It Doesn’t Add Up…
October 14, 04The more I look at the protracted diamond supply and demand imbalances, the more I am convinced that we are heading for some 16-18 months of a weak market both for rough and polished. Too much rough (and resultant polished) has been, and is being, supplied and is out there in the market. One can play mathematical games with prices, but when we look at carats (volume), far more comes into the pipeline than goes out. In terms of values the same conclusion is inescapable.
Rough prices have bounced back to the historic high of 1998 and are sliding down again. Polished prices, after rising earlier in the year (and the various price list publishers are divided about how much), are again softening. And what makes it all so miserable is that the macro industry figures all confirm that the consumer market isn’t good – or isn’t as good as it should have been – and, when measured in real terms, the diamond jewelry consumer market is still stagnating, if not declining.
The Herald Tribune, in one of its recent fashion sections, highlights staggering increases of some 25% in luxury goods sales in the first half of 2004 over the first half of last year. The enormous gap in the pace of growth between luxury items and diamond jewelry sales is still huge – and again seems to be widening. Diamond consumption, according to De Beers, rose 5.5% in local currency and some 7%-8% when expressed in dollar terms in the first half of 2004. Polished prices rose more in the first half, certainly when compared to the first half last year. So we are witnessing some inflationary growth at best.
This is a
What upsets me is that the diamond market perceives shortages – and acts on those perceptions – ignoring the fact that on a macro level there are no such shortages. Somehow, early this year, there was a view (especially among Indian companies) that supply shortages were imminent. DTC boxes were traded at premiums of 15%-20%, and even more. Some producers knowingly sold rough at unsustainable prices, knowing full well that their clients would lose on these purchases.
Many goods were traded in the secondary market at exorbitant prices. What we now see is that those who bought at high prices are reluctant to sell at losses – holding on to the goods until the prices have gone up sufficiently. They are still waiting as this scenario did not play out that way. It didn’t happen – and it couldn’t happen.
Oversupply in the Market
In the past three years the diamond markets have been oversupplied. If one takes the total supply to the rough markets in 2003, for example, this comes to $10.1 billion. [New mining output, plus withdrawals from producer inventories.] After converting this supply to polished, De Beers says that the rough will yield $16.1 billion worth of polished, measured in polished wholesale prices (pwp). In 2003, however, worldwide polished demand (in the $14.5-$15.5 billion range at polished wholesale prices, depending on who is doing the calculation), was significantly lower – maybe by as much as $1 billion.
De Beers recently noted that polished stocks had come down some 17% from July 2003 to the end of June 2004. I can’t figure out how they achieve that figure. Maybe De Beers looked at the cumulative polished exports from the cutting centers to the main markets. These figures are up by some 21% (polished imports into the
A similar situation existed in 2002 and in 2001 for that matter. Even if we can argue on the size of the excess supply margins of these figures, there is absolutely no argument whatsoever on the fact that in the last few years we have seen a multiple billion dollar figure worth of diamonds in a growing stock overhang, with new rough supply being consistently and substantially higher than the sale of the resultant polished.
There is another figure that keeps popping up: in 2003, worldwide diamond jewelry retail sales were recently estimated by De Beers at $57 billion. We have heard this ballpark figure now for quite a few successive years (and our own figures indicate a $60 billion figure.) But, undoubtedly, De Beers has the harder information as it devotes enormous resources to its global tracking surveys. While giving a $57 billion market figure, De Beers at the same time estimates that worldwide diamond jewelry sales increased at a nominal growth of an average of 3.6% in the 1999-2003 period, after years of a negative growth of -0.2% in the 1994-1998 period. These are rates at nominal terms, and ignore general inflation as well as specific diamond price inflation.
The fact that the total diamond jewelry retail figure remains constant may point to a decline in retail margins on diamond sales, maybe it is the result of excessive discounting or – in absolute terms – retail profitability has taken a southward turn. That seems to be the case, but we lack the hard evidence to substantiate this premise.
Price Volatility
The best we can say for the market is that things have been slightly better in the past four years than in the preceding years, but, one must add, at what price? The stock overhang in the diamond pipeline is enormous even though De Beers claims that it decreased by 17% in the first half of 2004 over the first half of 2003. Looking at polished diamond imports into the United States, they went up in the first half of 2004 by 15.5% to $6.71 billion, but decreased in volume terms by -2.6%. Fewer carats are imported - and at 18.5% higher average import prices.
The price volatility in the market drives some players nuts. Rough prices may have gone up by some 20% or more in the past 18 months, but since the end of July they have come down again by some 10%. The premiums on the DTC boxes have been severely reduced to somewhere in the 3%-5% range and sliding. Some people who bought boxes at 15%-20% premiums only a few months ago, must either sell at significant losses or hold on to the boxes. Holding may well mean until early 2006, if we have a good Christmas season in 2005.
So why all the confusion? There are various psychological reasons. The DTC showed clients a nice slide measuring applications versus availability. Wow, that’s effective. There is no more effective way to show that De Beers doesn’t have sufficient goods. There is a fear that Argyle’s production may come down faster than expected and there are more and more voices indicating that the life of the mine will not be extended beyond 2007 by going underground. One also takes comfort from the fact that producer stocks have gone down to working levels and I have stopped trying to figure out how De Beers consistently reports inventory reductions of $600-$700 million when it publishes its figures. [Since its privatization in 2001, De Beers has reduced stocks by $2.1 billion.]
Looking at the supply side we see the growth in Diavik output, the growth in Venetia and Finsch mines in
We don’t see this convincing growth, certainly not at the same pace as rough supplies. Therefore, caution must be a word that guides all our actions for the next year or so. This is an industry driven by optimism. Some predict a doubling of rough prices within a decade. We don’t see it that way at all. We’ll have to go through a difficult period before sustainable demand and price growth will gain momentum.
Not yet.