The rough diamond market report: sizzling again

One of the questions most asked lately, and the one many do not have an answer for, is the reason the diamond market is so active these days. Unlike the mood during the second half of 2013, in the first couple of months of 2014 rough diamonds are in high demand, leaving many traders a little puzzled.

Some are talking of a concern that the banks financing the sector might decrease this financing or at least place stricter demands on receiving it, and buyers are simply taking advantage of the opportunity and buying now, when they can. This may be the issue on an individual basis.

A better explanation is that this is part of the cyclical trend of the rough diamond sector. For example last year, during the first De Beers Sight, we reported, “Demand for rough diamonds is increasing (…) and buyers are reporting mid-single digit premiums. Some of the DTC boxes are selling to the secondary market at a 5-6 percent premium.”

There are several reasons for the rise in prices early in the year. Firstly, demand is high after traders see the results of the December-November holiday season, leading traders to start the year with vigor and renewed hopes. Stocks need replenishing and then some, while others point to the need to balance inventories.

The typical annual trend is a rise in demand at the beginning of the year, followed by increased prices as the summer months approach, a hesitant start after the August vacations, and a decrease in prices late in the year. This, mind you, is a generality. The cycle is not immune to various economic factors and changing demands in the polished and retail sectors of the diamond pipeline.

During and following the first De Beers Sight in January, premiums for many goods increased and one rough diamonds trader said, “Prices are completely insane.” Standing on the selling side of the table, he was not really complaining, more happily surprised at the intensity of demand.

Following the second Sight, premiums are up by 1-2 percent, averaging 5-6 percent. Select Makeables 5-15 carats, for example, command a 6 percent premium on 60-days credit and the 5-15 carat Fine goods a 5 percent premium at 60 days. Among the ‘Western’ goods, the Commercial 5-15 carats are doing very well, and demand has pushed up paid premiums to 7 percent for cash payment.

On the higher end of the scale are the ‘Indian goods’, for which traders are paying an extra 7-8 percent above the De Beers list price on 60-day payment terms. Among the top selling items are the rejection goods (8%-9%. 60-days) and Makeable low, which is fetching more than 10 percent at 60 days payment. The strong demand for these goods are probably part of the annual ritual referred to as “carat balancing,” fitting inventories to the books before the end of the Indian economic year on March 31.

The 60-day credit terms, now a near standard in the sector that used to work on a cash basis only, reflects the dominance of Indian buyers in the secondary market – and their ability to stretch their financial might to the max.

The relatively steady premiums have a couple of meanings. First, it indicates that speculative buying is limited and that availability of money is constrained. According to a broker, this is also a sign that the market is healthy.

This last point needs some explanation. Many Sightholders expected De Beers to increase prices on the goods ahead of the second Sight, which they did not do. Usually, in this situation, there is a certain mental preparation, almost a willingness, to pay more. If De Beers does not raise prices, some expect that the willingness to pay more will go into premiums. The fact that this did not happen is that traders acted in a restrained manner.

On the downside, high premiums usually result in De Beers increasing their prices. This may happen in Sight three or four. This is expected to happen before the JCK Show in Las Vegas in the latest.

After suffering from serious financial difficulties in the recent past, speculation in the market is that De Beers did not increase prices at the February Sight to allow Sightholders to regain their footing.

The Sight, the first since Varda Shine’s departure, is estimated at $650 million.

Demand for Key DTC Boxes following February Sight

Source Idexonline