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Diamond Market Softens, Rough Price Remain Firm

27 july 2012

The diamond market in the first half (H1) of 2012 vastly differed from that in H1 2011, Michelle Smith writes in an exclusive analysis to Diamond Investing News (diamondinvestingnews.com). From liquidity to polished prices to consumer demand, conditions were clearly not as robust. As macroeconomic conditions continue to deteriorate, the diamond market continues to soften, but major rough diamond suppliers De Beers and Alrosa are resisting price declines creating a situation that many insist is unsustainable.

Rapaport’s Diamond Index reveals polished prices not only declined in June, but for many categories of diamonds, prices were also sharply lower year-on-year for H1. Take .30 carat diamonds for example; the price decline in June was 1.2 percent. The price declined 3.7 percent in H1 2012, but when compared to the same period in 2011, prices were 21.6 percent lower.

The diamond market continues to be shrouded with caution as macroeconomic conditions weigh on finance and consumer confidence. The bulk of recent buying has been done with purpose. For the most part, people have stopped making speculative purchases and they are not building inventories. Most buying has been to fill orders, and in June diamond market activity nearly stalled.

“Business is definitely quiet. Asia is definitely not buying as much as they did,” Reuven Kaufman, President of the Diamond Dealers Club, told Rapaport News. “I think people are waiting it out to see what happens.”

Despite the current conditions, Kaufman says that people are not panicking or dumping goods. They seem to be going with the flow of the market, hoping that it is just cyclical.

“Companies in New York, from what we know, are strong and financially stable at the moment. I think people maybe can afford to hold onto goods thinking this is some type of anomaly and come the end of the summer demand will come back, Asia will come back,” Kaufman said.  “We are cautiously optimistic about the future.”

The US remains key in the diamond game and the consumer market there has remained stable. But, the bulk of demand is trending toward the higher and lower ends of the spectrum. Rare and fancy stones continue to perform well but amid the average consumers, affordability has become key and they are showing a willingness to sacrifice quality.

Globally, liquidity is tightening for members of the diamond trade but this is particularly problematic in India, which is also struggling with rising inflation and the severely weakened rupee. The cost of repaying previous loans is rising, as is the cost of obtaining dollars to purchase diamonds, and the profitability of the business is shrinking.

With global economic uncertainty mounting, including concerns about conditions in the US, and other markets such as the Far East and notably China showing a diminishing appetite for diamonds, polished prices are coming under increasing amounts of pressure.

As the market overall is softening, De Beers and Alrosa’s rough diamond prices remain firm.

Rough diamonds on the secondary market and at mining tenders have declined. Small and medium firms have seen prices drop by up to 20 percent in H1. Yet these major rough suppliers are attempting to create an environment that defies basic market mechanics.

Rapaport estimates that De Beers sales fell 19 percent year on year to about $2.83 billion in H1.Yet, Rapaport estimates that DTC prices rose 5 percent in H1. Alrosa also reported a 5 percent price increase in Q1 and claims to have maintained those levels since then.

De Beers and Alrosa have stubbornly resisted markdowns that are reflective of the current market conditions and many insist the situation is unsustainable. Not only has demand slowed but polished prices have been dropping over the past year. The steeper the declines, the more these firms’ pricing has put the squeeze on manufacturers’ and dealers’ margins. Sightholders are increasingly reporting little or no profitability on their De Beers and Alrosa purchases. Once those diamonds hit the secondary market they are often trading at or below list prices.

At a De Beers sight in June, sightholders appeared willing to push back and refused the goods on offer. DTC responded by announcing that it would permit deferments of up to 50 percent of future allotments as long as goods were taken by March 2013.

This could be the beginning a very interesting situation. Rapaport says De Beers and Alrosa have maintained irrationally high prices. But, sightholders are expected to continue rejecting goods at these levels. Some believe that rough diamond prices will have to come down during the second half of the year.

Consumer sentiment is expected to remain weak in most regions in the near term. Throughout the diamond pipeline participants are likely to remain cautious and to continue looking for price declines. It appears that H2 will be a period filled with challenges for the diamond industry.