Are Bullish Rough Diamond Sales Overly Enthusiastic?

Rough Market
04/02/2016 16:28

Diamond industry analyst Avi Krawitz addresses the bouyant rough diamond sales by De Beers and ALROSA in January, but notes that this has led many to wonder whether it is sustainable. To wit, does the seemingly improved sentiment truly reflect rising consumer demand, or is it another case of overreach on the part of manufacturers? For while "sightholders were quick to point out that the market mood is currently “much more positive,” it is important that stakeholders are aware of the factors that have underpinned the sudden turnaround in rough diamond demand."

De Beers sales 

De Beers sold $540 million of rough diamonds in January at the first of its 10 sales cycles, compared to $248 million recorded in December, the last sales cycle for 2015, and approximately $486 million in January last year, notes Krawitz. “Overall a better than expected number as the year started with shortages of rough,” wrote Des Kilalea, an analyst at RBC Capital Markets. “The issue from here will be whether the enthusiasm in the rough market will be sustained given slow growth in China and a strong U.S. dollar, as well as still tight credit conditions.” Krawitz writes that, "there is a bit more liquidity in the market ... however it is still relatively tight particularly as European banks have reduced their credit to the industry. Instead, industry players explained the improvement in rough demand was driven by a lack of goods on the market." Good demand for rough in most categories in January, including very small goods and for larger sizes where there are no notable shortages suggests demand is also factory-driven, which means that manufacturers simply need rough to keep their factories churning as they cannot afford to lose any more workers than they did last year. Sightholders also noted De Beers rough held better value in January after the company reduced prices by an estimated 7 to 10 percent.

ALROSA sales

"Some argue," writes Krawitz, "that sightholders would have bought [De Beers] goods even if prices remained stable – as they did at the ALROSA sale. The Russian miner reportedly extended its sale for an extra week in light of the strong demand and was set to sell about $500 million worth during the monthly cycle – double its original plan, according to Bloomberg. It doesn’t quite make sense that manufacturers are currently buying the ALROSA rough at the same price they rejected it in the fourth quarter ... One must wonder if the ALROSA rough ... are profitable at this point. It seems that manufacturers are betting polished prices will continue to rise in the coming months to enable that profitability on rough bought from ALROSA and at the auctions in January. Therefore, there is some concern that manufacturers are falling into a familiar trap of speculating on short-term gains in lieu of long-term sustainability."

Concerns

"Sightholders appreciated measures taken by De Beers to reduce prices at a time when the company would likely have sold the same volume regardless. The decline will help manufacturer profitability in the short-term." The concern is whether, "that new polished supply - manufactured from the January rough - will exceed demand when it reaches the market in three to four months. Much hinges on consumer trends during that time ... Perhaps, polished demand will improve as U.S. retailers place larger orders to replenish stock and Chinese jewelers will return to the market in a meaningful way after the Spring Festival. Few are betting on the latter." In short, Krawitz warns that, "the increase in rough demand was more likely driven by factory-demand and polished shortages than current levels of consumption. That may be okay for the time being and the improved sentiment might stimulate some trading momentum. But the industry must consider its position six months from now when new polished supply may exceed demand." He concludes that, "Over-enthusiastic manufacturers would be advised to exert similar caution in these early stages of 2016, even as they benefit from improved value in the rough market."