Is Reduced Supply of Rough Diamonds A Positive Sign?

Rough Market
21/03/2016 11:46

Diamond industry analyst Ehud Arye Laniado analyzes the current state of the industry after hearing that ALROSA's third sales period of the year is currently estimated at $300 million-$350 million, about half of what De Beers supplied in February. The key question is whether the $3 billion in rough diamonds already sold by the major miners in the first quarter of 2016 genuinely indicates increased demand and that the market is getting back on its feet. Thus far he has concluded it does not. He has found no justification for entire supplies of run-of-mine production to be sold rather than specific items selected to address niche shortages. Thus, despite optimistic voices arising from elsewhere, he believes the "market is not yet out of the woods" and sees signs of declining demand - such as "a cooling down in premiums paid for De Beers’ boxes following Sight 2" and less willingness to pay premiums for ALROSA's March goods. This, however, seems to be a positive development - namely, companies are not buying rough because they have excess credit.

"The decline in credit utilization in India is important," writes Laniado. "We received reports from market sources that mid-size and small companies were maximizing their bank credit and loans to the limit while larger firms were reducing their dependency on credit. Now we see that credit is down for everyone. The banks in India woke up to the reality of their near endless supply and found themselves knee deep in non-performing accounts and fears that some money would not be returned. This combined with the depreciation of the rupee, has seen credit supply in India recede. If the picture above is an accurate one, then this is very good news for the diamond industry. I expect it to help bring the trade to focus on the core elements: price of polished, cost of manufacturing and sourcing rough according to real consumer demand and at costs that reflect the potential to generate actual profit. The relatively small size of the ALROSA allocation and the narrow premiums paid for goods might be early signs that we are back to basics, operating on the basis of real needs, real capacities and long-term plans."