In a positive development for Botswana which traditionally relies on diamond export revenues, prices of rough diamond have recovered significantly and are now at the pre-recession levels.
In a recent letter sent to its sightholders ahead of the all-important Las Vegas JCK show in June, the Diamond Trading Company says rough diamond prices have impressively recovered to the early 2008 levels while demand has also grown by almost 200 percent in the 2010 first quarter, compared to the same period last year.
The Las Vegas show is the jewellery industry's premiere trade show where the jewellery industry comes together each year. "After an unprecedented year for the diamond industry in which diamond demand and sales were dramatically affected, we are seeing clear signs of recovery and after a slightly better-than-expected Christmas buying period, there have been good levels of restocking reported throughout the first quarter," the letter reads.
"There has been strong growth in countries including China and India and in addition, there has been increased demand in the US. It is clear that in the New Normal, consumers' desire for diamonds as the ultimate gift of love remains strong."
The New Normal refers to De Beers new policy of moderating production permanently which some say will result in the company able to influence prices as demand will continue to outweigh supply.
"As we start to understand what the New Normal means, and as the market continues to recover, we are reassured by the increasing demand for our rough diamonds (driving a nearly three-fold increase in the DTC's first quarter in 2010 sales versus the same period last year) and would like to share with you that our rough diamond prices are now at similar levels to those before the Vegas show in 2008," says Mahiar Borhanjoo, DTC's Executive Director, Sales and Sightholder Services.
As a result of the recession, which knocked diamond prices by as much as 60 percent and demand by about 40 percent, Botswana suffered significant revenue cuts that saw the country post budget deficits for the past two national budgets. Presenting the 2010/11 budget last February, finance minister Kenneth Matambo said diamond revenues were forecast to fall to P6.8 billion in 2009 from P10.8 billion in 2008.
As rough diamond prices recover to pre-recession levels, some analysts have raised concerns about the rate at which the prices have increased in comparison to those of polished prices. While rough prices have on average risen to their pre-crisis high, polished diamonds have only regained about one third of the price lost during the crisis.
Analysts feel that to justify the current prices of rough, polished prices have to rise or rough prices need to cool off. "From miners to wholesalers, players in the market with whom we spoke could not explain buyers' recent willingness to pay high rough prices," says an analyst on Idexonline.
"At this point, we expect the prices of rough to moderate and the upstream market to explain to jewellers they just have to pay more for polished. The question mark hinges over retailers' ability to sell for more and the consumers' willingness to pay more."
In a recent interview with Business Week in Gaborone, renowned diamond industry analyst and journalist Chaim Even-Zohar said prices of rough were now out of balance with those of polished diamonds, a situation not healthy for the fundamentals of the industry.
"If you have that imbalance, you are either creating a bubble that can burst any time in the rough diamond market or you are causing a lot of bankruptcies and failures in the diamond pipeline because there will be nothing to drive up the polished prices," he said.
Even Zohar, who is the author of the 900-page book 'From Mine to Mistress,' said by cutting supply when the market needed more, De Beers was creating gigantic shortages because sightholders had no choice but to keep buying the goods as they had factories to run.
While describing De Beers' New Normal as a legitimate policy because "they can argue that we are running out of diamonds and so we are trying to prolong the lifespan of the mines," Even Zohar emphasised that "you can never run away from the basic fundamental of maintaining stability in the market".
Asked on how much the increase in rough had affected their business, a manager with a local sightholder confirmed that though most Botswana sightholders would not feel the pinch as they were all subsidiaries of multinational companies, the imbalance was hurtful to business.
"The imbalance that exists at the moment might not be good for the dynamics of the industry," he said, talking to Business week on condition of anonymity. "But I doubt if any of the local sightholders will directly feel the impact as they do not sell the diamonds themselves. The impact will probably be felt at headquarters level."