RAPAPORT... The recent improvement in both rough diamond trading and prices in the secondary market should raise some eyebrows. While it has helped inject additional confidence into the market, it remains unclear whether this momentum will be sustained.
The current uptick in rough demand has resulted from perceived polished shortages with the short-term strategy of rough dealers not taking into consideration the seasonality of current polished demand or the possible influx of additional rough to the market.
Dealers ought to recognize that demand is being driven by a temporary surge in Far East polished buying ahead of the Chinese New Year that begins on February 10 and a relatively slow Indian manufacturing restart after the Diwali break. In addition, the apparent polished shortages may be explained by the time lag required to convert rough into polished as rough goods that were kept off the market in the second half of 2012 would otherwise have already been in the mix as polished.
Assuming it takes around three months for rough to pass through the cutting, polishing and certification process, any current polished shortages emanate from larger manufacturers reducing their rough buying in July in response to high priced De Beers and ALROSA goods, while the Indian manufacturing sector basically closed in November for Diwali.
Polished dealers have noted a surge in Far East demand for 0.30-carat to 0.90-carat, VS-SI goods, with nice-make goods becoming increasingly scarce. Similar feedback was received from participants in the Rapaport Chinese Buyers Group attending this week’s Antwerp Diamond Fair. “Belgium does not have a lot of Triple Ex and Double Ex goods at the moment,” one buyer told Rapaport News.
But one expects those shortages to ease in the next few months as more goods are expected to come to the market. Rough buying improved in the fourth quarter with the De Beers November sight being the largest of the year. In addition, Indian manufacturers have started to increase their factory output.
India’s rough diamond imports by value rose 31 percent and by volume by 52 percent year on year in the fourth quarter. Similarly, a quick look at Belgium’s rough trade indicates that while rough imports and exports fell in 2012, they rose significantly in the fourth quarter.
In fact, while production fell in 2012, the shortfalls may have been slightly overstated due to the market’s focus on the top two suppliers.
De Beers production fell 11 percent year on year to 27.875 million carats in 2012, while its rough sales fell approximately 12 percent to $5.7 billion, according to Rapaport estimates. ALROSA maintained steady production of around 34 million carats for the year but sold about $230 million worth of rough to Gokhran instead of the market.
However, while these two companies account for around 55 percent of global production by volume, other companies such as Rio Tinto, Petra Diamonds and Harry Winston conversely increased their production during 2012. Rapaport estimates that global production in fact fell by just 2 percent to 5 percent during the year.
Therefore, instead of shortages, talk of supply shortfalls at the De Beers sights are measured against the company’s initial forecasted supply made a year ago, rather than what is currently required by the market.
Rather, there may be shortages in specific, in-demand goods. As one De Beers executive told Rapaport News, “We can’t choose the type of goods that we mine.”
Overall, rough supply in 2013 is expected to be about in line with 2012 with only modest price increases during the year. Analysts at Bank of America Merrill Lynch expect rough prices to rise 2 percent this year, having declined about 14 percent in 2012.
Their prediction sounds reasonable given expectations in the polished market, leaving forecasts of a sustainable rough price hike the subject of speculation. After all, little has fundamentally changed from last year.
Polished markets are stable and not booming. The Chinese New Year wholesale rush has already begun to subside. Jewelry retail inventory levels in both the Far East and the West will be better assessed soon after the New Year, but are unlikely to signal a significant increase in polished diamond buying.
The Chinese economy, while forecasting improved growth in 2013, is still hesitant. Likewise, the U.S. economy continues to give mixed messages with the Commerce Department reporting this week that gross domestic product (GDP) fell 0.1 percent in the fourth quarter – its first contraction since the 2008-09 recession – but consumer spending, up 2.2 percent, was a bright spot. Pending fiscal cliff negotiations and tax increases may still impact jewelry spending but the recent surging stock markets may yet spur wealth and spending on diamonds.
That has left the diamond market in an edgy state as traders don’t know where or how demand will evolve.
So while dealers are looking at the market and seeing shortages at the moment, they’re afraid that once Chinese demand settles down after the New Year, there might not be any more shortages.
Therefore, the diamond industry needs to be careful regarding any price movements at this time. If anything, the polished market doesn’t appear to be in the mood to play catch up with the rough – certainly manufacturers don’t. Any spurts in rough demand are therefore another testimony to the imbalance between the rough and polished markets.
That disparity is created by the expectation that prices must go up in the future given that long-term diamond supply is limited to a few new mines and even fewer companies operating them. As suppliers curb production and dealers hold back rough inventory, price increases become a self-fulfilling prophecy.
However, such increases based on long-term expectations can easily be destroyed by shifts in short-term demand. And there is still a fair bit of uncertainty surrounding polished demand. If anything, dealing with short-term volatility has become the industry’s new long-term strategy.
So while it’s too early to talk of a rough bubble, it’s also premature to expect further rough price increases in the coming months. On the contrary, the market might pull back a little. After all, sustainable pricing requires sustainable demand. And the diamond market is not quite sure it’s at that point just yet.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz
This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.
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