Big Sales in Q1 Do Little to Calm Industry Nerves

Finance and Trade
01/04/2016 10:09

The midstream of the diamond market was out of the gate quickly in the first quarter of this year, purchasing around $3 billion of rough goods. But is there really demand from end consumers for diamond jewelry of the level that will sustain the rough purchases, and will there be another glut on the global market as happened last year? Those are some of the questions raised in an opinion piece on Rough & Polished. The heads of De Beers ALROSA and Gem Diamonds are certainly cautious in their outlooks, suggesting that the industry will have to see where it is at the end of the second quarter before drawing any conclusions."It is premature to speak about full recovery in the diamond market, since the problem of low margins in diamond manufacturing has not been solved and there is no reason to expect growth in jewelry demand in China," the article states. "The main role in revitalizing the market in January and February, according to the unanimous opinion of all experts, was played by the midstream - diamond traders and diamond manufacturers, - but excessive transfer of risks into this segment on the backdrop of incomplete health in other parts of the diamond pipeline may lead to an oversaturated market, as was the case in 2015."

Deutsche Bank believes the recent increase in demand was due to restocking rather than a full recovery of the market, while a Morgan Stanley report said prices of rough and polished diamonds remained stable, suggesting that "the road to recovery will be tortuous, despite the strong start to the year." And Citibank said there still remains considerable uncertainty as to whether demand will recover to a level that will outpace supply growth: "We believe it will not, and trade levels observed in February added to our doubts. Diamond prices are likely to be at the current level until 2017."

Meanwhile, several Russian banks are quoted as saying that it is too early to determine if a recovery is on the way, particularly since China remains sluggish, and the results of the sights in the first quarter "may only reflect the restocking needs of diamond manufacturers, which may be a temporary phenomenon,” said Sberbank CIB. "A good start to the year has mainly resulted from the midstream transition to restocking triggering recovery in demand for rough,” said Otkrytie Bank. Meanwhile, Morgan Stanley said the results of the diamond miners' sales were strong "mainly due to the midstream players’ need to replenish stocks. Since restocking will sooner or later subside, we expect consequent slowdown in rough sales by ALROSA and De Beers, which will lead to an increase in the diamond stocks held by the miners. This process will continue throughout 2016."