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Rough Supply Signals Shift in Balance of Power


Dec 15, 2016 4:22 AM   By Avi Krawitz
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RAPAPORT... Profit is the new turnover in the diamond trade. As retail inventory levels continue to shrink due to recession-driven efficiencies, the trade has had to change its mindset. No longer can diamantaires play the high-volume production game: they have to do more with less.

It seems 2015 provided the wake-up call which enabled a more profitable trade this year. Some credit, though not all, can be given to the mining companies who carefully limited supply this year.

Still, with the final sight of the year now over, De Beers sales rose an impressive 36 percent to about $5.83 billion in 2016. While in the past that would have triggered the uncomfortable sense the “syndicate” is profiting at the expense of the trade, this year feels a little different.

The disproportionate correlation between rough diamond prices and their polished counterparts was less extreme than in previous years, even as it still exists.

De Beers rough index fell 5 percent in 2016 following a 15 percent correction last year. Meanwhile, polished prices, as measured by the RapNet Diamond Index (RAPI™) for 1-carat diamonds, dropped 2.8 percent in the 11 months to November, after firming 5.8 percent in 2015.

Rough dealers and manufacturers remain cautious, noting De Beers supply offers less value than other sources. The average price may have gone down, or was stable, but assortments were changed driving up box values. Online rough broker Bluedax shows premiums for trading boxes on the secondary market shrunk to an average 3.5 percent after the December sight, whereas they were 7.1 percent in February.

Either way, the fact that average rough prices fell at a faster pace than polished in the past two years is encouraging.

The mining companies do appear more mindful of their clients’ ability to profit. Two years ago, they would have driven up rough prices in such a market environment. And manufacturers would have paid the premium out of fear they might lose the guarantee of supply, and the ability to maintain high volumes of polished production.

Things changed in the last 18 months as manufacturers refused to buy overpriced rough in the second half of last year and mining profits slumped as a result. They're treading carefully, recognizing manufacturers won’t take goods at any price. It seems the balance of power in the miner-manufacturer relationship shifted to a more even state.

The last two De Beers sights of the year were notably small at $476 million and $418 million apiece. This at a time when sightholders would otherwise be preparing their production for the replenishment of stock by retailers anticipated in the first quarter. That’s partly due to “demonetized” Indian demand. But more importantly, De Beers, ALROSA and other miners emerged from 2015 determined to avoid a repeat of the rough bubble burst of 2015.

Frankly, it’s long overdue. The old model of pushing more goods to manufacturers, and subsequently to the market, was never sustainable. In today’s frugal retail environment, market efficiencies are finally trickling down to the midstream. Let’s hope it continues as profitability is still tight and there’s yet a way to go. The diamond mining and manufacturing sectors will surely profit from this more balanced approach.

Graph sourced from De Beers annual reports and 2016 provisional monthly sales.  
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Tags: Alrosa, Avi Krawitz, De Beers, diamonds, Jewelry, mining, Polished Diamonds, Rapaport, Rough Diamonds
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