De Beers’ Sight: Recovery or Overload?
April 18, 2016
De Beers reportedly raised rough diamond prices by an average of 2% at its 4-8 April sight cycle. The $660 million (£460 million) total announced by De Beers was larger than expected.
The price increase caused some concern in the market from manufacturers who have just begun to return to profit after nearly two years of struggle. Since there have been no reports of clients refusing goods as they did last year, however, most were still on the profitable side and have accepted the deals.
De Beers’ CEO Philippe Mellier said polished diamond demand has been reasonably positive at the wholesale level and that “rough demand is significantly stronger” than last year. He hinted that the 16-20 May cycle will be smaller because seasonal demand usually declines mid-year.
Alrosa announced it was sitting on a 22 million carat (valued at $2.5 billion/£1.7 billion) stockpile of rough left from last year, when it cut back sales by nearly 25%. The company will reduce its mining output this year by 5% to 7%, but noted that it sold $780 million (£540 million) worth of rough in January and February, slightly less than De Beers by value.
Some analysts worry that De Beers and Alrosa may be compromising the recovering market by selling more rough than world demand warrants.
In addition, the credit situation in the diamond industry continues to tighten even as the trade recovers from the difficulties of last year. Bankers − and most diamond people − acknowledge that the recovery is fragile, based on a reduction of excess stock and firming polished prices.
This week, Standard Chartered Bank, which holds about $2 billion (£1.4 billion) in loans to the industry (about 12% of the industry’s total outstanding credit), reportedly informed its clients that they would have to provide collateral for 100% of their outstanding loans or obtain payment insurance for their outstanding balances. The bank said it will not accept receivables as collateral as it (and other banks) had done in the past.
Standard Chartered blamed its action on an increased regulatory and compliance environment, but the bank has been struggling with non-performing loans across the board, particularly in commodities – especially oil and gas – which have fallen sharply in price since the China bubble burst. Bloomberg reported that the bank is trying to shed or restructure about 40% of its $261 billion (£181 billion) loan portfolio. The new CEO also replaced all of the bank’s senior managers.
The presidents of the Israel Diamond Exchange and International Diamond Manufacturers Association both called for a concerted action to lobby industry lenders to ease credit restrictions at the upcoming World Diamond Congress in May.
China’s largest jewellery retailer, Chow Tai Fook, reported continued declines in sales, both in Hong Kong and on the mainland. The company said same store sales were down 26% for the quarter that ended 31 March, compared to the same period last year.
Gemfields reports that its April auction of quality emerald rough achieved near record prices: 469,000 carats sold for $33 million (£23 million) or about $70.68 (£49.06) per carat.
CEO Ian Harebottle said the company was shifting its marketing strategy to get closer to retail markets. It did not renew the three-year contract with actress Mila Kunis, who it had previously featured in its advertising. The company is putting that money into partnering with top retailers, such as Bergdorf Goodman in the U.S., to promote emerald and ruby jewellery, much of it under the Fabergé brand it acquired two years ago.
The company earned $12.3 million (£8.5 million) on revenues of $171.4 million (£119 million) in 2015, selling 30.1 million carats of emeralds from its Kagem mine and 8.4 million carats of ruby from its Montepuez mine. Harebottle said the company is committing 20% of its revenues to growing demand, 11% on advertising and 9% on exploration, with projects in Colombia, Sri Lanka, Madagascar and Ethiopia.
This spring auctions will bring potentially record-breaking sales of fancy coloured diamonds and a major ruby to market.
On 20 April in New York, Christies will offer the 15.99 ct. Jubilee Ruby set by Verdura and a 10.07 ct. Fancy Intense purple pink diamond, graded by GIA. On 18 May in Geneva, Christie’s will auction the 14.62 ct. Fancy Vivid Blue Oppenheimer diamond, which is expected to bring in $38 (£26 million) to $45 million (£31 million).
Sotheby’s Geneva auction on 17 May will offer the “Unique Pink” a 15.38 ct. GIA-graded Fancy Vivid pink diamond, which is expected to sell for $28 (£19 million) to $38 million (£26 million). And, earlier this month, the 10.1 ct. De Beers Millennium 4 Fancy Vivid blue diamond brought $3.1 million (£2.2 million) per carat ($31.8 million/£22.1 million total) at Sotheby’s Hong Kong sale. The same sale brought a $2.47 million (£1.71 million) price for a Fancy Vivid orange diamond and a similar price for an imperial jadeite ring with matching earrings.
Russell Shor is senior industry analyst at GIA in Carlsbad.