DIAMOND MARKET – JANUARY 2016
Global diamond supply remains dominated by the two majors, De Beers of Anglo American and Alrosa of Russia. World production is then supplemented by several other mining companies, including Rio Tinto Diamonds, Dominion Diamond Corporation, Petra Diamonds, Gem Diamonds and Lucara Diamond Corporation.
2015 was a very challenging market for the diamond trade. Producers, manufacturers, traders and retailers all suffered from tight liquidity and low margins in the middle market resulting in a drop in business levels and revenue.
Following on from 2014, which saw rough diamond price increases in the first half and subsequent decreases in the second half, the difficult market situation continued throughout 2015.
Rough Diamond Market
Over the course of the past twelve months, the market has faced significant challenges. Producers have attempted to sell as much as possible, but faced with continued, rejected allocations by their clients they have been forced to reduce both volumes and prices, as well as allow their clients to defer purchases.
The larger producers have either cut production in H2 2015 or reduced supply to the market and they will face a fall in revenue (expected to be up to 35%) for the full-year 2015. Smaller producers, who sell via tender/auction, have fared better as they were able to place their lower volumes into the market at prevailing prices.
Companies such as Lucara Diamonds, which famously unearthed the second largest diamond in history (a 1,111 carat Type IIA diamond) as well as several other large gems from its Karowe mine in Botswana, have continued to perform well.
The so-called middle market, comprised of traders and manufacturers, has seen financial weakness and several bankruptcies in key cutting centres. This situation has been caused by a combination of high rough diamond prices, declining polished prices and reduced demand from the emerging markets, particularly China. India as the world’s largest cutting and manufacturing centre has been worst hit.
Beneficiation (value-adding activities such as polishing in producer countries) in African countries has struggled with Botswana, South Africa and Namibia all seeing factory closures due to the reduced ability of manufacturers to operate profitably in these relatively high cost centres.
Since the beginning of 2015 rough prices are estimated to have fallen by 15-20%. The market is not expected to show stable price growth until mid-2016, as destocking continues. However, as the market re-opened in January, there were positive signs that supply shortages in polished are bringing back some demand for rough diamonds. The pricing strategies of the key producers over the next few months will be a major factor in whether the rough market stabilises.
Polished Diamond Market
Polished demand and sales showed a mixed picture in 2015. The key US market, with around 40% of global polished sales, was relatively solid. Increased consumer confidence gave a boost to jewellery retail sales. The industry awaits the results from the key festive season sales.
However, the emerging markets of China and India have both struggled and both polished and retail sales figures weakened in 2015. The aggressive expansion of jewellery stores over the last decade has stopped and some of the majors are actually closing retail units instead in order to improve operating efficiencies.
The main trade fairs in Hong Kong, Las Vegas and Mumbai in 2015 were disappointing and the widely hoped for shortage in polished supply did not materialise across the full range of polished articles.
Polished diamond prices are estimated to have fallen by 7% since January 2015, compared with the drop of 15-20% in rough prices.
Faced with tough trading conditions, the industry acted in 2015 to combat the market challenges.
- Several mines were put on care and maintenance (for example Snap lake in Canada, Damtshaa in Botswana); other producers cut back on production.
- The Diamond Producers’ Association was established in May 2015 – this is a body operated by the leading miners around the globe to support marketing initiatives to promote demand for natural diamond jewellery.
- De Beers embarked upon new advertising campaigns in the US and emerging markets to drive renewed demand for diamond jewellery over the key Christmas season.
- Several initiatives to combat the threat of synthetics diamonds were initiated.
The next 3-6 months are expected to remain challenging for the diamond market. Reduced supply volumes will help, potentially supported by further price decreases from the rough producers. The all-important Christmas retail season, when traditionally 40% of diamond jewellery sales by value are achieved, will serve as a guide to how the 2016 market opens.
As the reduced polished supply from 2015 takes effect, it is hoped that 2016 will start on a stronger footing and it is expected that rough demand should improve.
The longer-term picture remains bright and is supported by robust supply-demand fundamentals. Limited opportunities for growth in rough diamond production are available and diamond production is forecast to decline after 2020. At the same time global diamond jewellery demand is predicted to grow at up to 5% CAGR for the next 10 years and beyond, driven mainly by the US and a recovery in the emerging markets. Therefore, both rough and polished prices are expected to grow strongly in the longer-term.