Industry
Rising Inventory Hopeful Expectations
Both the diamond mining and manufacturing sectors are hoping that strong holiday jewelry sales will stimulate better trading in 2016.
By Avi Krawitz
As always, there’s an air of anticipation ahead of the holiday season, even if diamond trading is well below levels usually associated with this time of year. Diamond dealers expect that positive U.S. economic trends will raise consumer confidence to spend and influence jewelers to place stronger orders in 2016. Furthermore, recently announced marketing campaigns by Signet Jewelers and De Beers Forevermark have raised expectations that the season will at least exceed 2014’s lackluster performance.
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Sarine Technologies, which sells equipment used in diamond manufacturing, noted a reluctance by both mid- and downstream buyers to replenish stock, “as they believe further price adjustments are warranted and may be forthcoming.” As a result, dealer restraint resonated through the trading centers, with Belgium’s and India’s polished exports dropping 15 percent and 19 percent respectively in the third quarter (see Belgium & India 3Q Polished Diamond Trade chart in Slideshow). Buyers are selective, with steady demand for 1-carat, G to H, VS to SI GIA-graded diamonds. There is also good demand for SI to I2 eye-clean diamonds with no black inclusions, which are in short supply. Dossiers are slow due to lower Chinese demand, while activity during Israel Diamond Week at the New York Diamond Dealers Club (DDC) signaled a shift toward larger diamonds. In general, dealers are looking for bargains and Israeli and U.S. buyers have been “cherry-picking” Indian goods before the Mumbai trade breaks for Diwali in mid-November. However, finding the right goods isn’t easy as very small volumes of fresh stock are coming to the market since manufacturing was cut by 30 percent to 50 percent in the past year.
Sarine, in a note warning investors that it expects a slump in third-quarter revenue, explained that the reduction in polished output has negated the need for capital equipment investment by manufacturers. Furthermore, a handful of defaults among its customers, primarily in India, has resulted in liquidation sales of equipment in the second-hand market, which has created additional pressure on new-equipment sales, the company added. Sarine expects manufacturing to trend back to normal after Diwali and possibly only in the first quarter of 2016 — depending on developments in rough diamond pricing and holiday retail sales. As manufacturing is expected to remain at depressed levels, rough demand has slumped. Belgium’s rough imports dropped 38 percent in the third quarter, and its exports by 40 percent, while India’s rough imports dropped 34 percent (see Belgium & India 3Q Rough Diamond Trade chart in Slideshow). The trend continued in October, when manufacturers refused approximately 50 percent of supply at the De Beers sight and ALROSA Alliance sale. Both companies kept prices relatively stable during the month and are expected to maintain current levels until the end of the year — despite manufacturers’ rallying for further reductions. ALROSA reported that rough prices fell 8 percent in the third quarter, which it said was “in line with the slowdown in the diamond market.” The mining companies have been clear that they’d rather reduce supply than drop prices again in the current environment. For its part, De Beers introduced greater flexibility at its final two sights of 2015, allowing sightholders to defer more goods than previously stated, as well as presenting opportunities to bring supply forward and apply for goods that were not part of their original intentions to offer (ITOs). Likewise, on the rough auction circuit, Okavango Diamond Company, which is entitled to 14 percent of Debswana’s production, reduced volumes in response to market conditions, its Managing Director Toby Frears told Rapaport Magazine. The Botswana parastatal only offered diamonds in the 10-plus-carat range at its October auction and has canceled its sale in November.
Mining companies, for the most part, have adjusted their operations to align with the decline in rough demand. De Beers lowered its production guidance for the year “to better reflect current trading conditions” and now expects to yield 29 million carats in 2015, compared to its previous update in August of 29 million carats to 31 million carats. The company reduced processing primarily at its Botswana and South Africa operations as group production fell 27 percent during the third quarter (see Diamond Production at ALROSE, De Beers & Rio Tinto chart in Slideshow). Rio Tinto had a similar response to market conditions by cutting its full-year production plan from 20 million carats to 18 million carats, which will still be 30 percent higher than 2014 levels, since it ramped up its Argyle processing in the past year. In contrast, ALROSA maintained its 2015 outlook for production of 38 million carats, since, as the Russia-based miner explained, it would rather keep production going and not sell than absorb the cost of reducing its mine operations. In fact, despite their revised production plans, the mining companies are left holding a lot of rough, while manufacturers maintain low factory production and try to deplete their polished inventories. Both sectors are hoping for a pull-through from the retail market, which has been largely missing in 2015, to stimulate stronger trading next year. “Attention is increasingly being focused on the holiday season,” wrote Ernie Blom, president of the World Federation of Diamond Bourses (WFDB). “I believe we have reason to be cautiously confident of a solid holiday sales season. The November-December period is critical for polished sales, ahead not only of Christmas, but the Chinese New Year, too.”Article from the Rapaport Magazine - November 2015. To subscribe click here.
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