Rough Ride for Diamond Trade

If one looks back at the road the diamond industry has travelled between the March and September Hong Kong shows, it may be difficult to pinpoint the exact juncture at which the euphoria that had been unleashed in March peaked and began the start of its decline. But the extent to which the mood had changed in the span of a few months is obvious from the call by Avi Paz, President, World Federation of Diamond Bourses (WFDB) in early September where he urged the industry to approach the show with ‘optimism’. “By taking an optimistic stance, we will contribute to the markets’ and the consumers’ mindset and motivate them toward recovery,” Paz remarked.

Speaking during the show, Moti Ganz, Chairman of the Israel Diamond Institute (IDI), President of the International Diamond Manufacturers Association and the Israel Diamond Manufacturers Association, welcomed the then reported decision by the DTC to decrease its September sight. Ganz noted that this “will help to calm the market, which has recently seen vacillating prices” and it could benefit “the entire diamond supply pipeline, including the polished diamond market in diamond trading centres.”

Though the September sight is believed to have been slightly higher than the levels Ganz estimated, it is reported to be lower than in the past. Still, a few days later, Mike Aggett, Managing Director of H. Goldie & Co., in his Sight Letter commented on “the fragile situation we currently find ourselves in.” At about the same time, Alrosa, the one miner that had not cut back production even during the darkest days of 2008, announced after a meeting of its top management that its “current diamond trade policy aims to maintain market stability and avoid the negative influence of speculative factors.” Mehul Shah of Star Brillian and Vice-President Bharat Diamond Bourse, sums it up quite succinctly. “There is a nervousness in the market. The present mood is a result of a number of factors coalescing together.”

If one looks back at the road the diamond industry has travelled between the March and September Hong Kong shows, it may be difficult to pinpoint the exact juncture at which the euphoria that had been unleashed in March peaked and began the start of its decline. But the extent to which the mood had changed in the span of a few months is obvious.

A few examples indicate just how buoyant the industry was. In its press note accompanying the H1 results, De Beers spoke about how “strong price growth leads to record H1 DTC sales” and credited this to the “sustained demand for diamond jewellery in retail markets of Far East and US”. It noted that “Sales of rough diamonds by the Diamond Trading Company in H1 2011 were US$ 3.5 billion (including those through joint ventures) – a 33 per cent increase compared with 2010 – driven by price growth of approximately 35 per cent. This is the highest ever sales figure recorded for the first half of the year, buoyed by continued retail demand from the Indian and Chinese consumer markets and stronger than expected demand in America.”

A few weeks earlier, Alrosa revised its 2011 sales forecast upwards to US$4.7 billion from US$3.5 billion. For the first half of 2011, it reported sales worth US$ 2.16 billion (an increase of 9 per cent), and a five-fold increase in net income to US$ 598 million. At its fifth auction for the year, held between June 28 and July 14, Diamdel sold all 410 lots spanning near gem, smalls, grainers, +2ct and large product categories. Jonathan Whitney, Director of Sales and Marketing commented, ‘‘Prices on comparable product sales rose further across all product ranges, with the greatest gains realised in the ‘smalls’ and ‘grainers’ product categories.” In Israel, Diamond Controller Shmuel Mordechai said that the centre had seen about a 40 per cent rise in exports and imports of both rough and polished diamonds in the first half of 2011, compared to 2010, but only a rise of 25 per cent in exports of polished diamonds in comparison to 2008.

There seemed little indication of the turnaround that was to follow. Onset of the slowdown Though it may not be feasible to zero in on an exact turning point, the general consensus among observers and trade members is that things started to change from July onwards. Two things seem to have triggered the shift. Firstly, the July sight which, at an estimated US$ 850 mn, was significantly higher than the levels of the previous months. It not only put more goods into the market, but also impacted liquidity.

Looking back, Shah believes that “the market, which was earlier booming, has suddenly gone down because of the excess rough and the European turmoil.” Of course these were factors that only tilted the balance and threw a confident industry into disarray – the conditions had already begun to ripen before that.

Sanjay Kothari of Kunal Diamonds and Vice Chairman, The Gem & Jewellery Export Promotion Council (GJEPC), feels that there were signs a bit earlier. “At Las Vegas there was uncertainty about prices. Manufacturers said they would confirm orders and prices only after they returned.” Kothari adds, “By around July-August prices for both rough and polished had gone so high that it was difficult for the consumers to digest them. Things got further stuck as retailers thought they should check if consumers were accepting the prices.” But perhaps not enough people had read the signs correctly, and in June and July quite a few companies seemed willing to pay what industry veteran and Chairman of H. Goldie & Co, Mark Boston has described in his blog as “…. the more exuberant premiums (that) were definitely over hyped”.

Fragile Economic Scenario Of course, these internal factors were accentuated by the fragility of the prevailing economic climate, and though there have been no major financial or economic disasters, even small things can cause serious panic. If in early August it was S & P’s downgrading of the US credit ratings; throughout September it has been the cloud of persistent uncertainty over a feared Greek debt default and similar possibilities in Spain and Italy. Statements from the US Fed that the economic recovery was not as strong as expected and unemployment was still a major challenge have added to the concerns.

Andrew Law of Peter Lam Jewellery Ltd. said, “The coming months I feel, are going to be quiet due to the fluctuations in the markets of the world and in the prices of raw material.” Expectations and Outlook The general consensus is that in a gloomy economic scenario, there are currently more goods than the market needs. Over the last three to four months, rough has continued to flow in from all mining companies – De Beers, Alrosa, Rio Tinto, BHP etc., leading to a situation of oversupply. Anup Zaveri of Polar Star and Co-Convener, Diamond Panel Committee, GJEPC says that there is a substantial supply of rough while Indian manufacturing has slowed down. “When demand slows down, we should cut down intake and not worry about what the miners will think. We have to worry about keeping our house in order,” he suggests.

“To protect our businesses, we need to discipline ourselves, and restrict inputs. Intake of rough should be limited. If you sell US$ 100 worth of goods, then you should only input 30-40 per cent of that. If we are able to introduce self-discipline, then the market will revive.”

Shah too has a similar emphasis. “Serious and sincere players should maintain discipline and if they conduct business in a planned way, they shouldn’t have a problem.” Some of this seems to be happening. Observers note that premiums on sight boxes have all but disappeared, and there are more sellers than buyers of rough today. Reports also suggest that buying at the recent sight was quite restrained. It appears that there were very few applications for extra goods, and some sightholders even took advantage of the buy-back policy to reject some lower-end material. Kothari feels that this will have some impact on the supply side.

The September sight was small, and the November-December sight is also traditionally smaller. And both De Beers and Alrosa have talked about supply side reductions, even if there is no mention of reduction in the curently prevailing higher prices.

“Though mining companies have not decreased prices,” he says, “premiums are down and at the recent Diamdel suction, prices went down by three to four per cent.” Advocating that mining companies “should take some corrective action”, Kothari says that “supply should be reduced by half”.

Many believe that this is bound to happen. The September sight was small, and the November- December sight is also traditionally smaller. And both De Beers and Alrosa have talked about supply side reductions, even if there is no mention of reduction in the curently prevailing higher prices. All eyes are therefore focused on the markets. Kothari avers that this season will be difficult and things will be clearer after January, saying, “The long term prospects seem alright. Demand is okay and there are no new mines.” Others believe that if supply is reduced a bit and the season is even average the situation will stabilise and the backlog will get cleared.

Shah stresses that this is a temporary phase and “post-Diwali the market should be back to normal. In the long term, things will be OK.” Most echo what Mehta said, “We don’t mind if the prices go down or up but stability is important for any kind of healthy business. The retail markets are OK, so I don’t think that there is too much to be worried, but it is important to be cautious.”