Has Rough Hit A Glass Ceiling? The Case for Glut

In its most recently released figures, the Antwerp World Diamond Centre (AWDC) reported gross rough diamond exports of $857.2 million in May. What I found interesting in that figure was that it is practically identical to Antwerp's rough diamond exports in July 2009, just a few short months after the industry started to recover from the Great Recession: $856 million.

Here is another interesting figure: May 2010 net exports of $152 million have declined (!) year-over-year by a full 4 percent.

Finally, demand in the secondary market for DTC Sight goods this week is lukewarm. The demands are there, but the crazy +20 percent premiums of just a few months ago have fallen sharply to a single digit figure.

The DTC has raised the prices of some of the boxes in the Sight this past week. They are small increases, with an overall effect of about 4 percent. Some items, like the mixed rejections, are currently selling at below the DTC list price after they more than doubled their price from about $5.50 per carat at their lowest to over $12 p/c this week.

The above figures are pixels that at a distance, and with some additional figures, combine to a clear image. After months of runaway prices, high premiums and large purchases – and the concerns that we are witnessing a bubble about to burst in our collective face – we see a shift. Here is my guess in a single word: Saturation.

Antwerp seems to have a limited capacity for rough, one that exists around $900 million in gross exports, and $175-$200 million in net exports. In fact, the net capacity of exports may be even lower, around $100-$125 million.

Once the leading rough diamond center overshoots its capacity, we see a decline. This is what we are witnessing now – in January, Belgium exported $817 million in rough, rising to $904 million in February, peaking at $1.01 billion in March. From there it declined to $893.4 million in April and $857.2 million in May. The market rose to capacity, went a little too far and relaxed. Even the good reports of solid sells at JCK, did not cause the collective rough market to over react. It has its capacity, and above it, there is a glut.

I kept wondering in the past 18 months about the following dichotomic behavior: the industry's collective understanding that runaway prices are bad, versus the individual desire to turn a quick profit. The question was 'what would make the individual act based on the collective good.' I think we have an answer: Saturation. Any large beast, as big and hungry as it may be, can only eat so much. At some point, the largest gorging turns into a sleepy period of digestion.

Sweet dreams.