Even with a very small supply of rough diamonds from the major diamond suppliers De Beers and Alrosa during this diamond cycle, premiums in the secondary market were so low that in some categories it meant selling at a loss for the first hand buyers – the Sightholders and Alrosa clients. There are several reasons for this, the upcoming Diwali holiday being a major one, but other issues are behind this as well.
Due to the Diwali holiday, most if not all Indian diamond companies go on a two-week vacation, and few companies want an expensive stock sitting idle. However, traders continue to point out continued financing issues, poor payment schedules and in some categories, an accumulation of goods.
Traders in Antwerp are saying that they are feeling the beginning of a cash crunch, some connected it to the start of the winding down of Antwerp Diamond Bank, one large Sightholder stating that it is a wider issue.
De Beers Sight $350-$370 million
With the majority of goods sold to the diamond market, De Beers had an expectedly small Sight. Some goods were left on the table, but not much, even though real demand in the market is low. The reason for this could be that Sightholders’ applications for the next Sight contract were due last week. The application, a questionnaire called CPQ, was simpler in terms of marketing plans, but far more involved on the financial side, according to Sightholders.
Despite the low frequency turndown at the Sight, many goods were simply offered very quickly in the secondary market. However, there was limited demand there too, as the table of demands below indicates. According to one insider, “October was the most slack period in terms of buying/selling” of De Beers rough diamonds, adding that there is “no Illusion at all” about the boxes.
Premiums for the De Beers boxes reflected this. Some boxes, such as the Fine 2.5-4 carats, selling at list price (a de facto 2% loss for Sightholders), or below list price (Cubes 4-8 grainers at -3%) while some command mid-single digit premiums at best, according to Bluedax.
There was some talk that De Beers has increased prices, which was not really the case. The list price of some boxes was indeed higher, however in many cases this was a result of changes in the composition of these boxes – more of the pricier stones in the assortment.
Alrosa and Rio Tinto
After several months of providing very small supplies to its contracted clients, Alrosa increased its supply by an estimated 5% at its last sales week. Nevertheless, even with that increase, Alrosa is offering the market a lot less than it could, also due to Diwali. In terms of price, it seems that prices are stable with the value of goods trading in the secondary-market declining overall by about 1% compared to the September.
Select Diamantaires, the contract clients of Rio Tinto Diamond have been complaining that the company is pricing its rough diamonds very high, making it an expensive supplier to the market.
Profits Generated from Financing
For a few years, traders have been complaining that rough is not economical to manufacture, that prices of polished do not justify it. With the recent sharp drop in the prices of polished, in some cases by some 6% and even by as much as 8%, and price of rough remaining at their current high levels without budging; the complaint is more relevant than before.
One could ask if this is the case, how companies can survive. Partially, the answer has to do with sales to the secondary market, where business is done, at least perceptually, in cash. However, in many transactions a delayed payment is agreed to, with the cost of financing added to the price. That cost is 1% per 30 days.
Take for example the Crystals 2.5-4 cts box. De Beers sold it for $2,650 per carat. That is the list price. This box was in medium demand in the week following the Sight and traded in the secondary market at a 4% premium, 60 days payment terms, according to Bluedax.
The breakdown of the deal is thus: Sightholders pay De Beers 1%-1.5% for certain services and their broker collects another 1% of the cost of the goods, bringing the Sightholder’s cost up to about $2703 p/c.
At 1% per 30 days, the buyer of the Crystals 2.5-4 cts box paid the Sightholder 2% interest as the cost of money, which means that at cash terms, the Sightholders sold the box at cost. The extra 2% income was generated by the Sightholder serving as financier for the buyer.
Clearly, this is not a healthy situation. Diamond manufacturers are supposed to make the majority of their income from manufacturing, not from serving as a bank, while secondary market buyers (also manufacturers) should be able to have access to bank financing at a much lower rate than the 12% per annum that Sightholders are charging.
Financing Shrinking and More Expensive
In conversations with Belgian and Indian traders in the past few weeks, more are starting to report that the banks are not willing to increase financing and that in some cases the cost of credit is increasing. According to one Sightholder, the cost of financing is at its highest in 20 years.
With all the issues in the market – low polished prices, an overabundance of some goods, high rough prices, liquidity problems and tough financing – there is one ray of light in the market. Traders are reporting good sales volume downstream, to jewelry makers and retailers. A recent report by the National Retail Federation in the US projects an increase in holiday sales.
Together with rising sales in China and Hong Kong and even robust retail business in India, demand for diamonds by consumers this holiday season gives reason for some optimism. It is the issues inside the diamond market that need to be resolved, and that is what places the damper on most traders.
Demand for Key De Beers Boxes Following October Sight*
|Demand*||Remarks on Demand|
|Fine 2.5-4 cts & Fine 5-14.8 cts||Medium demand||Same demand compared to previous Sight|
|Crystals 2.5-4 cts & Crystals 5-14.8 cts||Medium demand||Same demand compared to previous Sight.|
|Commercial 2.5-4 cts and 5-14.8 cts||Low demand||Lower demand compared to previous Sight|
|Spotted Sawables 4-8 gr||Medium demand||Lower demand compared to previous Sight|
|Chips 4-8 gr||Very low demand||Lower demand compared to previous Sight|
|Colored Sawables 4-8 gr & Colored 2.5-14.8 cts||Low demand||Lower demand for both boxes|
|Makeables High 3 gr +7||Very Low demand||List +1%, 90 days|
|Preparers Low 3-6 gr||Low demand||List +2%, 60 days|
|1st Color Rejections (H-L) +11/+7||Low demand||List +7%, 120 days|
|1st Color Rejections (H-L) -7+3||No demand||Not sold|
|*Demand during the week following the Sight|