The DTC’s decision to extend the Sightholder contracts by a year was, however, a welcome message to the market. Instead of focusing on how to impress the DTC with their well-being, Sightholders can concentrate on establishing their well being and improving their business, which was the DTC’s main goal in lengthening the contract period. The extra year will be accompanied by a new contract, perhaps be a simpler one that offers greater flexibility to both sides.

 

The extension came about as a result of a DTC process to consider new and creative ways to improve business. The market is awash with speculation about the ideas that were voiced during the brainstorming process, one of which is believed to be creating a second tier of Sightholders that would be offered those goods not purchased by the top tier Sightholders.

 

Discussions about Diamdel were also on the table. At this point, it is not clear if the sister company will receive more goods – thereby expanding De Beers’ options to sell goods through tenders – or if it will be closed for good. Closure has been on the cards for a few years.

 

Hefty Premiums Still Exist

The previous Rough Diamond Report asserted that a calm market was expected, meaning that prices would remain stable. That assessment was backed-up by a DTC announcement that it did not plan to raise prices, coupled with general sentiment in the market, especially in the sizzling Indian market, that business was on an even keel.

 

The past couple of weeks, however, have shown that this feeling was short lived. Strong demand for most of the box categories drove up premiums, on average, by 2-3 percent. Interestingly, however, premiums were less pronounced in the Indian goods.

 

The fine boxes were in higher demand, driving premiums, some say by as much as 20 percent. The commercial goods, in steady demand, commanded a 15 percent premium. Sellers of Indian goods, in comparison, were able to make 5-6 percent. On average, premiums hovered around 12-13 percent.

 

The rationale for speculation on the boxes is that polished prices are slowly rising. Hopefully, by the time the rough is polished and ready to be sold in the wholesale market, the prices will be high enough to justify the rough prices paid today. Is that a right assumption?

 

The polished goods currently coming out of the factories were purchased as rough in January and February, when the rough diamond market leaped. The price of polished, which has increased on average by a few percentage points since the start of the year (up 1 percent in March according to the IDEX Online Global Polished Diamond Price Index), somewhat justified the speculation at the start of the year, but it may not be the case two months down the line.

 

The high premiums on DTC boxes are inadvertently translated into DTC price hikes. Some are sure that this will happen as soon as this month, at the April 26-30 Sight. This will be the last Sight before the Las Vegas trade shows start, a time when the DTC has raised prices in the past. Since there is no Sight in May, the next one will take place during the first week of June, at the same time as the Las Vegas shows, which is when others in the market expect the increases to occur.

 

Either way, when there is an expectation of a price increase, speculative buyers purchase goods with the intention of holding on to them until they can be sold at a higher price. This buying drives up premiums, which in turn convinces producers that the market is willing to pay higher prices and so they raise their own prices. It is a vicious cycle, and unhealthy to boot.

 

Tenders by Rio Tinto, BHP Billiton and Alrosa

Rio Tinto Diamonds held its first tender last month. The tri-annual tender has raised concerns among some of RTD’s Select Diamataires. They fear that the tender’s results will cause RTD to increase prices.

 

The size of the tender, which offered only Diavik goods, is unknown. The company said it was relatively small. If that was the case, and it is not enough to become a market-wide indicator like the BHP Billiton tenders, then perhaps these fears are not justified. It is our understanding that the bulk of the offers were all within a normal pricing range, although we do not have any specific examples. If most bids were reasonable, and RTD chooses to look at them as the true market indicators, it will further dispel the sentiment that the tenders will drive up prices.

 

BHP Billiton and Alrosa’s tenders are being held this week. Manufacturers say BHP Billiton‘s prices have come down and today stand at about the same level as DTC boxes with their premiums. Alrosa is still asking high prices for its goods.

 

Pockets of Profit

Looking at the market, there are probably still areas where profits can be made. A quick look at the prices recently achieved at Sotheby’s Hong Kong sale show that D/IF goods with excellent polish and symmetry command very high prices – an 8.24 carat round fetched $170,000 per carat. Not surprising, there is growing demand for rough that results in D-I color, VVS-SI clarity 1-10 carat polished. 

 

Demand for DTC Boxes - Sight 3