The diamond market has largely followed trends on Wall Street throughout the recession, a practice that has continued in 2010 through this April’s bull run.
The Dow Jones Industrial Average (DJIA) fell 43 percent from the Lehman Brothers collapse in September 2008 to its low point in March 2009, but the index has gained approximately 70 percent since then through April 2010. Similarly, average rough prices dropped about 45 percent in the fourth quarter of 2008, and have doubled since January 2009.
It is little wonder that as financial traders gained confidence through the first quarter of 2010, helping markets reach levels last seen before the collapse of Lehman Brothers, so, too, have diamantaires. April brought the Dow above 11,000 points again, while oil touched an 18-month high of $87 a barrel and gold bullion settled in above $1,100 an ounce. In addition, the U.S. Commerce Department gave its most positive jobs report since the recession started, with the U.S. economy adding 162,000 jobs in March.
However, even as investors surged up Wall Street, seeking the next bit of positive news to signal that the recovery was here to stay, they kept looking back to check on which direction the chasing bull might turn. For the most part, they are satisfied that, compared to where they were 12 months ago, each quarter has brought improvement in the market.
At the same time, investors have drawn on the experience of the recession and remain mindful of the risks that still linger. The handling of Greece’s out-of-control debt served as a reminder that anything can prompt a downturn, even as Moody’s Investor Services issued warnings to the U.S. and U.K. governments to curb their spending. “The recovery that has taken hold across the global economy remains fragile in several of the large advanced economies, most of which have also implemented the most aggressive expansionary fiscal and monetary policies,” Moody’s wrote.
In addition, U.S. unemployment, entrenched at 9.7 percent, weighs on consumer confidence and spending, with Federal Reserve Chairman Ben Bernanke warning that high unemployment and weak construction are among the “significant restraints” on the pace of growth.
China Soars
The diamond industry watches these developments closely because the U.S. consumer remains its number one customer. But, whereas the mature U.S market still provides a business base for the industry, it is well recognized that growth will come from China and India in the years to come.
This trend was most evident in the first-quarter 2010 growth data, which showed that the Chinese economy grew a staggering 11.9 percent, its fastest growth since 2007. Furthermore, the Asian Development Bank (ADB) projected that India’s gross domestic product (GDP) will rise 8.2 percent in 2010. The result is that the consumer markets for diamonds in India and China combined are projected to exceed that of the U.S. within the next five years.
Stable PolishedDiamantaires appeared ever mindful of this development in April as they focused their attention on the Far East. They did so despite the slate of positive economic recovery news in the West as the industry leads up to the June JCK Vegas show. Momentum in Hong Kong continued after the March show there and some of the price resistance shown by buyers at the event eased in the month that followed. Trading in New York remained stable, with good demand for 1.50-carat to 3.00-carat, G to I, SI diamonds. Polished markets worldwide slowed at the start of April due to the Passover and Easter holidays, but gradually returned thereafter, resulting in a slight rise in average prices during the month.
Just as in financial markets, diamond traders have been encouraged by the increase in activity seen in the first quarter, even though the data is being compared with a recessionary first three months of 2009. Polished exports from the trading centers — India, Belgium and India — rose significantly during the period, as did polished imports to consumer markets in the U.S., China and India.
Rough Rises
Similar trends were seen in the rough market as mining companies ramped up their supply, although arguably not to the level that manufacturers would like. Production at the four major diamond mining companies — ALROSA, De Beers, Rio Tinto and BHP Billiton — rose 19 percent in the first quarter of 2010, due mainly to De Beers mine stoppages that took effect in the first quarter of 2009. Sales, likewise, increased four-fold in the first quarter of 2010.
“Supply of rough diamonds is increasing in the short term as the major miners start ramping up their mines or, in the case of ALROSA, halting previous stockpiling,” Des Kilalea, RBC Capital Markets analyst, wrote in a research note about the industry. “This could limit prices in the near term but longer-term supply looks extremely constrained.”
While De Beers and ALROSA signaled they would keep rough prices stable in the near term, prices continued to rise at tender as demand remained strong. Reports indicated that demand was being fueled by shortages and speculation on prices. One Antwerp-based manufacturer charged that some larger sightholders were opting to trade their rough on the secondary market, rather than manufacture, because they earned better profits from trading rough due to the slim margins on polished.
Cutters’ hunger for rough has been evident in the interest stirred by ALROSA’s focusing its sales on long-term contracts, saying it plans to sell 56 percent of its total to favored clients who have made long-term commitments to buy. In contrast, De Beers delayed signing its new Supplier of Choice (SoC) contracts for another year in order to provide manufacturers the time they need “to focus on the recovery.” As the company renegotiates its joint-venture agreements with Botswana, assesses the extent to which it will ramp up its production and works to reduce its debt and boost cash flows, De Beers appears to have enough on its plate without having to engage in sightholder negotiations. It is especially true — if ALROSA’s approach is any indication — that now would be a good time for rough suppliers to lock in manufacturers, given the strong demand for their product.
Rough and polished trading in April was also slightly impacted by the strengthening of the Indian rupee against the U.S. dollar, leading many manufacturers to buy locally. RDR believes, however, that the fluctuation has not been significant enough — staying within its historical range — to effect a change in prices at the consumer level and be a real game changer.
Reading Trends
The question that arises is whether the dominant trends of the promising first quarter will continue. Traders are asking if rough prices will rise, to what extent production will increase and whether polished prices will continue to hold stable or rise more aggressively. While those same traders have been looking to the East for their answers, they might begin to ask their questions — and get some answers — at the JCK Vegas show in June.
The clearest signal to the future of the diamond market, however, may come from the financial markets as traders and investors place their bets on the economic recovery. Those traders are hoping the bull continues to chase the Dow upward, edged on by improving economic data. Either way, history shows that the diamond industry will likely follow suit.
Article from the Rapaport Magazine - May 2010. To subscribe click here.