The traditional positive mood in the diamond market in the first quarter of 2013 has not yet changed to invite a price adjustment, but the latter has all the preconditions to happen, Nikolai Afanasyev, Deputy General Manager and also Marketing and Sales Director of Smolensk-based Kristall (the largest diamond manufacturer in Russia), believes. Despite the fact that polished prices have finally outstripped rough prices, the difference is not yet able to offset manufacturing costs and diamond cutters could not or did not have time to take full advantage of the 5-percent rise in prices since the beginning of the year. There is a positive aspect, which is the reduced speculative component (Indian banks have become more cautious to extend credits to diamantaires); at the same time, diamond manufacturers are made uneasy by a possible release of excessive amounts of rough to the market and by the relentless fight against luxury consumption in China.
RISK OF EXCESSIVE SUPPLY
On the backdrop of reduced rough supply to the market and increased demand for diamonds, mining companies achieved a significant rise in prices - ALROSA, for example, recently posted a 5-percent rise in sales for the first quarter (its production, however, decreased by 7.5%, while its sales in carat terms were not disclosed). "Prices peaked in the second half of February and in March,” Nikolai Afanasyev said. “The jewelry exhibition in Hong Kong was better than expected. April and early May were strong enough by inertia, but the exhibition in Basel was not very successful. After the exhibition in Las Vegas, the market goes on a summer vacation, thus followed by cooling, the symptoms of which are already being felt."
Right now "prices went softer" and the secondary market is not giving big premiums anymore, so some boxes are sold below the purchase price, Kristall’s Deputy General Manager said. In his opinion, this is also a consequence of the fact that the market is resilient to further price increases by suppliers.
The worst thing that can happen in the near future is an excess in rough supply to the market, he said. "The market is very sensitive and cautious. Any wrong move or message may flood it,” Nikolai Afanasyev said. “Excessive supply of rough may turn out to be the most dangerous thing of all. Much will depend on the mining companies, on how aggressively they will stimulate sales. If they will take into account the mistakes made in the past and will not impose significant sanctions on customers while limiting the supply volume, the summer season will be softer and the market will be stable for 2 or 3 months."
"In case of excessive supply of rough to the market, prices will not hold and may fall by up to 10%. And all the achievements of the market in January-May will be destroyed in a matter of one month," Nikolai Afanasyev fears.
At the same time, he noted that De Beers and ALROSA are "keeping on level with each other and raising prices for similar goods, bringing no surprises to the market." The limit of monthly collection of contracted goods for a customer of ALROSA was 90%, which is typical for the positive conjuncture of prices.
CHINESE NEGATIVE ASPECT
A more than negative surprise for the market came from China, which was the fastest growing region in terms of jewelry consumption during the past few years. According to Bain’s estimate, China’s consumption of jewelry in 2012 increased by only 7% compared to 30% in 2010-11. In the first quarter this year retail sales of luxury goods in China fell by 15% over the previous period, while the market of premium cars posted a growth of 8.3% (it ranged from 40% to 80% in previous years). China's communist authorities are stepping up the fight against excessive spending among government and military officials, who made up a significant proportion of buyers purchasing goods in the premium segment.
“The influence of such an unpleasant phenomenon for the industry as restricted consumption of luxury goods in China turns to be felt. The Communist Party of China believes there is a too big gap between the rich and the poor in the country. They launched counter advertising introducing the idea that people demonstrating their wealth were wrong. This already resulted in lower sales of luxury cars. It is clear that all this will not stimulate jewelry sales growth. This measure has very grave significance for the market," Nikolai Afanasyev said.
Of other remaining jewelry consumption centers optimism is generated only by Japan, whose population started to spend more money as a result of depreciation of the yen. However, the effect of any devaluation is limited, according to Nikolai Afanasyev. There are fears that the "budget sequestration" in the United States, which is now consuming 40% of all diamonds in the world, will lead to a reduction in household spending. Finally, the Indian diamantaires, who produce about 60% of diamonds by value, faced such a rare phenomenon there as the liquidity problem.
INDIA’S REHABILITATION
This liquidity problem, on the one hand, limited the growth potential for rough prices, but on the other hand, served to make healthier the industry earlier distorted by “round tripping” transactions involving Indian diamonds. This was proved by the statistics released by the GJEPC (Gems and Jewellery Export Promotion Council), which are ever closer to reality after India imposed a two-percent import duty on diamonds in January 2012. According to the GJEPC, India's polished exports decreased by 25% in the 2012-2013 fiscal year (ended March 2013) compared with the previous fiscal year, reaching $ 17.42 billion.
The cautiousness of Indian banks in lending to the diamond industry has reduced speculation in the secondary market, Nikolai Afanasyev said. "After 2009, when rough rose in price by 33% over the year, there were no similar jumps repeated as the market is not willing to pay so much. Now the situation is much healthier for the industry. The Indian diamond industry has no liquidity in the previous amounts. Banks, including Indian banks, are now more carefully analyzing the rough and polished diamond business and they better control the situation. They just thought: why should they finance admittedly unprofitable operations? In fact, such actions only aggravate the situation."
ON THE RESALE
"To date, diamond prices rose at least by 5-6%. This is an average figure, and certain categories of rough went up by 10-12%,” Nikolai Afanasyev said. “We were able to raise polished prices approximately in the same way."
According to the deputy head of Kristall, the difference in prices for rough and polished diamonds is not yet able to cover manufacturing costs. "The market has not yet normalized to such an extent as driving polished prices significantly higher over rough prices," he said.
Nikolai Afanasyev believes that the period in the early months of 2013, when rough prices were rising, was too short for his company to "skim the cream," selling rough from its stock. "Two or three months of growth in our business are a very short period of time. Only growth in the course of six months can be called really sustainable, you will be able to earn only having such a long-term period of growth," he explained.
According to the Audit Chamber, Kristall’s re-sale of rough diamonds increased dramatically in 2011 reaching 40% of the cost of purchased goods. The management of Kristall, however, has always claimed that the company sells only rough, which is loss-making to cut.
In early 2013, there was no sharp rise in sales of rough by Kristall, the company’s Deputy General Manager said. The explanation lies with the purchasing price of rough: "Part of the stocks kept by all manufacturers was accumulated at a very high price. If you sell it cheaper, you’ll lock in a loss. If you feel that the price will return to its previous level and if you have the necessary funding, it is better to hold such rough. Therefore, part of the goods, which had been bought in advance at a high price, has not been sold, because such a transaction would result in a loss."
GROWTH CEILING
The growth ceiling for prices in diamond cutting is 6-7%, Nikolai Afanasyev remarked. "There are no implications for a more significant growth. The market simply does not have available goods, whose price would increase at such a pace. Previously, there was at least gold, which was rising and was used by funds as a security asset. But diamonds, apart from all their other differences, are not commodities in the full sense of the word. As for gold, it is not the fact that its growth trend will spread over to diamonds," he said.
The decline in gold prices has not produced an immediate impact on the diamond market, but its influence is indirect: "Dealers are looking at gold and think: Should we buy diamonds today, if tomorrow the same will happen to diamonds? These jerks affect the mentality of market players and bankers increasing their prudence."
CHANGE OF SUPPLIER
After ALROSA, the second largest supplier of Kristall for at least two years in a row was Yakutia’s OAO Nizhne-Lenskoye mining diamonds on the alluvial fields in the northwestern part of this province and producing about two million carats of diamonds annually, the quality of which, on average, is higher compared with the produce of the Russian diamond monopoly. In 2011, Kristall bought all the product range offered by Nizhne-Lenskoye – Kristall’s purchases were estimated at $ 100 million – and these companies continued collaboration in 2012. In December 2012, Almazy Anabara, a subsidiary of ALROSA, won the auction run by Yakutia’s Ministry for State Property Management, and earlier this year acquired a 51-percent stake in Nizhne-Lenskoye for RUB 3.7 billion. In the result, Kristall lost its exclusive status.
"All the trade operations between Kristall and Nizhne-Lenskoye were terminated after the change of ownership in the Yakut company," Nikolai Afanasyev confirmed.
According to market participants, ALROSA plans to sell all of the production generated by Nizhne-Lenskoye off its own bat. And if the game change for the Yakut producer, whose sales were not systematized, was generally positive, Kristall had to find new channels of supply. The manufacturer’s Deputy General Manager did not specify whose diamonds substituted for the assortment of Nizhne-Lenskoye, noting that "there is enough rough on the market needed for manufacturing purposes." However, Kristall took part in the tender carried out by ALROSA to sell diamonds produced by Nizhne-Lenskoye, which resulted in $ 27 million raked in by ALROSA (the average price of rough diamonds was low - $ 140 per carat - but this may be partly explained by the fact that the company sold "Indian goods").
Boris Ashkenazi for Rough&Polished
