The rough diamond market, always a dynamic section of the industry, is alive and kicking. Prices are changing, allocations are growing, trading is active and mining giants, such as De Beers and Alrosa (!) are looking for ways to start benefit from the developments. One thing is for sure - the market is hungry again for rough.

 

The Diamond Trading Company (DTC) Sight last week, estimated at $420 - $450 million, was a substantially larger Sight compared to the previous four Sights held this year. Despite a belief in the market, in part fueled by the Antwerp Town Hall meeting, that prices will rise, for the most part the DTC realigned prices. In general, prices of some boxes were up and others were down—in the 1-2 percent range.

 

There was no official second sales week, but there is an unconfirmed report that one DTC Sightholder bought more than $45 million in goods in the week following the Sight.

 

The current desire for rough is an indication of shortages in certain areas and a testament to the ability to generate profits from goods. Speculative buying, for the purposes of resale, still takes place, though a far less common practice than before.

 

The 2.5-4 carat goods Commercial boxes, yielding 1+ carat goods that often go to the U.S. market, are in high demand, and a good example of where profits can be made. DTC’s Fine boxes in this size range, generating VS clarity goods in HI colors, are somewhat expensive at ~$1,820 per carat compared to other suppliers - price differences are in the mid single digit percentage point. These boxes are therefore in low demand.

 

Demand for the 4-8 grainer boxes, which yield 0.2-0.9 carat polished diamonds, is improving. Conversely, prices of "Indian boxes" are considered too high and demand is low. Demand is also low for the 5-10 carat boxes.

 

The June Sight concluded the first half of the year's sales. Usually, first half sales are larger than second half sales but at less then $1 billion, and with DTC plans for $3.5 billion in annual sales, expectations are that following Sights will be larger and the temptation to increase prices is there.

 

Demand for the July Sight will probably reflect a rising appetite for rough, but with Botswana’s production returning to normal levels only in May, supply may well be lower than demand. This is the classic back-story for continued price increases.

 

What is Alrosa Trying to Do?

Alrosa is as enigmatic as ever. The company is not lowering its prices, despite being some 20 percent over market prices. As a result of these high prices, the company is not generating any large scale sales or even regular sales.

 

Reports have surfaced that the company made several discrete approaches to some of its former clients. Attempting to jump start business, Alrosa President Sergey Vybornov, quietly visited a number of theses clients in Israel and Antwerp. The secretive meetings did not necessarily include discussions about prices, just very personal invitations to subscribe to a new Alrosa marketing scheme. Details still remain vague.

 

So why not simply lower prices? Alrosa may have worked itself into a corner. At the onset of the economic crisis, it declared that it will start selling its production to the Russian state repository, Gokhran. Alrosa, for their own reasons, most likely sold these goods at full pre-crisis prices, locking itself into a high price position. If the company should start selling goods to clients at lower prices, how can it justify the price list it used with the Gokhran up until now? And how could it justify continuing high price sales to the Gokhran?

 

Alrosa is probably offering clients a long term deal. Should customers pay their high prices, the company in return will not raise prices if and when prices should recover.

 

As De Beers Managing Director Gareth Penny stated several times recently, rough prices peaked in August 2008, just before the economic fallout. Chances that rough diamond prices will return within a year to the same levels, after dropping approximately 40 percent, are slim at best. The proposed deal seems at this stage unappealing to many, though Alrosa has heard very few outright "nays" to date.