Rough diamonds hit a rough spot. Nothing major, it's not a crisis of any magnitude, but the wild rally came to a halt, Edahn Golan of IdexOnline says. The trigger was the last Diamond Trading Company (DTC) Sight, followed by a series of other small events. Is this a sign for a bigger change? At the Sight last month, the DTC unloaded on to the market more than $850 million worth of rough, baring a price increase of between nil (such as the Makeable High -7+5 box) to well over 15% with an overall effect of around 10%.
The reaction on the market was quick – the premiums Sightholders tried to get on the boxes when selling them on the secondary market fell drastically, from more than 20% to a mid-single digit. That is market speak for 'low demand.'
De Beers reported an average 35% increase in rough diamond prices in the first half of 2011 and indeed, looking at the price list, that is the common markup. However, some boxes leaped by more than 100% in the past six months. What is important to know is that the largest increases are found in boxes mostly bought and manufactured by Indian firms, a.k.a. Indian Boxes.
This is important because Indian traders drove the premiums in the past few years, backed by good financing. Indians also halted this trade in the past couple of weeks. Is it also an issue of financing?
Non-Indian traders say the Indian market has a "liquidity issue." In Mumbai this week, the reaction is mixed. Some agree, and others give other reasons, such as concerns over the polished market, cost of manufacturing, an unfavorable exchange rate and uncertainties over the economic well being of the U.S. and Europe, and some even worry over the escalating price of gold.
The overall impression is that this is just a bump in the road. Rough prices are softening a little because premiums are eroding. Indian boxes are offered with a 5% premium and are not finding buyers. If sold at list (which means a loss because of the 1% DTC brokers fee and the ~2% Value Added Services that the DTC adds to the total), there are many jumpers on the box – that means there is no real shortage of cash, just of real economic value.
At the same time there are sporadic reports of Sightholders pre-selling their DTC boxes from the August Sight later this month at list prices, at a loss as we noted above. The reasons could include accumulating polished stock or the upcoming Diwali holiday and the following wedding season in India, which means polishing facilities will be closed for weeks.
Another reason that cannot be ignored is difficulty in paying for the goods. Non-DTC goods are also being sold below cost, signaling a certain weakness.
Indian manufacturers' stock levels are at 3-4 month supply level. Prices of polished, after a three-month upwards race and rising by 5.6% in the last month alone, are finally pausing. This is a healthy response. Buyers need to get used to the new prices. Many of these buyers are owners of new stores that are stocking up.
In the U.S., retail sales are strong. Total jewelry sales rose by 14.2% in May and demand for luxury goods – especially higher-end merchandise – appears to be strong across the board and jewelry is benefiting from this trend.
One trader joked that the recent price increases are an "historical correction." He is talking about the increases that most commodities enjoyed since the '80s, something that polished didn't enjoy. There is some justice to that.
There are two bellwether signals to watch for: the upcoming BHP Billiton rough diamond tenders and then diamond jewelry purchases in India ahead of the wedding season. That is where the diamond market and consumers will respectively speak their mind.
