Bank Suspends Credit for ‘Unprofitable’ Rough Diamonds
July 22, 2019
De Beers and Alrosa both slashed their rough diamondsales in the second quarter of this year and further cuts are sure to come following ABN AMRO’s announcement that it will no longer finance rough purchases for goods that can’t be cut profitably – which includes the majority of sizes and qualities.
ABN AMRO’s restrictions are stringent. It defines “profitable” sales as those that can achieve “real sales margins for goods sold as soon as possible after purchase of rough without considering credit terms”. This means the bank is likely to finance only a narrow range of goods that are in demand; mostly medium to better quality diamonds above 0.5 cts.
The bank also said that clients wanting to use its rough-buying credit facility need to apply on a case-by-case basis for the time being.
Diamond manufacturers in India report that prices have fallen as much as 10% on such diamonds in recent weeks, even though manufacturing output has declined by about 40% on the same time last year.
Stocks of rough and polished diamonds in the major cutting centres – especially India – are approaching levels where the supply overhang causes polished prices to drop to levels where it is no longer profitable to cut rough – especially in goods that would result in 0.25 to 0.50 cts.
De Beers will certainly allocate another small cycle sale of rough diamond in July, following a very small June allotment. The May and June rough sales - the company’s smallest in several years - and disappointing results from the Las Vegas and Hong Kong trade shows have not helped diamond market sentiment. The company’s sales in the first half of the year are down nearly 20% compared to last year and are likely to drop further during the second half of the year.
Alrosa announced that its rough diamond sales are down 33% by value for the first six months of this year, with June’s allocation down by 43% compared to the same month last year. Sales will likely sink further after the ABN AMRO announcement.
Some manufacturers are expecting relief following Rio Tinto’s announcement that it will close its large Argyle diamond mine in Australia at the end of 2020. Rio had indicated it might close the mine on several occasions some years ago but, because stocks of rough and polished have been accumulating to the point that prices for both have been softening, the announcement is real this time.
It is unlikely, however, that taking Argyle’s 14 million carats out of the market will be a cure-all for the industry’s high stock levels because much of the mine’s output filled a specific niche – millions of carats for low-priced mass market jewellery. The majority of Argyle’s production is small goods with a brownish tint and an average value of about $13 (£10) per carat. Removing such material from the market will not alleviate the large stocks of diamonds larger than 0.20 cts.
Just after making the mine closing announcement, Argyle unveiled its latest collection of fancy coloured diamonds, which will go on sale at its annual tender sale in September. This year’s collection of 64 diamonds weighs a total of 56.28 cts.
The six hero stones, all graded by GIA, are the
- Argyle Verity, an oval, 1.37 ct Fancy Vivid purplish pink
- Argyle Enigma, a modified radiant, 1.75 ct Fancy red
- Argyle Amari, a heart-shaped, 1.48 ct Fancy Vivid purplish pink
- Argyle Opus, a round, 2.01 ct Fancy Intense pink
- Argyle Elysian, a modified cushion-shaped, 1.20 ct Fancy Vivid pink
- Argyle Avenoir, an oval, 1.07 ct Fancy red
This will probably be the penultimate Argyle fancy coloured diamond tender sale, which began in 1984.
Russell Shor is senior industry analyst at GIA in Carlsbad.