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Holding Rough

Apr 22, 2010 4:50 PM   By Avi Krawitz
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RAPAPORT... The two largest diamond mining companies, ALROSA and De Beers, have released a series of data in the past two to three weeks that have left us scratching our heads.

Between the two, some $2.5 billion worth of rough came to the market during the first quarter as manufacturers, starved of manufacturing in 2009, restocked and ramped up demand. Even ahead of next week’s Diamond Trading Company (DTC) sight, and with prices rising, rough demand is still strong as shortages are reported from the market.

Diamdel, De Beers subsidiary for non-sightholder sales, reported “broad based participation from all customer groups and across all markets during this first series of auctions in 2010.” Sightholders, encouraged by that trend, appear to be buying rough to take advantage of the high premiums they can attain in the market, or to satisfy their own growing manufacturing needs. Meanwhile, ALROSA, which sold an astounding $1 billion worth of rough in the first quarter, seems set to repeat this feat in the current quarter; the miner expects to sell $300 million worth of rough in April.

At the same time, however, De Beers appears to be holding back production while Russia’s state repository, Gokhran, is holding back its vast stockpile of ALROSA goods. And that’s the curious part. In the current rough market environment, wouldn’t a mining company bring as much stock as it could to the market to take advantage of the strong demand?

While parent company Anglo American reported that De Beers production fell 31 percent, compared with the fourth quarter of 2009, to 7 million carats in the first quarter of 2010, it explained that “heavy seasonal rainfall in southern Africa imposed operational challenges.” A skeptic might question whether the same seasonal effects were also apparent in 2008 and 2007, when De Beers first quarter production averaged the normal 11 million to 12 million carats. Were operations really impacted enough to cause a production decline of 3 million-plus carats of diamonds between the fourth quarter of 2009 and the first quarter of 2010?

As we have documented, De Beers emerged from the recession with a lot on its plate (see “The De Beers Waiting Game,” published on April 15, 2010). Most significantly, it entered 2010 saddled with debt, after sales fell 45 percent to $3.24 billion in 2009 and production halved to around 24.6 million carats for the year. Again, we wouldn’t expect a company in such a position to hold back production when rough demand is so strong. It also wouldn’t necessarily delay on negotiating terms with potential clients in such an environment, as it has done.

Similarly, ALROSA, which is also burdened by high debt, sold at least $1 billion worth of diamonds to Gokhran, which has pledged to continue holding back from the market.

In addition, there are rumors, probably false, that indicate that DTC may raise prices at next week’s April sight, even in the absence of “any further major changes in market conditions,” which, as it explained just two months ago, would be the catalyst for any short-term increases. Perhaps the ongoing demand observed in April represents that unforeseen market event.

Regardless of expectations, true or otherwise, the overriding trend for rough prices remains a clear and sustained upward shift. And this leaves us with another question: What is the effect of the two companies, which control 60 to 70 percent of global production, producing less and charging more?

In a purely competitive market, were both De Beers and ALROSA to maximize sales by throwing as many diamonds as profitable at the industry, the result would be a softening of prices. Both companies would ultimately suffer as a slump in demand would follow.

Based on the deep desire for rough currently emanating out of India, Belgium, Israel and the Far East, as long as diamonds remain artificially scarce miners can be assured of high rough prices and ever higher profits. Whether or not these high prices are sustainable will depend on polished demand. For no matter how skillful the miners are in manipulating the supply of rough diamonds, the ultimate arbiter of prices is and will always be demand.

Note: This article is an excerpt from a market report that is sent to RapNet members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office. The writer can be contacted at avi@diamonds.net.  

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Tags: Avi Krawitz, Alrosa, Anglo American, Auctions, Avi Krawitz, Belgium, De Beers, Diamdel, DTC, Gokhran, India, Israel, Manufacturing, Mining Companies, Production, Russia, Sightholders
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creating a bubble
Apr 23, 2010 11:07AM    By aayush
they are holding back all the rough and rough production because as the demand rises and economy recovers the prices will rise from the lack of supply. thus giving their existing goods a higher value as time progresses.
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