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Sightholders React to Price Cuts at $250M Sight
Analysis
Aug 27, 2015 10:48 AM
By Avi Krawitz
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RAPAPORT... De Beers sightholders had mixed reactions to the price cuts at this week’s sight, which had an estimate value of $250 million before any additional supply was offered. The company dropped its rough diamond prices by an average of 8 percent to 10 percent, which spurred demand for additional goods during the week. Sightholders at press time were waiting to hear whether their requests would be granted.
“People asked for more goods when they saw the prices and it is an opportunity for De Beers to sell a few extra hundred million dollars’ worth of rough,” said an Antwerp-based sightholder. “It’s just not clear if they want to.”
Another sightholder suggested that De Beers gave a clear message that it intends to limit supply for the rest of the year in effort to support these new price levels. Rapaport News spoke with five sightholders for this story.
Paul Rowley, De Beers head of global sightholder services, told Rapaport News that the company’s strategy has been to limit supply as there has been an overhang of inventory in the market from 2014. He declined to comment on prices at the sight but noted that De Beers gradually reduced prices in 2015 with the company’s price index down 8 percent in the first half of the year.
Not Enough
Sightholders, meanwhile, said they don’t expect the company to reduce prices again this year, even if they felt the drop was not far reaching enough.
“Sightholders appreciated the adjustments but in many areas it wasn’t enough,” said a market observer. “There’s still no profit so while they are happy De Beers is finally doing something, it doesn’t help them in the short term.”
Still, the message that sightholders conveyed was that De Beers will be more focused on limiting supply than price in the coming months.
While improved margins may have increased their appetite for more rough, a Surat-based sightholder noted that manufacturers are not yet ready to raise polished production, which is currently estimated at around 40 percent to 50 percent of capacity.
Some expressed concern that manufacturers might be buying into the rough market at the new price levels even though polished demand is lacking. “Some boxes fell 10 percent to 20 percent so people requested more of those goods even though I don’t see profit there,” said a sightholder. “We all know how overpriced the goods were to begin with and we’re not seeing the pull through from the polished yet.”
Polished prices might decline further on the back of the rough price correction, ultimately downplaying the extent of the reductions. “Let’s call it an adjustment rather than a reduction,” pleaded a sightholder. “We shouldn’t expose the correction widely because it effects polished prices and sentiment.”
Polished Effect
Another sightholder agreed noting that his clients have already said they read on Bloomberg News that rough prices fell 9 percent and now expect polished prices to follow suit. “Of course it doesn’t work that way because the market is inefficient,” he explained. “But it doesn’t help me when I sell my polished or when a retailer sells his jewelry.”
Still, the mood at the sight improved from the previous month as sightholders saw the adjustment as an opportunity to improve their margins on new manufacturing. They also expect the De Beers price cuts will affect other sources, particularly as ALROSA held its prices steady in August.
The Russian miner limited its supply at its August sale, which preceded the De Beers sight by one week, allowing clients to forego their full supply. ALROSA Alliance clients told Rapaport News that prices were relatively stable at the sale but now expect a similar decrease to De Beers in September.
Accepting Low Demand
Unlike De Beers, which has cut its production plan for the year to align with its weak sales, ALROSA has so far maintained its production guidance. Clients noted that the company has the option to sell any excess goods to the Russian treasury – Gokhran. ALROSA spokespersons did not reply to Rapaport’s questions whether it has taken up that option yet. Analysts at VTB Capital expect the Russian company will downgrade its sales volume guidance for 2015 by about 2 million carats due to weak rough sales in the past few months. ALROSA is scheduled to publish its second quarter results on Friday.
For sightholders, the reduction may have shifted the conversation away from price to demand as they also accept that rough volume will remain low for the rest of the year.
“Both De Beers and the Russians have made it clear they don’t want to sell more, as they want to dry the market of inventory in the coming month,” a sightholder said. “We expect that the new generic marketing campaign that they’re doing and the Forevermark campaign will boost demand very strongly in the U.S. and in China.” |
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Tags:
Avi Krawitz, By Avi Krawitz , De Beers, Sightholders
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