Rough buyers are complaining about the high prices at the
July sight, saying that, with the market the way it is, they’re going to lose
money on everything they just bought. A major Diamond Trading Company (DTC) client said, “If the producers
don’t come down with their prices, their customers are all going to lose money.
I think it’s fair to say that across the board, we’ll have to give up 5 percent
or 10 percent of what we just paid. And only if we agree to those losses will
manufacturers have a chance of manufacturing something that’s sellable in the
current pricing structure. The market isn’t strong enough to absorb the current
prices. I think it’s clear that the rough market did overshoot, and that it
absolutely must come down before stabilizing again.”
Paying too much for DTC or ALROSA boxes that are overpriced
with respect to current market conditions is something that can happen once in
a while on a couple of boxes, but if it becomes a long-term pattern, there can
be dire consequences. That is exactly what the banks want to prevent from
happening.
ROUGH OVERHANG
Erik Jens, chief executive officer (CEO) of the
International Diamond & Jewelry Group (ID&JG) of ABN AMRO, explained,
“It is true that the overhang in rough inventory is a drag on the earnings and
capital of some major players. We have witnessed that before. It is also true
there is an overhang of finished goods due to the weakening demand lately. So
there’s a bit of a catch-22 in the market. The midstream of the value chain is
facing an increasing profit squeeze because supply and demand are being driven by
different dynamics. Supply is driven by long-term contracts with volumes and
prices determined by producers, while purchasers — the sightholders — are driven
by their need for a long-term sustainable supply determined in the end by
consumer demand.”
Pierre De Bosscher, CEO of Antwerp Diamond Bank, added that
“We contacted and have been contacted by customers recently who told us that
DTC and ALROSA boxes were overpriced, leaving no profitability for rough
dealers and possibly a marginal one for manufacturers. We can accept temporary
losses as a result of market fluctuations, but only if the medium-term outlook
is favorable. As this is not the case today, we are suggesting that producers
reduce supply and improve assortments.”
HOW LOW CAN YOU GO?
In response to the pricing compliants, Louise Prior, DTC’s
head of sightholder services and communications, replied, “We generally take a
long-term view on our pricing in light of prevailing and forecast market
dynamics. For this reason, we may not price at the top of the market when
trading conditions are positive, and we may not price at the bottom of the
market when times are more challenging. We do not deny that diamond pipeline
trading conditions are difficult at the moment, but we nevertheless believe our
prices reflect the fair value of our products.”
TALE OF TWO HALVES
“The first half of 2011 was very profitable for our
customers, and during the second half, prices rose and they obviously lost
money as there’s a limit to price elasticity,” explained De
Bosscher. “Premiums paid in the B2B segments could not be passed on to
consumers. However, until July 2011, they had a profit cushion, which enabled
them to end up the year with profitability. Unfortunately, profitability has
been an issue since day one of 2012. If it goes on like this, our customers’
capital base and their solvency ratios will be impacted, which is very annoying
because those two figures are critical in the framework of the price volatility
we’ve been seeing since 2008.”
Jens said the instability in the diamond pipeline is
understandable. “Producers are confronted with increased costs and changing ownership,
giving different dynamics on the supply side. At the same time, purchasers are
confronted with the new reality of smaller margins, increased demand for robust
financials and transparency. These structural developments will force change and
we at ABN AMRO will support our clients in going through that change to ensure
their long-term profitability based upon what we believe will become a different
purchasing behavior.
“Rough prices will probably stay around current levels,”
predicted Jens, “and here and there, we will see some price adjustments in the
assortment. Most probably, prices of finished goods will increase over time in
line with some economic growth acceleration in India, China and the U.S. once
inventories have been reduced. In the meantime, purchasers will need to become
financially more robust and more transparent in order to continue to have a
healthy balance sheet, stronger bottom line and better financial ratings if
they want to continue their financing arrangements. This will lead to some
consolidation in the market, as well as further vertical integration in the
industry.”
Banks do not plan to just wait and see. “We informed our
customers that in light of the July sight, we would be more strict, and indeed,
for the August sight, it’s our intention to question our customers on the
profitability of their businesses before giving credit, ” concluded De
Bosscher.
The Marketplace
Polished
- Demand is a bit slow across the board.
- VVS is very slow but it’s not clear whether it’s the
summer vacation season or the pricing that is having a negative impact on
sales.
- Overall, everything lower end is selling.
Article from the Rapaport Magazine - August 2012. To subscribe click here.