RAPAPORT... The downward spiral that began in October appears to have leveled off and diamond traders have grown in confidence, bringing price stability and more transactions to the major cutting centers. The question on everyone’s mind is whether the uptrend will be sustained in the long term, or if further sharp price declines will appear down the road.
The rise in confidence mirrored two trends evident since February: stability in the market for rough diamonds and improvement in the financial markets.
Rough Edges On Diamantaires began to report shortages for certain categories of rough diamonds as early as February and this trend strengthened and became more widespread in the months that followed. The swing in demand has been evident in the more upbeat rough diamond sales around the world.
One South Africa–based tender house representative, who requested anonymity, noted that there was a significant spike in interest for rough after the Passover and Easter holidays. “Dealers from all over, who we hadn’t heard from in six months, have suddenly contacted us again,” he said. The representative reported that prices in April rose around 3 to 5 percent across the board “from the new low,” with 10 to 25 percent increases in certain categories. Strongest demand has been for 3- to 5-carat rough diamonds, which yield 0.50- to 1.00-carat polished stones, while rough larger than 10 carats remains very quiet, he said.
A better mood was also reported at the De Beers Diamond Trading Company (DTC) April sight, where sales doubled from the previous month, albeit still at one-third the estimated value from a year earlier. At the same time, Debswana, the De Beers mining subsidiary in Botswana, renewed production at its major mines, and forecasts for global output in 2009 became clearer. Sources at De Beers operations in Botswana and Namibia have estimated a 50 percent drop in production in 2009 — significantly more than initially anticipated — while ALROSA said it expects output to fall by about 20 percent.
The biggest threat to stability in the rough market remains the possibility that entities such as the Russian and Angolan governments, which have been buying up rough through the economic downturn to sustain their respective state-run companies ALROSA and Endiama, will “dump” their newly acquired stockpiled diamonds on the market too quickly. This would create an oversupply of rough diamonds and impede the recovery of rough prices.
The Bullish BearThe second, and no less important, influencing factor in the improved mood in the diamond industry has been the upswing in the financial markets. The Dow Jones Industrial Average (DJIA) rose 8.5 percent in the month that ended April 20 while the NASDAQ was up 8.7 percent. Similar increases were seen in markets in Europe and Asia.
Analysts at Asian Development Bank (ADB) noted that “Asia’s capital markets are starting to stabilize and the region’s relatively resilient economies should help them recover as the global crisis ebbs and investor appetite returns.” The bank warned, however, that the road to recovery for the region’s markets will be long and hard “given persistent uncertainty about the length and severity of the current economic downturn.”
The continued stream of negative economic data out of the U.S. served as a similar reminder that a real upswing should not be expected anytime soon. The improved mood in the markets nevertheless indicates there is hope that some stability can be maintained. “Despite disappointing economic news, consumer and manufacturing sentiment readings improved sharply in April, on optimism that the worst may be behind us,” wrote Standard & Poor’s analysts David Wyss and Beth Ann Bovino.
Of course, time will tell if the increases in March and April were merely a “bear trap” and the market’s way of capitalizing on investor hunger for good news, or the start of an actual recovery.
Prices Holding SteadyThe diamond industry saw a clear spike in activity in March, but was inconsistent through April as dealers in Ramat Gan and Antwerp took vacations over the Passover holiday. The start of the wedding season in India and China increased demand in those markets. In addition, many recognized the contagious effect that “good mood” has on business. The optimism that started in the Far East — evident at the March Hong Kong show — crept into markets across the globe.
Demand remains strong for 0.50- to 1.25-carat polished diamonds, while demand for 5 carat and up has tapered off. The bridal market continues to stimulate trade in the U.S., accounting for an estimated 80 percent of the retail market there. Triple EX diamonds are still hot in the U.S. and China. Local demand in India’s polished market remains healthy, while a slow stream of Far Eastern foreign buyers has returned to Mumbai.
Most dealers attributed the stronger trading levels to the price stability evident in the market recently. The trend seen in the past six months indicates a direct correlation between price volatility and market confidence. When prices spiraled in the fourth quarter of 2008 (see graph), trade levels dropped accordingly. Similarly, as prices have shown stability since around mid-February (as shown in the graph), confidence has grown and the level of trade has increased.
Average price changes on RapNet held relatively steady during the period March 19 to April 19, with some downtrend evident.
The negative numbers, although marginal, should serve as a reminder that the diamond market is equally vulnerable to the “bear trap” the financial markets could so easily fall into, particularly given the uncertainty about the length and severity of the recession. For now, however, as demand for rough reaches toward healthier levels and as Wall Street cracks a smile, the diamond industry can rightfully enjoy its new lease on life… regardless of whether the upturn is short term or more sustainable for the long term.
Article from the Rapaport Magazine - May 2009. To subscribe click here.