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Rough Diamond Market Stand-Off May Yet Prove Costly

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Dec 17, 2015 8:54 AM   By Avi Krawitz
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RAPAPORT... Now that 2015 is coming to an end, mining companies are reportedly preparing to reduce rough diamond prices in January. Having held off from doing so in the fourth quarter of this year, the industry may be missing an opportunity to capitalize on an expected seasonal improvement in polished demand at the beginning of 2016.

After all, U.S. jewelers will, in theory, need to replenish goods they sold during Christmas while Far East jewelers will place orders around the Chinese New Year. But while De Beers and ALROSA rough prices remained stable in the fourth quarter and supply was constrained in the past six months, manufacturing was kept to a minimum. As a result, a shortage of polished diamonds is likely to develop in January which will constrain trading during what should be the market’s busiest period.

It would have been better to encourage rough buying by dropping prices in the fourth quarter. That would have motivated manufacturing activity so that polished production would be ready for the January retail stock replenishment – as has been the case in previous years.

Instead, diamantaires continue to see poor value in their December rough supply. The De Beers and ALROSA sales were again very small as they anticipate cheaper prices in January. Manufacturers turned to the rough auctions for supply while trading on the secondary market remained very weak.

De Beers Estimated $180M Sight

There was a sense of predictability about the De Beers sight as the miner kept rough prices unchanged and continued to be flexible in its supply. De Beers earlier told sightholders they could take what they want in November and December instead of adhering to their usual intentions to offer (ITO) allocation rules.

However, sightholders saw little profitability in the supply and bought the minimum required to keep their factories going. Based on conversations with sightholders and dealers, Rapaport News estimates the sight was valued at around $180 million.

“People came to Gaborone with the intention to buy something but they also took full advantage of the flexibility offered by De Beers,” said one Antwerp-based sightholder.

Auction Prices Rise

Similarly, ALROSA’s sale was subdued as the Russian miner maintained prices and allowed clients to defer up to 70 percent of their allocations. While there was demand for some categories of rough for which there is a shortage of the resulting polished, manufacturers “are just not prepared to take a loss on the goods anymore,” another manufacturer stressed.

Dealers were particularly inactive and trading of De Beers boxes on the secondary market was muted, as was the case in November.

Manufacturers instead turned to the auction circuit saying there is better value in that rough than in the De Beers or ALROSA contracted supply. Smaller manufacturers also bid strongly since they couldn’t find sight goods on the secondary market.

As a result, auction prices firmed by an estimated 5 to 10 percent in December. Petra Diamonds sold 606,080 carats at its latest tender with just 3,200 carats remaining unsold. The company explained it achieved higher prices because of an improvement in the product mix. Grib Diamonds reportedly sold all of its lots on offer this month at prices back in line with December 2014 levels, market sources told Rapaport News. Similarly, rough from Angola was more expensive this month than in previous periods, sightholders noted.

Low Manufacturing Levels

Still, the volume of rough on the market is significantly below the level in previous years and manufacturing has, consequently, slumped about 30 to 50 percent from December 2014, one India-based sightholder said. If you consider the size of the De Beers and ALROSA sales and the amount of goods sold by the auction houses, there can’t be more than $600 million worth of new rough on the market, “which is nothing,” he claimed. Last year, the De Beers December sight alone was valued at $577 million, according to Rapaport estimates.

Indian manufacturers bought because they needed some rough to keep their factories going, particularly after resumption of operations following the Diwali break. As it is, they went into the festival with very little rough stock as rough purchases had already slumped in June, while their factories were closed for three-to-four weeks in November.

One market observer noted the manufacturing sector has diminished in size in the past year to a point where it can’t contract any further. “So they need rough that will keep them busy in a cost effective way, which is why we’ve seen good demand for near-gem small rough this year,” he said.

Many anticipate manufacturing activity will start to increase in January as polished inventories are being reduced and demand is expected to pick up in the first quarter. Already, sightholders note that polished inventory levels have diminished because of a cut-back in manufacturing and sales during the holiday season. Polished suppliers are reporting steady U.S. orders and better Chinese demand in December, while polished prices have firmed largely due to the shortages.

Reduced Polished Inventory

And those scarcities are expected to persist in the first quarter of 2016 considering current manufacturing levels. That may provide continued support for polished prices but it will also constrain trading if suppliers don’t have the goods to fill orders.

Still, conversations with manufacturers in the past three months have revealed cautious support for De Beers and ALROSA’s policy. Manufacturers were content that rough supply was constrained as they focused on reducing excess polished inventory of largely unwanted poor-quality diamonds that they’ve held for most of the year. Sightholders also expressed concern that a drop in rough prices would reduce the value of their polished inventory.

Perhaps, that’s why there’s been some hesitant hype around the fact that rough supply was at record lows and prices were unchanged throughout the fourth quarter. Having made its last price cut of around 8 percent in August, De Beers rough sales dived about 71 percent year-on-year to around $450 million in the final three months of the year as per Rapaport estimates. For the full year, sales slumped 45 percent to an estimated $3.6 billion.

De Beers “flexible” supply has allowed the company to show it is working with sightholders in times of difficulty, while its conservative price policy has kept investors and shareholders interested. In an Anglo American investor day presentation earlier this month, Marc Cutifani, Anglo’s CEO and chairman of its De Beers subsidiary, noted that diamonds was among the most resilient commodity within Anglo’s portfolio as prices fell 15 percent this year. Only thermal coal prices declined by a narrower margin of 7 percent whereas platinum, coal, copper, iron ore and nickel prices each plummeted by more than 25 percent.

A Bearish Industry

Perhaps there’s something to be said about minimizing the reported annual decline, but further rough price cuts are expected in 2016 that could arguably have been made in the fourth quarter. Sightholders are confident that De Beers will lower prices by 5 to 7 percent in January – even if they’re hoping for more. They also expect other diamond miners to follow suit and there was always a sense that the December rise in auction prices was going to be short-lived.

Meanwhile, 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 non-activity zone. With no major consumer event and the first rough from January finishing, I’m not very hopeful about [polished] price levels after March.”

Similarly, De Beers CEO Philippe Mellier told Anglo analysts that a recovery is only likely to take shape in the second half of 2016.

One might take these as a signal the diamond industry is notably bearish about its outlook for the first half. Add to the mix Moody’s contention that a continued slowdown in global economic growth and reduced availability of credit to cutters will exert additional pressure on the mining sector, and you’d be forgiven for expecting more of the same in the rough market next year.

At least January might provide an interesting temporary reprieve for the diamond trade as polished prices firm up and rough prices decline. But while polished trading has historically been at its strongest in the first quarter, it’s just not clear whether diamantaires will have the goods to take full advantage of that seasonality this time round. There may yet be an opportunity cost to the recent stand-off in the rough market.

The writer can be contacted at avi@diamonds.net. Follow Avi on Twitter: @AviKrawitz and on LinkedIn.
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Tags: Alrosa, Avi Krawitz, De Beers, diamonds, Dominion, grib, Jewelry, Rapaport, Sightholders
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