Hello Laszlo
An article of interest and a few to follow on my next post.
State of the Diamond Industry
(by Marcel Pruwer)
The performance of the international diamond market over the last year has clearly displayed the relative strengths and weaknesses of its constituent parts thereby highlighting the privileged positioning of .
The already well documented volatility which hit the smaller, cheaper end of the rough market after July 1996, when Argyle announced its decision to market its Australian mine production alone, set the stage for markedly different trading conditions in the various segments of the rough and polished market.
Although rough sales have at first sight been satisfactory, CSO rough sales for 1996 were a record US$4.83 billion with first-half 1997 sales of US$2.88 billion also a record, this performance belies significant differences in price performance across the wide range of rough categories.
Firm demand continues for gem quality rough diamonds, especially in half-caraters and larger. A fairly tight distribution by the CSO in these goods has kept demand buoyant. The slower flow of Russian rough, diminished deliveries from Angola in the light of growing tensions between the MPLA Government and UNITA, and restrained activity in the Congo has so far this year limited the flow of outside rough onto the diamond market.
The weakness in cheaper qualities of rough, which began with the aggressive selling of Russian rough outside the CSO in breach of a Russian Government-CSO contract, grew with Argyle's market-direct decision, and has spilt over to the polished diamonds produced from these qualities. Over-stocking of rough and polished diamonds at the Indian cutting centres, and to a lesser degree in Tel Aviv, may in a currently difficult diamond trading market, still create some problems in these areas.
On the other hand the tight supply of better-gem diamonds on the world market has ensured firm prices in these qualities, almost across the board. These bettergem diamonds represent the core value of production from the South African based kimberlite fissure mines.
In polished consumer markets, Japan and a number of Pacific Rim diamond retail markets have reported a somewhat weaker performance in the first half of 1997. This is mainly due to local macro-economic conditions which have recently been exacerbated by currency volatility. Japan is reportedly down by over 15% while Thailand is weaker as are Germany and France. The UK produced a 13% increase in 1996 and is up 18% in the first half of 1997. The Philippines reported growth in 1996 of 20%, Indonesia of 12% and Hong Kong of 10%. Quiet polished markets and the current pressure on manufacturing margins may make for a more difficult diamond market in the second half of 1997.
The crucial American market, the largest in the world for diamond jewelry, was up 6% and is expected to show 8% growth in 1997.
For 1996 De Beers reported an increase in the average price of diamond jewelry sold, and a growing American diamond jewelry market, especially in the category of $2,000 and up.
A cause for concern in the American polished diamond market is the competition-driven increasing credit and memo program envelope. This push for market share carries some risk of wearing down margins, increasing risk and lowering the quality of business in the world's largest polished market.
The supply/demand equation for rough diamonds appears to be coming into ever tighter balance, with the Russian stock-pile by now much diminished with anything between LIS$3-4 billion of rough diamonds sold down from this source over the last few years. In addition the Russian stock-pile is now seriously out-of-kilter with much of the cream already sold leaving an out-of-balance stock of largely cheaper rough.
The 15% "quota" system imposed by De Beers several years ago is rumoured by some to have been relaxed. James Picton of Standard Equities in South Africa suggested recently that the quota may have been lowered to a current rate of around 11 %.
Deliveries of Russian rough outside CSO channels this year have so far been down on last year. This is largely due to delays in the granting of export licenses. A number of pre-paid rough shipments were blocked in Moscow pending investigations which are reportedly the outcome of power-plays and political manipulations seeking control of Russia's diamond industry. These manipulations extend to a tug-of-war between Moscow-centre and the Republic of Sakha and President Mikhail Nikolaev as well as between various competing Government and business factions in Moscow.
Second-half sales of Russian rough are expected to be larger with an appropriate effect, again mainly on the cheaper, Indian end of the rough market.
On a longer-term strategic note, the Russian Government is reportedly in dire need of funding for its diamond mine exploration, development and expansion programs. This need for financing will require the introduction of sounder, more transparent accountability in order to satisfy Western bankers and investors.
SBC Warburg and Smith, Barney have reportedly been nominated to advise on the raising of several hundred million dollars in Eurobonds for ARS later this year and around US$100 million in loans from SBC Warburg, NatWest, Credit Suisse and Tokobank may have already been extended to ARS this year.
The introduction of Western style reporting, accounting and transparency requirements is likely to tighten up sales and marketing. If Russian dumping and aggressive competitive marketing come to an end this will help Russian diamonds fetch the right price and in general prices for cheaper diamonds may recover to the levels they commanded when the CSO had firm control of this segment of the market.
Polished goods in demand over the last year include 0.50 pointers, 0.75 pointers, 11/2 caraters and 2 caraters in H colours and better, in VS, SI and PI qualities, for the most part "American" goods. Cape colour polished, those colours at the darker end of the diamond colour spectrum, had enjoyed a period of popularity due to Far Eastern demand but the market for these goods has eased this year. Demand for various categories of fancycut diamonds including emeralds, marquises and princess-cuts, continues in a range of qualities up to 3 caraters. Strong demand continues for larger, perfect diamonds and for rare, special gems.
The market for commercial mel6es, full-cuts and other smaller polished diamond assortments has been extremely competitive offering manufacturing jewelers and retailers the benefits of wide choice and attractive pricing.
While the immediate future holds certain challenges for the cutting and wholesale global diamond jewelry market, especially in cheaper and medium polished, beyond the short-term horizon the prospects are excellent. To a great extent current problems of profitability in the cutting centres are the direct result of Russian and Australian marketing strategies and in time these are likely to play out to the benefit of the overall industry.
A discovery rate of major new economic mine deposits measured in isolated instances every 50 years and the steadily increasing number of diamond and jewelry consumers counted in the billions, promises a buoyant and profitable market for well-managed producers of high-quality diamonds.
Regards |
