With Modest Polished Demand, Why Is Rough Diamond Market Still “Hot"?

Market Analysis
05/09/2016 21:11

In his latest installment, diamond industry analyst Ehud Arye Laniado looks for a plausible answer to the following question: if consumer demand for polished diamonds is not rising, and inventory of said stones is not decreasing, what explains the currently strong - even "hot" - demand for rough diamonds? To give an example: "During De Beers’ Sight last week, the company raised prices by 2-4% on average, according to traders. Sightholders that chose to sell rough diamonds from the Sight reportedly sold them for higher premiums. Premiums on 4 grainers (1 carat rough diamonds) and larger are up to a reported 8%-15%. Some goods are selling for list price, or up to 3% above list price." What gives?

One plausible explanation is diamond manufacturers in India gearing up for the Diwali holiday; another, correlatively, is manufacturer's wish not to close factories due to the high cost of doing so. Smaller manufacturers need the rough for the holiday season, and firsthand buyers (sightholders) are making a handsome profit on selling to the secondhand market, with up to double-digit premiums. But even those who are buying and selling at the same price are making decent cash on interest - they sell diamonds to be paid 1-3 months later, accruing higher than normal interest because of the lack of available liquidity. In essence, sellers are financing their buyers, supplying goods for delayed cash while accumulating interest.

"In a nutshell, this is the story of the diamond pipeline’s midstream today. Consumer demand from the wholesale sector is subdued, and polished diamond inventory levels are steady. Despite this, the pace of manufacturing is rising in India, demand for rough diamonds is therefore rising, pushing up its price, and many of the buyers simply don’t have the capital on hand to buy the higher-priced rough diamonds."