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By Avi Krawitz
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Posted: 11/20/09 12:00
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Editorial
Return to Tender…
Many issues were discussed at the Antwerp Diamond Symposium this week but the question regarding how rough diamonds are marketed to manufacturers emerged among those of primary concern. This development came after Rio Tinto announced that it has restructured its marketing efforts by dropping five ‘Select Diamantaires’ due to its forecasted output decline, and its intention to start holding tenders on the open market for a minor portion of its production. Manufacturers, meanwhile, bemoaned the tender system as encouraging market speculation and being unable to ensure a stable, sustainable supply of rough, as the sightholder system might.
Rio Tinto is not the first of the major producers to turn to tender; BHP Billiton did so earlier. Nor is Rio Tinto exhibiting a lone perspective. In an interview with Rapaport News to be published next week, a senior official in the Botswana diamond industry explained that the country intends to start tendering rough in the near future. The move, he said, would help Botswana achieve its goal of developing a secondary market and enable the establishment of a more market-related price mechanism, which could be filtered back to other Debswana goods.
Indeed, BHP Billiton’s marketing director, Chris Ryder, stressed that the tender system allowed the company to follow the market, rather than try and outperform it, so that “prices reflect supply-demand fundamentals.”
This is not necessarily so, however, and the debate outlining the pros and cons of selling rough through tenders is highly dependent on who is doing the debating. From a producer’s point of view, tenders make goods available to more buyers, therefore increasing competition for the company’s products. As a result, Rio Tinto, which is indeed faced with volatile production in the medium term as it transforms the Argyle and Diavik mines to underground operations, stands to earn better profits per stone through the tenders.
While manufacturers in the secondary market gain another avenue to buy rough, they remain subject to the same high competition and, in fact, more competition to obtain their supply.
As long as the ratio of buyers to sellers remains heavily lopsided, and buyers are forced to bid higher than supply-demand fundamentals may dictate, rough will be susceptible to speculation, whether marketed by tender or any other system.
We therefore welcome Botswana’s goals to sell rough independent of De Beers. While the hows and whens of this development remain to be seen, any move to increase competition between rough sellers and therefore balance that lopsided ratio, may represent one avenue to resetting the correlation between the rough and polished markets. Provided of course, that the move by Botswana is not purely a mechanism to gauge prices for Debswana (and De Beers), but a genuine effort by the country to develop as a rough trading center. If the latter is true, this should be seen as a positive development indeed.
Between the Lines
Rough: ALROSA Still Holds the Trump Card
ALROSA vice president Sergey Oulin assured the market that Russia would act responsibly with its stockpile of diamonds, causing industry players at the Antwerp Diamond Symposium to breathe a collective sigh of relief. Oulin said that “now is not the time to rush for profit” in explaining that the country would not dump the goods on the market when it felt the time was right. In an interview with Rapaport News, Oulin declined to disclose the size of the Russian stockpile and, more importantly, neither would he disclose the manner in which state depository Gokhran intends to sell them. He also declined to comment regarding ALROSA’s sales under long-term contracts. In an ideal world, the industry would be well served if ALROSA offered some transparency on its marketing, as well as the flow of information from the company. But as Oulin himself said, “Don’t get frustrated; you’re not the only one.” Either way, as reassuring as the “being responsible” speech in Antwerp was, Russia still has the ability to significantly influence the rough market through its sizeable stockpile of goods come 2010.
Wholesale: U.S. Polished Imports Trending Upwards
Polished diamond imports to the U.S. have gradually increased as the year has progressed, but remain well below 2008 levels (as shown in the table below). The decline in imports by volume has been less dramatic than the drop by value, reflecting the strong impact that prices have had on the market. Average prices in the third quarter remain 24 percent below the same period of 2008.The statistics should reflect improved comparative figures during the fourth quarter, considering the crisis that enveloped the market after the Lehman Brothers’ folded in September of 2008. As a result, the data may be more effectively analyzed when taken in context of the preceding periods. Taken as such, the U.S. polished import figures are showing some encouraging signs.
Retail: Bulgari Sees Improvement
Luxury retail group Bulgari cited improving sales in the third quarter and continuing into the current quarter. With group sales down 9 percent to $346.5 million (EUR 233.2 million) during the three-month period, the company’s jewelry unit met the average with a sales decline of 9.7 percent to $142.6 million (EUR 96 million). Sales trends across regions reflected general economic trends, as sales fell in the U.S., Europe and Japan, but grew in the rest of Asia and the Middle East.
Economic Highlights:
• Gold sets new record, moving above $1,150/oz.
• The Organization for Economic Cooperation and Development (OECD) expects its combined economy of 30 members to grow 1.9 percent next year and by 2.5 percent in 2011.
• Goldman Sachs forecasts that China’s economy will grow 8 percent in 2009, adding that the country would become the world’s biggest economy by 2027.
• U.S. home construction slumps to six-month low in October.
• Lev Leviev’s Africa Israel reportedly sells half its share in The New York Times building and uses the proceeds for a debt settlement of $400 million.
Global Markets
United States: Retailers are reporting a lull in the market in the run-up to the holiday season, although hopes are still high that sales will improve from last year. On the wholesale side, shortages are being observed and there is strong competition among suppliers to find goods to fill specific orders, forcing premiums up. In addition, there remains a wide gap between bidding and asking prices. Demand has improved for 2.00-ct. goods and fancy shape diamonds in better colors and clarities, items that are in short supply.
Belgium: Demand for polished improved slightly, with more buyers from Israel and Europe visiting Antwerp this week. Buyers are looking for very specific items that can be difficult to find, particularly in the high-end category, which is experiencing strong demand. There is good demand for rounds, 0.30-0.80 ct., F-H, VS-SI goods and 1.00-ct. stones are also selling well. While high rough prices are a cause for concern, dealers are hoping the polished market will remain stable through the rest of the year.
Israel: The positive trend continued this week, with good demand and improved trade through the Ramat Gan bourse. While Christmas demand from Europe and the U.S. is driving growth, the boost is not as noticeable as in previous years and is not significantly outpacing demand from the Far East. Dealers suspect that U.S. buyers may be finding better deals in New York than in Ramat Gan due to discount shopping through the recession. Still, there remains strong price resistance from buyers, with very few categories traded at prices desired by sellers. Prices have improved for sellers of 1.00-1.99 ct., D-E, VVS1-VS1 goods, while demand for low colors and clarities remain weak.
India: The current wedding season is stimulating demand in the domestic market and trading has strengthened post-Diwali. Asking prices appear to have edged up since Diwali in response to higher rough prices and shortages in the market. Shortages are most prevalent in 0.50+ ct., G-I colors. There is strong activity for 1.00 ct. in all categories, while lower piquee goods below 0.18 ct. are also trading well. While manufacturing levels have improved in the fourth quarter, they remain far below full capacity.
China: Both wholesale and retail markets in Shanghai remain stable with steady trading, although it is occurring at lower levels than during the busy October buying season. Dealers are looking ahead toward the next holiday boost in the lead-up to the calendar New Year and the Chinese New Year in February. Traditional Chinese goods in the range of 0.30-1.10 ct., D-J, VVS-SI, GIA, EX cut are most in demand.
Hong Kong: Trading remains at sustainable levels, with good demand from Chinese buyers. There is improved demand for larger stones of 5.00+ ct., D, IF, VVS-SI, with shortages in these goods heightening the demand. Shortages in the market are also influencing buyers to go online more to find goods. There remains a struggle over prices and many offers are being tabled, with buyers holding firm.
Quote of the Week
As the pace of economic recovery may frustrate, one might look to emulate former U.S. President Abraham Lincoln, who said, “I walk slowly, but I never walk backward.”
Note: The full version of this report is sent to RapNet members on a weekly basis. To subscribe go to www.rapnet.com or contact your local Rapaport office.
Disclaimer
©Copyright 2009 by Martin Rapaport. All rights reserved. Rapaport USA Inc, Suite 100 133 E Warm Springs Rd, Las Vegas, Nevada, USA. +1 702 893 9400. This Rapaport Market Report is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report , are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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