IDEX Online rough diamond market report: dreary summer

There is a passage in the Talmud that says, “More than the calf wants to suckle, the cow wants to nurse.” Today’s rough diamond market is a good example of this:the miners want to feed manufacturers rough more than the manufacturers want to buy it. As a result, goods are trading at low prices and many goods are left unwanted.

An estimated 5-10 percent of the goods by value were left on the table at the last DTC Sight, because Sightholders found their prices too high or that they could not find buyers for them on the secondary market.

This means that the secondary market, which usually pays more for the goods, was unwilling to pay much more after the last Sight. Currently, De Beers’ prices for rough diamonds are generally considered high. As one insider said, “Not enough goods were left on the table.” By that, he meant that if Sightholders turned down more goods, maybe it would have been better understood that prices are too high.

The market is clearly reacting to this. Both Antwerp and Mumbai saw a reduction in rough diamond trade in May compared to April. Rough diamond imports into Antwerp dropped 26 percent and exports declined 20 percent.

In India, imports fell more than 14.5 percent and exports by nearly 44.5 percent. Doesn’t that tell a story? Yes it does.

If trading in the secondary market has a large influence on DTC’s price-setting policies, and it seems so when prices increase, then the low premiums Sightholders were paid should lead the way to price declines.

Following the June Sight, estimated at $550 million after goods were returned, trading was limited and at very low premiums, especially for the cheaper goods. Even the most popular boxes did not see high demand.

For example, Crystals 2.5-4 cts were in low demand, with offers for the box standing at 2 percent below DTC list price, according to rough diamond brokers Bluedax.

Low premiums

Many boxes were selling for credit, instead of cash. Select MB 2.5-4 cts sold at a 4 percent premium for cash payment, a 5 percent premium at 30 days credit and 6 percent for 60 days credit. Cubes -7+5 sold for a 1 percent premium at 120 days, the kind of paying terms that U.S. retailers got prior to the 2008 crisis.

Following are some more items:

• Cubes 3 grs +7 sold at list +1.5 percent cash
• Cubes 4-8 got a 4 percent premium for cash payment
• Collection 2.5-4 cts 3 percent at 60 days credit
• MB Clivage 3 grs +7 at list for 60 days credit
• MB High 3 grs +7 sold for cash at list
• MB High -7 +3 at a 4 percent premium, 60 days credit
• MB Low -7+3 at list, 60 days credit
• Select MB 5-14.8 cts sold at a 2.5-4 percent premium for cash payment

If a reminder is needed, here it is – a small premium is not translated into a profit. Sightholders pay their brokers a 1 percent fee and the DTC another 1.5 percent for Value Added Services (VAS), commonly referred to in the market as the “DTC Tax,” on top of the price of the goods. This means that anything sold for less than a 3-percent premium is a loss.

Therefore, an item that sold at list price for 60 days credit is a triple loss – the broker’s fee, VAS and the cost of money were an outright expense, AKA, a loss. Sightholders who are generally willing to pay just to look good to their sources of oxygen do this type of trade: offloading goods to generate a turnover for the bank, look capable to De Beers.

It is not clear if DTC really increased prices at the last Sight. The box composition changed somewhat because of availability. The consensus is that prices were somewhat adjusted.

Alrosa, on the other hand, did increase prices. According to an estimate by Dudu Harary and Nurit Rutman, co-founders of Bluedax, Alrosa’s prices increased on average by about 3 percent.

Botswana, BHP, Rio – Difficult to do bBusiness

All agree that the level of profitability remains near nil, that the price of rough diamonds is too high and polished prices are allowing the industry to hardly squeeze out a minimal margin. This is already old news. What’s compounding this is the uncertainty.

Manufacturers are not altogether happy about the move to Botswana. They fear greater government involvement influencing DTC policies. A recent meeting in London that included Sightholders and Botswana government officials left DTC’s clients with even less confidence about the move.

Dominion (still known as ‘formerly known as Harry Winston’) decided to kill the BHP Billiton tender system, and dismissed many capable people on BHP’s Antwerp team. The decreased transparency is going against the grain of what the banks and society are looking for, although many traders prefer a contracted supply system to tenders. For some reason, there is a level of wariness among traders relating to Dominion and its team. This is something that the company needs to address, and sooner is better than later when it touches reputational issues.

Outlook

Decent demand for jewelry and loose polished diamonds at the recent Las Vegas show should translate into a certain increase in diamond manufacturing. Even if that translates into an increase in demand for rough, prices are already high enough – and retailers are not paying more for polished – to keep the lid on prices, at least in the short term.

Longer term, manufacturers and wholesalers need to educate retailers about fluctuating rough prices and the need to increase prices of polished – on occasion. Retailers learned how to accept this when it came to gold. And there is no reason why retailers won’t accept this for diamonds too – especially if this is not abused by manufacturers. This can be easily addressed by transparency in polished diamond selling prices.

Demand for Key DTC Boxes following June Sight

Source Idexonline