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De Beers November Sight Slumps to Estimated $70M

Nov 11, 2015 3:33 AM   By Rapaport News
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RAPAPORT... De Beers recorded one of its smallest ever contract sales in November as last week’s sight closed with an estimated value of $70 million. The rough diamond supplier kept prices stable and enabled extra flexibility due to the slump in sightholder demand.

“It was a small sight as we expected because of the Diwali holidays,” said David Johnson, head of midstream communications for De Beers. “We recognize that there are challenges in the industry and that we’re still in a destocking period. So our focus was to be flexible to meet sightholder needs.”

Among the measures taken, sightholders could defer their entire November allocations to December, or bring their December supply forward. They could also reject 20 percent of their box instead of the usual 10 percent so–called “buybacks.” In addition, sightholders could apply for goods that were not in their initial intensions to offer (ITOs), a mechanism referred to as “ITO swaps.”

Most took the deferral option and many didn’t attend the sight which one Israeli sightholder referred to as a non-event. An Antwerp-based Indian manufacturer noted that businesses were already closing for Diwali so there was no real point in spending three-to-four days in Gaborone.

He reported that many Surat-based factories were closing for the full month rather than the usual three week Diwali break due to the drop in market activity. However, the sightholder said he expects rough demand to improve in December once factories have resumed operations.

Different in December?

“Manufacturers stopped buying because they knew their factories were closing so they were polishing whatever old stock they had,” the sightholder explained. “Now, there’s some concern that manufacturers don’t have rough stock and will need to buy just to restart production.”

Consequently, the December sight is expected to be larger, particularly since sightholders deferred most of their November allocations to next month. Johnson explained that while applications for December will be filed in the coming week, the company will revert to its standard deferral policy next month – allowing the deferral of one box per band (selection of boxes) from one sight to the next every six months. De Beers will maintain the option to do ITO swaps in December.

Still, sightholders are expected to maintain caution until they’re able to fully assess their requirements after the holiday season. One southern Africa-based sightholder suggested that De Beers will have to rethink its policies in January since it will be stuck with a “truck load of diamonds” following the flexibility allowed in November and December.

However, he and other sightholders that spoke with Rapaport News urged De Beers to keep supply low and prices stable in the short-term as a means to support the polished market.

Don’t Tell Polished About Rough

Sightholders – almost unanimously – said they don’t want to see a sharp rough price reduction even though they consider De Beers prices to be too high and unprofitable. “If De Beers cuts rough prices, polished prices will drop further and we’ll never get the two markets aligned,” a sightholder said. “We need to deal with the market from the demand side. Let the polished meet the rough in terms of pricing instead of the other way around because otherwise we’re on a slippery slope. We have to support the polished market.”

De Beers reduced prices by 8 percent to 10 percent in August, which sightholders said affected polished market sentiment as buyers anticipated similar declines in polished prices. The RapNet Diamond Index (RAPI) for 1-carat, GIA-graded diamonds has declined by approximately 4 percent since the beginning of September.

Still, sightholders want to see better value in their De Beers boxes. A Surat-based sightholder encouraged the mining company to find ways to reduce prices more subtly so that it isn’t so obvious to the polished market. They can change their assortments or make slight adjustments to the list price, he suggested.

He reported that manufacturers are finding better value from outside sources, including at the auctions and tenders, as well as other bulk suppliers such as Rio Tinto, Dominion Diamond Corporation and in Angolan goods.

Unsealing Boxes

Still, De Beers and ALROSA account for the bulk of rough on the market and both companies have reduced their supply significantly in the second half of the year. Consequently, rough trading on the secondary market has slumped with very few goods coming to the market this week and most Indian businesses on vacation for Diwali.

One sightholder suggested that De Beers took measures at this sight to discourage the trading of boxes and thereby encourage stronger manufacturing after the break. For example, he noted that sight boxes were supplied unsealed, which limit sightholders ability to sell the box sight-unseen on the secondary market.

“Sealing the boxes brands it and makes it like a commodity because the consistency is known and it can be freely traded over the phone,” he explained. “Once it is unsealed, the sightholder can change the assortments or take goods out, and your buyer on the secondary market doesn’t know if the goods have been tampered with.”

Johnson stressed that De Beers decision to unseal the boxes came at the request of sightholders and was part of its policy to be more flexible this sight.

Year to Date

Either way, rough market activity is expected to remain muted through to the end of the year and it appears that both De Beers and sightholders have all but written off 2015.

De Beers rough sales have declined an estimated 42 percent for the year-to-date in 2015 and are expected to fall well below $4 billion for the full year. The company registered sales of $6.5 bill in 2014.

Sightholders expect it will take at least another two months before the market turns and rough demand trends back to normal at the sights.

“The amount of rough that has been sold this year is very low compared to last year, but retailers are still selling,” said one sight observer. “So if the mining companies wait until the end of January to give more value, the market will be more ready because the retailers will need more goods after Christmas.”
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