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Martin Rapaport Statement: The Right Way Forward
Jan 28, 2016 10:52 AM
By Martin Rapaport
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De
Beers is moving forward in the right direction by reducing rough prices
sufficiently to enable increased sales of rough diamonds and a resumption of
diamond manufacturing activity. This is evidenced by an increase in De Beers
rough diamond sales by 118% from $248 million in the tenth sales cycle of 2015
to $540 million in the first cycle of 2016.
While there
is no official indication as to how much De Beers lowered rough prices, we
estimate a drop of 7 to 10 percent in the current sales cycle following a
decline of 15% in 2015. The reduction in De Beers rough prices includes the
nominal lowering of price (i.e. reducing prices for specific boxes of rough) as
well as improvements in the assortments within the boxes. By providing better
assortments, De Beers can lower prices without reducing nominal prices.
So far, polished diamond prices have been firm with some improvements
and the lowering of discounts for select sizes and qualities. It is important
to note that the strength in current polished prices is the result of severe
shortages due to a 40-50% reduction in diamond manufacturing during the second
half of 2015. These shortages were created due to De Beers overpricing of rough
diamonds. The current firmness of polished prices is the result of such
shortages and not increasing polished diamond demand.
The
outlook for polished diamond prices is mixed. While the U.S. Holiday season
ended reasonably well, Chinese demand has not significantly recovered and will
likely remain under pressure due to the sharp decline in the Chinese and global
economic growth. The decline in Chinese and global equity markets is also reducing
polished demand as consumers, who are invested in the stock and commodity
markets, experience negative wealth effect.
To the
extent that polished prices are currently supported by artificial shortages, it
is possible that polished prices may decline as new production enters the
market. It all depends on the level of demand. Such corrections of polished
prices are a good thing, because it means that polished diamond prices are
being adjusted by the market to reflect diamond demand, rather than De Beers’ artificial
supply-side price manipulations. It is expected that polished prices will
increase as, and when, China recovers and the global economy improves.
We encourage De Beers to maintain a consistent level of
rough diamond supply at price levels that ensure reasonable sustainable
profitability to diamond manufacturers. De Beers must not repeat their
mistakes of last year by overpricing rough diamonds that result in a sharp
decline in diamond manufacturing, polished shortages and bullwhip effects that
increase volatility and uncertainty. Frankly, the diamond trade has enough
challenges matching supply with volatile and uncertain demand without De Beers
messing up the supply side with unsustainable manipulations of the price and
quantity of rough diamonds sold.
It
should be clear to De Beers’ management and the rest of the industry that De
Beers must not try to control rough or polished diamond prices. They are in the
business of mining and selling consistent quantities of rough diamonds at
sustainable prices, not creating market manipulations that result in artificial
shortages and long term damage to the diamond industry’s infrastructure.
De Beers and the other mining companies are also strongly
encouraged to embark on a comprehensive marketing campaign that promotes desire
for generic diamonds. This is the right way to increase diamond demand and
support sustainable polished prices. It makes sense for the mining companies to
invest in creating diamond demand that will increase their profits. Without
such investment in demand, the mining companies are simply throwing their money
into a hole in the ground.
The diamond trade has no
problem with De Beers making huge profits, as long as such profits do not come
at the expense of reasonable and sustainable trade profitability. When De Beers
increases advertising spend, they expand profitability for themselves and the
trade. They move away from the disastrous zero-sum game they have been playing
with the diamond trade. Increased advertising and promotion is the right way
forward for the mining companies and the diamond trade.
In
the event that De Beers continues on a responsible path, we expect a healthy
diamond market to emerge. Polished prices will adjust to the realities of
polished demand. There may be some short-term corrections as a return to normal
supply levels confronts relatively weak global demand, but we expect the
markets to settle down quickly as long as the supply side of the equation
remains consistent and profitable. China and the rest of the world will improve
and enter new periods of growth and development. As long as the diamond dream
is kept alive demographics will support consistent demand. In our view the mid
to long term growth outlook for the global economy is positive and the same is
true for diamond prices and markets.
In conclusion,
we are not out of the woods yet, but we are headed in the right direction and
it looks like the worst may be over. 2016 has the potential to be a great
year for the diamond industry as profitability and responsibility returns to
the diamond supply chain.
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Tags:
De Beers, Diamond prices, Martin Rapaport, rough market, rough prices
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