The dominant story of 2009 in the diamond industry was undoubtedly the rate at which the rough market recovered from the lows of the first quarter, and the extent to which the polished market did not. As the year progressed and confidence grew, rough and polished prices moved further out of equilibrium.
Under normal circumstances, movements in rough prices should be traced through the polished pipeline to reflect levels of consumer demand. While polished appeared to move along these lines, maintaining lower but steady price and demand trends, the rough market was influenced by independent forces.
The most prominent of these appear to have been:
- Speculation in the market as dealers bought rough, expecting further price increases,
- Prominent manufacturers buying up larger volumes of rough to maintain favor with producers,
- Reduced production, creating artificial shortages in the market,
- A sense of responsibility to resume operations at cutting factories and supply them with stock irrespective of demand, in order to avoid another round of shutdowns and layoffs.
As a result, while diamantaires were relieved to be doing business again, albeit at depleted levels compared to predownturn, their profits were being squeezed. One Israeli manufacturer explained in early December: “Theoretically, under normal circumstances, if you were able to buy rough, polish it and sell it on the same day, you should be able to profit. This is not the case today.”
While manufacturers ended the year with an air of optimism for 2010, there is a strong undercurrent of concern that profit margins will be further squeezed.
2009 in Summary
To gain a true perspective of how polished prices fared in 2009, one needs to look further than the past year to the initial downturn in 2008.
Riding the wave of ever-increasing rough prices through 2007 and 2008, the bubble burst. With the collapse of Lehman Brothers, the market was forced away from its speculative habits as consumer demand for diamonds plummeted, hurting cutting activity and, in turn, manufacturers’ demand for rough.
India put a moratorium on all rough imports at the end of 2008, which became a symbol of the dire situation in which the industry found itself. Rough prices fell an average of 45 percent between September and December 2008. The declines in polished prices, while significant, were less pronounced. That was reflected in the RapNet Asking Price Index (RAPI), where 1-carat stones fell an average of 14.7 percent during the four months that ended in December 2008, while 3-carat diamonds declined 21.2 percent and 5-carat stones decreased 24.6 percent.
Diamond mining companies responded to the downward trend by curbing production to bring it level with their new outlook for demand. With mines temporarily closed for maintenance through the first half of 2009, De Beers ended the six months with production down 73 percent, compared to a year earlier, and sales declining 57 percent.
Weak polished markets were still evident at the JCK Las Vegas show in May. Meanwhile, markets outside the U.S. started to show signs of life, which spurred some movement in rough. At the halfway point of the year, RDR reported on two very different quarters: The first three months of the year were marred by unprecedented declines and the second quarter saw some stabilization and improvement.
These trends were reflected in polished prices, where declines for different sizes in RAPI in the first quarter ranged from 3 percent for 0.30 carats to 9 percent for 1-carat diamonds while, from April through June, the changes were flat to a drop of about 1 percent. Average rough prices increased rapidly in the second quarter so that by June, prices were about 60 percent above the low levels of January.
The Second Half
Confidence in the market continued to pick up, spurred by a relatively buoyant Indian industry, which hosted a busy Mumbai show in June. Despite improvements in the consumer markets of India and China, the U.S. and Europe remained weak, with additional bankruptcies, most notably that of Finlay Enterprises, spoiling industry confidence. Furthermore, the U.S. hit double-digit unemployment, which negated the positive impact that strong financial and commodities markets were having on consumer confidence.
Polished prices reflected these factors and remained relatively stable, while rough continued its upward path. During the second half of the year, average rough gained approximately 10 percent, while polished prices held steady.
A Noble Goal
Looking at the year as a whole, rough prices rose approximately 65 percent, as polished prices fell about 8 percent. While some might argue that these trends moved to correct the market from the downturn, we believe the rough market has moved beyond that point. In fact, it probably did so at the start of the fourth quarter.
The polished market told a very different story, as shown in the following pages. RDR’s 2009 annual polished price report presents a detailed look at polished price trends during 2009 and over the past decade, providing an in-depth view of how prices moved in rounds according to size, color and clarity.
This data does not imply any forecast for the coming year. While most in the industry anticipate an improvement in overall market conditions in 2010, few would be brave enough to predict how prices will play out. What is clear, however, as we transition to a new decade, is that the industry’s priority should be bringing the rough and polished markets into equilibrium.
Article from the Rapaport Magazine - January 2010. To subscribe click here.