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Diamond market in search for fair price

20 february 2016

The results of January sales gave grounds for both optimism and doubts. On the one hand, demand for rough in January significantly exceeded expectations, offering hope for market recovery this year. On the other hand, some industry players were perplexed by different behavior of mining companies. According to media estimates (though not officially confirmed), De Beers lowered prices by 5-10%. ALROSA has officially declared it does not see any reasons for decreasing prices. Despite this seemingly essential difference, the two companies have posted good sales. If rough offered by both miners is selling well, then what is the fair price?

In our opinion, it’s the one accepted here and now.

An explanation of why De Beers decreased prices in January may probably be found in its financial statement for 2015 published some days ago. Media publications highlighting the results of this report are mainly focused on the company’s sales reduced by 36%, but few paid attention to another important detail - the prices.

The reduction in sales volumes to 19.9 million carats was partly offset by a 5% increase in the average realised diamond price, De Beers said in its financial overview for 2015. “This 5% increase in average realised diamond prices to $207/carat … reflected a stronger product mix, despite an 8% lower average rough price index for the period. From the final Sight in 2014 to the final Sight in 2015, the De Beers rough price index declined by 15%,” De Beers said further in its statement.

In plain language, this is to say that “globally, rough diamond prices dropped by 8% in 2015, but those diamonds that were sold by De Beers went up in price by an average of 5%.”

The specific figures are as follows. In 2014, the average price of diamonds sold by De Beers was $198 per carat. According to the report of Anglo American, it reached $206 per carat in the first half of 2015. If this average price came to be $207 per carat for the entire 2015, it is easy to calculate that it soared even higher in the second half of the year - despite all the difficulties faced by the diamond pipeline in autumn and winter.

Changing the assortment of regular boxes is a normal practice, to which all diamond producers resort from time to time. Demand for various categories of rough oscillates throughout the year, and producers either add parts of this or that rough to their parcels of goods or remove it depending on demand fluctuations. According to customers, De Beers has indeed changed some of its assortments to increase the share of more expensive rough. However, to maintain uniform workload at diamond cutting facilities it is impossible to use only expensive goods - you will need the entire product range. Therefore, the changes introduced into the regular mix of rough alone could not offset the significant drop in global diamond prices and result in overall growth.

Most likely, this 5% increase was also driven by extras added to the regular assortment. According to the accounts of market players, De Beers resorted to the so-called special deals last autumn due to difficulties experienced in regular assortment sales. Some of the company’s clients, especially from India, received add-ons to regular boxes consisting of very large rough diamonds (stones weighing more than 15 carats) accompanied by discounts on total price. These large-size diamonds gave a considerable boost to average selling prices, although provoking a mixed reaction from the rest of the customers, who received neither bonuses nor discounts.

The release of a great amount of large-size rough diamonds is partially confirmed by the trade statistics of India, which eventually attracts more than 80% of the world’s rough for cutting. According to the GJEPC, the average price of diamonds imported to India in 2015 did not change much - it was $97 per carat in January and $97.4 per carat in December. If the average price index for rough has still been decreased by 8-15% (which was registered by all industry organizations), something had to compensate for this decline.

Apparently, prices set by De Beers at the end of last year were higher than the market even without the special deals. This is indirectly evidenced by the company’s low sales results in the second half and especially in the fourth quarter of 2015. According to Rapaport estimates, the aggregate sales of De Beers through its sights reached about $450 million from October to December, while being accompanied by a large number of deferrals. Against this background, ALROSA - probably for the first time in its history - was able to sell more than De Beers, raking in approximately $700 million. Taking into account that both companies were offering greater purchasing liberties to their customers at that time, avoiding to compel them to buy large quantities of rough, it is possible to assume that we witnessed the old age saying, “buyers voting with their feet” in action.

In 2015, ALROSA repeatedly resorted to changing its product assortment as well, but the company’s average sales prices still point to an overall decline. Judging by its recent reports, the average price of diamonds offered by ALROSA in the fourth quarter of 2015 was $166 per carat, down from $176 per carat in the second quarter. The miner’s representatives have repeatedly reported that ALROSA decreased its prices by 8% in the second half of 2015 - and the performance metrics disclosed by the company confirm these statements.

The report on ALROSA’s performance in 2015, which is usually published in the spring, will finally set the record straight. But so far, based on the available data it can be concluded that prices offered by ALROSA at the end of last year - and accordingly at the beginning of 2016 - were closer to the general market trend. In this case, the January decrease of prices offered by De Beers is more than justified - not only to show loyalty to customers, but also in order to bring prices into sync with the market environment and recuperate sales lost in the fourth quarter. It is quite possible that once again changes were not about prices, but about assortments – large-size rough ceased to be marketed in previous amounts.

Judging by the successful sales posted by both companies in January, their prices are now levelled and meet the expectations of the market. De Beers reported its sales reached the level of $540 million - exceeding the entire fourth quarter of 2015. According to a market source, ALROSA shipped about $300 million worth of diamonds in January. According to the company's two customers, some part of diamond shipments was shifted to February due to high demand, while demand for some of the assortments was essentially higher than supply and was not completely met. “ALROSA is leaving prices unchanged during its trading session in February, as it was announced at the beginning of the year,” said the source, adding that in his estimation the results of this session were likely to repeat the January footing.

“Right now, prices look balanced,” one of the company's customers confirms. “And it would be good if they continued to stay at this level for some time. Demand and prices for polished diamonds are now beginning to recover, allowing manufacturers to increase the volume of purchases. But if rough prices continue to fall, this will devalue rough purchased by diamond-cutting factories in January, thus disrupting their business economics. The market got already tired of persistent price fluctuations in recent years.”

Elena Levina for Rough&Polished