As 2010 ended with relative stability in the market, rumors stirred that Anglo American was preparing to bid for the 40 percent stake in De Beers held by the Oppenheimer family. The prospective deal would bring Anglo’s share in the diamond mining company to 85 percent, with the Botswana government holding the remaining 15 percent.
While neither De Beers nor Anglo would comment on the report, the news brought a fitting end to 2010 and is indicative of the positive outlook for the rough market and the mining companies. A potential Anglo buyout also gives some room for speculation as to why De Beers still has not appointed a new chief executive officer (CEO) to replace Gareth Penny, who resigned in July 2010 after five years in the job. Anglo may be reluctant to allow De Beers Chairman Nicky Oppenheimer to make the appointment if he is on his way out.
Still, De Beers is in a far better position than it was a year ago, having increased rough sales through the Diamond Trading Company (DTC) by an estimated 48 percent to around $4.8 billion and having significantly improved its debt position. De Beers largest competitor, Russian manufacturer ALROSA, made similar strides in sales increases and debt reduction in 2010.
Perhaps more importantly, both companies appear quite upbeat about prospects for the market in 2011. They are waiting for a final assessment of the Christmas season in the U.S. and Europe to confirm their confidence. Many believe strong year-end results will spur the rough suppliers to be more aggressive in their production strategies, and subsequently their rough pricing.
The Early Indicators
Early reports on year-end holiday shopping totals indicated a positive season, albeit one which did not boom to the extent many had hoped. The 10.4 percent year-on-year growth in jewelry sales reported by MasterCard Advisors’ SpendingPulse, which tracks U.S. national retail and services sales, and other reports showing more modest growth, were above preseason forecasts, injecting some confidence into the market.
Diamond professionals across the pipeline appeared satisfied that there was a buying season, and some growth was recorded. Among the stronger trends seen during the holiday period was the growth in online sales, while high-end luxury items continued to outpace lower-priced jewelry.
The jewelry market showed single-digit increases throughout 2010, though compared to a weak 2009. Prior to the holiday buying period, January through October, seasonally adjusted U.S. jewelry store sales rose 5.8 percent to approximately $25 billion, according to a U.S. Commerce Department report, boosted largely by a 5 percent rise in prices over the same period.
A comparison between trends in seasonally adjusted jewelry sales and prices reveals that the two measures basically moved in tandem in 2010, as they did for most of 2008. However, while sales dropped during the downturn, jewelry prices held relatively firm (see graph at right). As the October sales value approached precrisis levels, the lag in sales versus prices indicates that sales have been buoyed by inflation. Thus, while holiday retail sales values appear to have increased from 2009, in real terms, it seems that volumes were much the same.
A Polished Perspective
Wholesale trading rose at a far greater pace as U.S. polished diamond imports in October increased 42 percent year on year to $1.9 billion, while net imports, discounting for export returns and indicating the amount of goods kept in the local market, grew 56 percent to $655 million, making October the highest month of trading since July 2008. Imports during the first ten months of the year rose 51 percent to $15.2 billion, while net imports grew 64 percent to $3.69 billion. These measures were 10 percent and 17 percent below 2008 levels, respectively.
Caution lingered that the U.S., still the largest consumer market for diamonds, was by no means out of the recessionary woods. Unemployment remained near double digits, clocking in at 9.8 percent in November, while the economy, as measured by the gross domestic product (GDP), grew by 2.6 percent in the third quarter, after recording 3.7 percent and 1.7 percent growth in the first and second quarters of the year, respectively.
At the same time, China showed double-digit growth and India maintained growth of 8.9 percent through the first nine months of 2010. The result was a proportional shift in focus of the diamond industry toward the East throughout the year, which remained evident in December. Just as the Christmas season in the West was finishing up, polished manufacturers and dealers were already eyeing the Chinese New Year, which falls on February 5, and the potential sales boost that precedes the holiday.
The rise in trading in November and December helped ease the price resistance displayed by buyers for most of the year, which led to upward price pressure in the polished trade. Polished prices, as reflected by the average RapNet Asking Price Index (RAPI), rose 1.4 percent during the month through December 27, with 3-carat stones rising by an average of 3.6 percent and smaller goods showing slighter increases (see graph at left).
Rough Margins
Polished demand was spurred by a shortage of goods in the market, emanating from a slowdown in manufacturing as most factories in Surat took a three-week vacation during the Diwali season in November. As a result, India’s rough diamond imports fell 14 percent year on year to $772.5 million in November. Diwali occurred three weeks earlier in 2009, on October 17, leading to higher comparative November figures.
However, the overall positive trend in India’s rough imports remains and the country has exceeded even its 2008 levels of importing rough (see chart on opposite page, top).
India remains the driving force in the rough market and cutters and dealers there maintained good demand in December, being the main recipients of extra goods supplied by the Diamond Trading Company (DTC) at the final sight of the year.
DTC prices remained relatively stable during December, while BHP Billiton saw low single-digit increases at its spot price tenders. Diamond cutters expressed concern that rough prices would continue to rise in the first quarter of 2011, once a full analysis of the Christmas season has been completed, further squeezing their manufacturing margins.
Manufacturers also expect rough supply from De Beers to increase, alleviating some of the shortages in the market. De Beers production rose about 34 percent to an estimated 33 million carats in 2010, while ALROSA reported output of 34.336 million carats for the year.
The combined production of five of the major mining companies — De Beers, ALROSA, Rio Tinto, BHP Billiton and Harry Winston — which accounted for about 63 percent of the total in 2009, rose 21 percent to 64.502 million carats in the first nine months of the year, 22 percent below the same period in 2008. Total end-of-year production is forecast to rise about 14 percent year on year to approximately 87.6 million carats in 2010 (see chart at right, bottom).
The Likely Winners
Production is expected to ramp up, driven by increases from De Beers, which still is playing catch-up from its slowdown during the recession, and by mining companies’ gaining confidence in the market. There is also potential additional supply from Zimbabwe and from Russia’s Gokhran stockpile. Bringing all three sources to market at full capacity, however, may result in an oversupply, and cause prices to soften.
Still, the deeper concern for manufacturers remains that rough demand and prices will continue to rise at a pace that is unsustainable for the polished market to absorb, continuing the squeeze on their margins. As a result, manufacturers are expecting to remain stuck in the middle of the market while the mining companies appear well positioned for strong growth in 2011. At the retail end, consumers in China and India are expected to continue to lead the recovery, with the U.S. edging its way to growth. By all accounts, the trends experienced in 2010 are expected to continue in the year to come. That bodes well for any major investor in the rough market.
Article from the Rapaport Magazine - January 2011. To subscribe click here.