Industry
Supply For Desired Goods Shrinks
Diamond dealers expect trading to improve as jewelers replenish inventory sold during the holiday season, but have kept polished production low due to high rough prices.
By Avi Krawitz
The U.S. holiday season provided some cheer for the diamond industry as polished prices firmed and dealers filled last-minute orders in December. Prices were largely supported by shortages as manufacturers limited their polished production and worked through existing inventory for much of the year. The RapNet Diamond Index (RAPI™) for 1-carat, Gemological Institute of America (GIA)–graded diamonds rose 1.5 percent during December. RAPI for .30-carat diamonds increased 4.7 percent, while RAPI for .50-carat diamonds grew 3 percent. RAPI for 3-carat diamonds slipped .1 percent during the month (see RapNet Diamond Index [RAPI™] chart in Slideshow).
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Despite the shortages in the market, manufacturers were not yet prepared to significantly raise polished production as they struggled to profit from rough that was being offered at high prices relative to the resulting polished. Manufacturers in India returned from their November Diwali break keeping rough buying to a minimum and polished production at an estimated 30 percent below capacity. De Beers and ALROSA maintained steady prices in December and were again “flexible” in applying their supply rules. The De Beers December sight closed with an estimated value of $180 million compared with $577 million in December 2014. Rapaport estimates that De Beers rough sales slumped 70 percent year on year to $900 million in the second half, representing its lowest half-year total in at least the past decade (see De Beers Half-Year Rough Sales chart in Slideshow). Full-year sales are projected to have fallen 45 percent to $3.6 billion. As rough sales slowed, the mining companies were left with high rough inventory, which influenced them to review their mining operations. De Beers put its Snap Lake mine in Canada on care and maintenance, along with its Orapa Plant 1 and Damtshaa mine in Botswana, and reduced its 2016 production plan to 26 million to 28 million carats compared to 29 million carats in 2015. ALROSA said it may cut its production if weak demand continues into 2016. However, for now, the Russian mining company announced a plan to increase production to 39 million carats in 2016, from 38 million carats last year. ALROSA ended 2015 with inventory almost double its usual level and is reportedly in talks to sell some of that inventory to Gokhran, Russia’s state depository. Midtier miners also felt the pressure in December as their inventory rose while sales fell. Dominion Diamond Corporation became the subject of takeover rumors and shareholder criticism in December as third-quarter sales plunged 35 percent while profit slumped 90 percent (see Dominion Diamond Corp. Revenue & Profit chart in Slideshow). Dominion reported that it had inventory of 1.9 million carats valued at $155 million on October 31, compared with 800,000 carats worth $165 million year on year.
There was stronger activity at the rough auctions in December. Manufacturers noted that rough sold at the auctions presented better value and was more in line with the polished market than the De Beers and ALROSA contract sales. Still, rough trading on the secondary market was very quiet. Trading is expected to increase in January as sightholders anticipate that De Beers will reduce prices and as manufacturers gradually increase their polished production to plug the holes in their polished inventory. There is also some anticipation that polished demand will improve as jewelers seek to replenish inventory that was sold during the holiday period. Polished suppliers are therefore wondering if they will be able to fill demand in the first quarter, given the shortages in the market. As manufacturing is expected to rise conservatively along with the increase in rough purchases, the resulting polished will only be ready in April — traditionally the start of a quieter part of the trading cycle. As one sightholder noted, “I think there will definitely be more activity on the ground in January but I’m just afraid that come the end of March, we’ll be back in a ‘nonactivity’ zone.” For now, the shortages are expected to continue in the first quarter, which is likely to support prices but will also constrain trading if suppliers don’t have the goods to fill orders. That was enough to create some optimism in the diamond trade at the end of 2015. But there is a sense the trade needs a bit more to create a sustainable momentum. Diamond dealers are hoping that demand will improve to enhance the mood even further in 2016.Article from the Rapaport Magazine - January 2016. To subscribe click here.
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