De Beers to keep rough prices stable

| Tuesday March 2, 2010 00:00

Cutters immediately appeared to be buying based less on speculation and more on need after the February sight. It seems they've been waiting for someone to calm the rough market.

De Beers wasn't the only firm to forecast a slowdown in the rough market. Bloomberg quoted Petra Diamonds' chief executive officer (CEO), Johan Dippenaar, as saying that gains in rough diamond prices were likely to slow in 2010.  'We don't expect big increases. They should be fairly steady,' he noted.  Similarly, ALROSA expressed the need to stabilize the market, adding that it plans to increase its supply through long-term contracts as a means to achieve that end.

The shift begs the question: What exactly has changed at the mining companies? Since they would necessarily seek to milk the most dollars from each carat of diamonds that they sell, why have the diamond miners given this seemingly collective message to the industry? To understand this move, it is necessary to recap some of the market trends witnessed over the past few months.

First, it has almost become clich that polished prices have not risen to the same extent that rough prices have through the past year and this trend has continued strongly in 2010. Across January and February so far, rough has increased by an average of approximately 10 percent, while polished hasjumped by an average of about 3 percent. This means that the industry's already shrinking manufacturing profit margins just got smaller.

Second, some $1.1 billion worth of rough was supplied to the market by the major mining companies in each of the first two months of the year and the jury is out on whether the market can sustain these volumes. While the Diamond Trading Company (DTC) sights have not risen back to pre-recession levels, they are significantly higher than they were a year ago.

Third, many of the larger manufacturers have generated tremendous profits from the rough market through the past year, as those who had the liquidity bought rough cheaply from April 2009 forward and are now seeing returns on their investments. Based on their current profits, they note that they have been able to 'buy rough at any price' in the past two to four months.

In turn, unlike small- to medium-sized operations, it appears that the larger players are able to profit on their current purchases due to the sheer volume of their turnover, even if margins remain small. They also expect polished prices to rise sufficiently when the resulting polished reaches the market in three to six months.

Third, while other cutting centers boost their manufacturing at a slower pace, Surat appears to be booming at the moment. At least in India, there are clearly strong levels of manufacturing going on.

Finally, as one industry leader explained, 'High rough is not a concern; the speculative climate that seems to come with it is.' Many blame the tender system for the speculative trend that developed as companies outbid one another for stones and in the process, set new base levels for prices.

What we hope, and what we assume is going through the mining companies' proverbial minds, is that there are no guarantees that any of these trends can be sustained if rough prices continue to rise. They should remain cautious about the prevailing economic uncertainty in the U.S., which, despite the growth of China and India, should still be considered the mainstay market of the industry. And based on sheer economics, they should be concerned that price levels cannot be maintained if they are not a product of supply-demand equilibrium.

Their pledge of stability was as much a statement about their own pending policy as it was a plea to the rest of the industry to follow suit. The underlying message was that if stability is not achieved, the consequences may be dire.  While De Beers announced a price increase at the February sight, its intention to stabilize the market was the more significant statement, as well as a responsible move. We hope that the diamond giant, along with its mining peers, does not find a loophole in the form of a 'change in market conditions' that would reverse the latter announcement.

We also hope that manufacturers using the tender system will act in an equally cautious manner. This past week, however, De Beers message to the industry did ease our concerns about another downturn. A stable market will help deflate the rough bubble. (Rapport)