There was deep pessimism at De Beers' March sight with more than 30 percent of goods refused, according to several sightholders.
The negative sentiment was due to a shared belief that polished sales and prices were unlikely to increase in the second quarter of 2015 and that De Beers' sight prices have not fallen enough to restore profitability to the industry’s midstream.
Sight number three closed with an estimated value of diamonds sold at $500 million due to the large amount of refusals, despite pre-sight estimates that placed the amount of goods on offer at over $700 million, Rapaport reported.
Rough diamond prices at the sight were flat overall when compared with the previous sight, according to sightholders. They also reported no significant changes in the assortment quality of boxes. Sightholders also noted that a very small amount of ex-plan goods was made available during the sight.
“Sightholders are very pessimistic about the market because the March [Hong Kong] show wasn’t very positive and now we are entering what is traditionally a weak quarter for polished sales,” said an India-based sightholder. “Things are not all hunky dory and everyone made this clear at the sight by refusing goods.”
The sightholder added that most large polished diamond manufacturers have high levels of inventory, which leads them to believe that polished prices will not increase in the near future and may even drop further then they have in recent weeks.
ALROSA also kept its average rough prices steady at its March contract sale, which preceded the De Beers sight by a week. In February, the Russia-based miner reduced its average prices by 3 percent, but it believed that the rough market is gradually stabilizing, a company spokesperson said. The spokesperson added that ALROSA had also maintained a relatively low sales volume during the first quarter to address the supply-demand imbalance in the market.
The negative sentiment among manufacturers at the end of March was most clearly expressed in the secondary market, where the vast majority of De Beers and ALROSA boxes were trading at a discount. Sellers were offering generous credit terms that extended between 90 days to 120 days on average.
“We are in a vicious cycle in the market that the industry is having difficulty escaping,” said Guy Harari, the CEO of BlueDax, an online rough diamond broker that specializes in the secondary market. “The pricing for low-end rough is approximately where it needs to be, which is why we are seeing more demand for these goods in the market. However, for the mid to high-end goods there still is not a healthy spread between rough and polished prices and the market will remain imbalanced until this balances out.”
Harari noted that market prices for non-label goods, non-branded boxes of rough diamonds sold outside the major miners’ long-term contract sales and tenders, declined at least 5 percent in the past month. These prices, he added, could be viewed as a better indicator that the overall state of the rough diamond market than sight list prices.
David Johnson, the head of midstream communications for De Beers, said that it fulfilled all of its sightholders pre-planned demand at the March sight, but provided few additional goods. He said De Beers temporary policy of allowing diamantaires to defer up to 25 percent of their planned demand came to an end ahead of the March sight, since this year’s third sale was the last sight of the current contract period.
“We know the industry is going through a relatively slow period," said Johnson. “But we still expect to see the situation improve over the second and third quarters. Consumer demand has been growing, albeit not skyrocketing, and we are seeing decent levels of retail sales, so inevitably retailers will restock and there be greater polished sales and improved cash flows for diamantaires.”
Johnson also noted that with the start of the new sight contract in April, De Beers would implement a dynamic distribution policy. As a result, sightholders who demonstrated strong, sustainable demand for specific box categories would get similar or increased amounts of rough for the following year. Similarly, sightholders who displayed weak demand for certain categories would have their supply of those boxes reduced in the following year’s intention to offer (ITO).
One sightholder noted, “The current market is difficult, but for sightholders who have developed a niche for their business things are not as bad as compared with others.” He added that the new dynamic ITO system will work well at his firm and that an increased supply of goods that are profitable to manufacture will likely compensate for any reductions in the amount of goods offered. However, he noted that this might not be true for other companies.
