Even-Zohar’s Diamond Intel: Rough Prices Must Fall 15% to Restore Profitability

11/12/2015 00:09

Deviating from his standard m.o., in his latest "Diamond Intelligence Briefing" Chaim Even-Zohar (CEZ) gives De Beers CEO Phillipe Mellier center stage by laying out his argumentation from his Dec. 8 address to Anglo American's top executives and shareholders about the current situation and future prospects of the diamond giant. "It was 'the right speech'," writes CEZ, "It inspired, it gave reasons for optimism." Specifically, Mellier explains that the current midstream crisis is not a result of a crisis in the consumer markets, but of overstocking in the midstream. This is a result of lower consumer demand in Q4 of 2014, combined with a sudden release of polished diamonds that had accumulated in the grading labs, flooding the market and lowering polished prices. This seems logical. 

Mellier also went to great lengths to explain how De Beers is working to alleviate the situation with their "unprecented price flexibility", allowing clients to buy only what they need while lowering rough prices at a rate higher than polished price declines, showing their commitment to midstream profitability. He emphasized De Beers' new commitment to transparency - a positive, if double-edged sign to the banks - and their efforts to increase output efficiency - a positive sign to shareholders. And lastly, currency volatility has made the situation appear much worse than it actually is. CEZ listens patiently, but some editorial commentary is in order.

Five editorial remarks

CEZ brings up five points: 1) China's crackdown on luxury spending is for real, and its market will not bounce back so quickly; 2) "Diamond companies are simply not buying rough because the goods are not profitable to manufacture"; 3) it is questionable whether the industry can digest the rough supply at current prices, with CEZ suggesting a 5-10% corection in rough prices in order to move it; 4) Mellier manipulates statistics to be able to claim that rough prices have declined more than polished, and; 5) a 15% downward correction of rough prices is needed to return some profitability to the industry and jump-start replenishment of rough supplies.