still in recovery mode, they will be far more encouraged to raise production in order to push sales this year, when prices are back at pre-recession levels.
De Beers is expected to ramp up production to about 40 million carats in 2011, which would be an estimated 6.5 million carats more than in 2010. In addition, there is an estimated $1 billion-plus worth of rough held by Gokhran, which the Russian state repository will be tempted to release at this year’s projected higher prices. Then there’s also Zimbabwe’s Marange stockpile, which could possibly come to market — with or without KP certification.
The Catch-22 for mining companies is that while they will want to capitalize on the strength of the rough market, a full ramp-up of supply from these three resources, and others, could result in a softening of the rough market.
Much depends on demand as expressed by rough dealers and diamond cutters and whether they have a price line they will not cross. The signals given over the past few years indicate they do not. As dealers persist in buying high in order to sell high, manufacturing margins will continue to narrow. As a result, murmurs of concern have already started to stir that a speculative rough price environment is in the making for 2011.
If that is the case, 2011 may yet prove to bring the true test of whether the diamond industry learned the lessons of 2008, when the speculative rough price bubble burst along with the global economy. While mining companies may proceed with confidence to capitalize on a strong market for rough in the first half of 2011, it may be left to traders in the market to impose some caution.
