DTC Price Rise Confuses The Market
August 12, 04In the past few months, two conflicting views prevailed in the market on the direction of rough diamond prices. While De Beers was warning that traders paying premiums of 15%-20% for DTC boxes were purchasing rough at unsustainable prices, a large part of the market was convinced that the DTC would eventually “vindicate speculators” and increase prices. Speculation would be rewarded. Then there were others who were absolutely certain the DTC, which continually warned about paying unrealistic prices, would show restraint and leadership, and would not be drawn into an upward spiral of price rises. Prices would not rise in August.
Now, both “camps” give different interpretations to the meaning of the 5% average increase which the DTC announced yesterday. It is crucial to understand what traders are thinking – because, at the end of the day, that directs their behavior.
It is also not less important to consider what the DTC is thinking. “This was not a prize for speculators – rather the opposite. Speculators, who were counting on a 15%-20% price increase, had their dreams shattered. They only got 5% and that means they overpaid - they lost,” said a very senior DTC sales executive in a telephone conversation. Whether that is true or not depends on the level of premiums after the August sight.
“Our price rise of 5% was based on higher polished prices, on healthy consumer demand. We settled on 5% because that was the figure we believe is sustainable,” said the executive.
The market does not seem convinced, at least that is the impression we got from talking to those who are not on vacation. Those who believed the premiums were worth paying the price expect that even after the August sight, the level of market premiums will not go down. They don’t expect to lose. The low interest rates will continue to encourage hoarding – and, in a few months, the boxes will again yield a hefty profit. And there will be more price increases.
Why is there so much speculation? The DTC is perceived as not having the goods. De Beers publicly announced that its mining production is below budget due to all kinds of mechanical problems suffered at Debswana. De Beers also admitted a number of its small South African mines were running at a loss, kept open more because of social concerns than out of commercial considerations. The EC remains surprisingly numb on the prospects of an early approval of the Russian-DTC trade agreement. Argyle’s production is well below expectations.
At the recent Israel Rough Diamond Seminar, eloquent spokesmen pointed to a decrease in the total diamond mining reserve, i.e. depleted mining is not replaced by corresponding amounts of new discoveries. The present psychological environment invites speculations and the question is whether the market is manageable - whether De Beers has the tools to avoid it. One may even wonder whether it has an interest to avoid it.
In 1999, De Beers announced it would not be willing to maintain buffer stocks. Ever since, it has been offloading its stocks onto the market – and now the point has been reached that the market (rightly or wrongly) is convinced that De Beers holds no significant stock. Increased efficiencies in the management from mine to market have created a situation in which sight allocations for two months down the road are still in the ground. The Intention to Offer (ITO) system has greatly decreased the DTC’s maneuverability and flexibility. Sight sales are predictable – and, as we saw in the first half of 2004, the actual sales of De Beers were by and large below the expectations of analysts and industry players. As I pointed out in an earlier column, in real terms (given the 14% price increases between the first half of 2003 and first half of 2004) DTC sales actually declined.
The DTC has made great efforts to explain its current 5% price increase. “The first half of 2004 has shown good growth in retail sales of diamond jewelry across the consumer markets, with initial estimates around +7%. This growth has resulted in a decline in polished stocks held in the cutting centers and a rise in the price of most categories of polished diamonds,” says the DTC. It didn’t say that the decline in polished stocks was exacerbated by the fact that rough is being hoarded by speculators. In recent weeks some of the hoarded goods were released onto the market, which may have indicated that the confidence in the inevitability or likelihood of an approaching price increase was not a “firm” conviction. There were those who hesitated.
“Consumer confidence levels have increased and macro economic indicators are broadly positive, indicating the environment will be in place to support continued strong consumer demand in the second half of 2004,” adds the DTC. Indeed, an election year in the United States should generally be positive for the market, and the assertion that “the price increase is based on the fundamentals of the market” is certainly accurate.
What next? If, after the August sight, premiums remain high – then this indicates we are in trouble. It signals that the market feels this hasn’t been the last increase for this year. This expectation will trigger reactions, as the DTC has never been seen as an organization that will tolerate large market premiums for more than a few months. Let’s wait and see – and reflect that things were much easier in the old days, when one huge sight was enough to dampen expectations.