Learning a Lesson from History

Polished diamond wholesalers have been reporting improved sales over the past few weeks. The improvement is most evident in sales made to US retailers seeking dossier goods in HIJ colors, SI and I clarities. In addition, sales to China have also increased somewhat in the lead up to the Chinese New Year. The goods destined for China are similar to those being sent to the US, only of slightly higher clarities – VS and SI.

Are these signs of a turn around? Can we in all honesty say that the end of the diamond crisis is in sight? I think it is too early to say. The 2015 November-December holiday season was not much better than the 2014 holiday season, according to most reports from US retailers. Improvements have mostly been reported in lower price point categories, which are dominated by gold and semi-precious stones, and less so by diamond jewelry. Regardless, the rise in business activity is a welcome development, and the improved mood among diamond wholesalers is understandable. 

However, we must keep in mind that the improvement is modest. The total value and volume are far below historic levels and it will take a lot more in terms of sales and demand before anyone can reasonably declare us to be within sight of the light at the end of the tunnel.

Furthermore, the current demand applies to a very narrow range of goods and once the orders for the Chinese New Year are filled, there is nothing on the horizon to drive sales for several months to come. 

What is most worrying at this point is the action that some midstream players may opt for in light of recent sales activity. Demand for rough is already rising, including for goods other than those that produce the items currently in demand. 

At the last Sight in 2015, De Beers reportedly sold more than $200 million worth of goods, more than double the sales reported in November. For the upcoming Sight, scheduled to start today (January 18), demand from Sightholders is reportedly very high, with requests totaling an estimated $700 million – more than triple sales for December and nine times the figures for November.

If there is a rush for rough diamonds and competition is high, then there is a chance that premiums will rise, followed by a rise in the cost of rough diamonds in the secondary market. This, as history has proved, will lead to increased prices from miners that don’t want to miss out on an opportunity to make more money. 

If such a scenario plays out, we are truly doomed. The diamond industry, in a painful process over the past year, has seen rough and polished prices decline in such a way that there is simply no opportunity for improved margins. To generate this opportunity, rough diamond prices cannot suddenly spike. They must not. 

This situation calls for reasonable action on the part of miners. This means keeping the volume of rough diamond supply low until polished diamond inventories are reduced, while the price of rough remains in line with polished wholesale prices. 

Meanwhile, the midstream, and clients of the main diamond miners in particular, should act responsibly, maintaining their roles as gatekeepers. It is essential that the gatekeepers continue to make educated purchases as they did over the course of last year, while keeping a watchful eye on the goods, market demand and price. 

Buying when the price is right, at a volume that meets consumer demand – while applying the logic of rough pricing based on real wholesale polished diamond prices – is an essential course of action to lead the industry out of its current quagmire and toward a brighter horizon of reasonable profitability for all players across the diamond pipeline. Without such action, history will repeat itself, margins will be once again paper-thin, and the midstream will be chasing bank financing for oxygen.

The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser.