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Rough Market Picks Up

26 october 2009

The rough diamond market produced impressive growth in the third quarter of 2009. Major diamond miners were able to get almost $2.5 billion for their goods which is already comparable with the pre-crisis sales figures. Distribution of market shares is also close to the pre-crisis pattern with 48% belonging to De Beers, 22% to ALROSA (without taking into account its sales to Gokhran), 9% and 6% accordingly to BHP Billiton and Rio Tinto, and the rest owned by small-scale diamond mining companies. Rough prices have shifted up quite noticeably – on the average up to 40% vs their minimum in February.

The beginning of the fourth quarter also looks bright. De Beers said that it had brought its output back to an 80-percent level of the pre-crisis period and that there was demand for the company’s goods. ALROSA was smart enough to sell $255 million worth of rough to the market in October at prices much higher than those offered by the Gokhran price list.

Revival in the market of rough diamonds continues to contrast with the polished market where the rise in prices is at best measured in integral percent numbers. The labor market in the United States also does not give any ground for optimism: last week the amount of primary applications for unemployment insurance went up from 514 thousand to 531 thousand whereas it had been expected to be only 515 thousand. Diamond import to the United States continues to remain at a low level, not exceeding 50% of the 2008 level by value. The U.S. labor market dynamics causes serious concern that Christmas sales in 2010 will be not at all better than in the ill-fated 2009.

Is the present positive trend on the diamond market just a fleeting episode generated by business activity around the several billion dollars injected into the industry under the guarantees of the Indian government, or is it caused by more fundamental factors? Is the market going through a speculative wave inevitably followed by a downturn or is it that maybe long-awaited stabilization is coming at last and the crisis will soon become no more than dreadful memories?

The condition of labor markets in the United States and Eurozone shaping the purchasing capacity of major diamond jewelry consumers as well as the condition of polished market prove at first sight that the worst times are still ahead and the diamond market can still be hardly hit in the nearest months when the Indian credits will be spent and unemployment will reach its peak values. But at the same time the fact that De Beers is escalating its output while well-known traders and sightholders are stepping up their business, including on the secondary market, proves that according to heavyweight players the current rough prices are relatively low and the probability of their growth in the foreseeable future is significant.

Thus, the rough market is playing for a rise expecting that polished markets and diamond jewelry markets in the countries which appear to be major diamond consumers will quickly follow the suite in prices – at least more quickly than there will be another round of overstocking and a new speculative bubble bearing the well-known threats. The fundamental grounds for such expectations lay, of course, outside of the diamond market, but the coordinated work of large-scale players proves that they exist.

Last September, Rough&Polished published a rather disputable theory, according to which China’s bid to develop deposits in Eastern Siberia appears to be the main political target of the current crisis to be reached by way of managing the scale of Chinese export, mostly due to decreased consumption of Chinese goods in the United States and Eurozone. According to such reasoning, the purchasing capacity of the population in the United States and Eurozone will be restored (consequently, bringing the diamond market to pre-crisis turnover) after achieved agreement on giving China access to the resources of the Russian Far East.

The data published last week by China’s National Statistics Bureau prove that in the third quarter of the current year all the growth increment in the Chinese economy for the first time during the last 10 years was reached exclusively due to expansion of internal demand - in its both consumer and investment aspects. The export, which used to provide over 60% of contributions to the national budget, continued to decrease and has ceased to be the prime mover of national economy. On October 12, 2009 there was published the program of cooperation between Russia’s Far East and Eastern Siberia and China’s North-East Region for 2009-2018. As a matter of fact, this document is a political frame for Chinese expansion to Russia’s perspective provinces rich in raw minerals. Meanwhile, the Chinese projects in Africa experience an ever increasing pressure on the part of the world’s leading multinational corporations and their affiliated regional offshoots. Thus, if the political target of the current crisis has not so far been achieved, it is at least already formalized as “a letter of intent.”

Such a succession of events gives some grounds to consider the current prices for rough to be fair and their possible increase as well-founded - for objective reasons.

Rough&Polished