Often, the manner in which the diamond industry starts a year proves more influential than the weighted importance it gives the end of year holiday season. Granted, they are interconnected, with the level of restocking naturally dependent on retail sales and prices responding to the respective supply–demand dynamic.
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While that is certainly true for polished, there is a sense that the rough market has other factors to consider. Applications for goods in the next intention to offer (ITO) cycle, that begins on April 1, 2013, is one such factor. This week’s announcement by De Beers that its non-sightholder auction clients can apply to receive a sight in the next ITO is another.
The announcement serves as a reminder to sightholders that their supply is not as secure as they thought. They will have to consider their 2013 ITO’s as they buy expensive De Beers rough over the next three months.
Rough prices remain sightholders’ primary concern with De Beers goods currently said to be about 10 percent above the rest of the market. Speculation that De Beers is mulling a January or February price increase was therefore understandably met with unease. But sightholders, still struggling to profit from manufacturing, will be loath to reject over-priced goods while their future supply is being considered.
The past year has been especially tough for manufacturers as they have consistently bemoaned weak polished demand, high rough prices relative to polished, consequent low profit margins, if any at all, and often grudgingly accepted their contracted supply. Thankfully, sometimes they did not, forcing De Beers and ALROSA to “allow” them to defer their sight allocations in the second half of the year. Ultimately, market forces enabled a rough price downward correction during the third quarter.
But those rejections may yet come back to haunt sightholders in the next ITO cycle, that begins on April 1, 2013. De Beers spokespersons told Rapaport News that the company has the contractual right not to re-offer a particular box within an ITO if a sightholder has demonstrated no, or very limited, demand for that box over the course of a selling period. De Beers also has the right to terminate a supplier of choice (SoC) contract if a sightholder has demonstrated little or no demand for any of its ITO goods during a selling period, the spokesperson explained.
Such a prospect may therefore spur some inflated sightholder demand in the next three months, especially as they still face competition from De Beers non-sightholder auction clients applying for a 2013 sight.
Clearly, supply, and sightholder status, is subject to availability. Given De Beers low production strategy throughout 2012, one shouldn’t expect too much excess supply to be available for new sightholders. De Beers continues to stress it is experiencing shortfalls against the value of the ITO’s indicated at the start of the ITO period in April 2012. Furthermore, the 2013-2014 ITOs are expected to be smaller than those published for the current year due to reduced sightholder demand.
At this week’s sight, sightholders again noted expensive De Beers supply and accepted their boxes deeply concerned about their ability to make a profit off them, even as some margin has emerged in the polished market. De Beers has argued in the past that it is the nature of contracted supply to be comparatively expensive in a weak market and provide better value than other suppliers in an uptrend. (A full report on the December De Beers sight will be published early next week).
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That may be true. But for now, De Beers rough is considered expensive and has been for most of 2012. While ALROSA reduced supply in previous months and is holding significant inventory of rough, reports from last week’s ALROSA sale indicate some improved value in the Russian miner’s goods. In addition, demand at rough tenders increased since October and manufacturers are seeing better value there.
However, overall rough market caution persists and dealer demand is weak, partly stemming from the lack of manufacturing during November. Indian factories, which are now slowly ramping up post-Diwali production, have enough goods in backlog to satisfy their immediate needs. But it seems their bigger concern is their prospects for January, as they try to salvage a profitable start to 2013.
They’ve been encouraged by recent signs of polished stability on reports of satisfactory U.S. holiday demand. But that has also fueled speculation regarding a potential De Beers price increase. Sightholders responded that if an increase is implemented they should leave goods on the table. But it is unlikely they would dare reject goods at this stage as they consider the year ahead, and having done so just a few months ago.
Even at a time when demand is weak and profitability low, competition among manufacturers to source rough diamonds is as intense as ever. Of course, these opposing trends reflect the short- and long-term aspirations of businesses within the manufacturing sector.
However, to enable a successful 2013, manufacturers will need to better manage their insatiable pursuit of long-term rough supply. Given the length of the current downturn, manufacturers may be better off focusing on short-term market dynamics as a means to ensure the long-term sustainability of their businesses, rather than long-term supply at the expense of seemingly short-term profits.
Too often they are sold by the promise of rising diamond prices with an ever-widening gap between high rising demand and subdued supply. While that may effectively sell the industry’s return to potential investors, it means little if such gains are achieved at the expense of manufacturers’ profit. The biggest challenge for manufacturers in 2013 will undoubtedly be how to ensure sustainable profit margins, much as it was in 2012 with little success. The first test will present itself at the first few sights of the year.
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