"The market is dead," "the mood is bad," "it's about to get worse," "diamond BUSINESS? There is no business," were just some of the comments uttered by rough traders, Sightholders, brokers and manufacturers this week. They all voiced a negative outlook and mood.

 

When the DTC Sight started last week, for example, traders were apprehensive. "Will they know to lower prices?" was a common question.

 

And it's not as if Sightholders left it all in the hands of De Beers. As we reported last week, Sightholders have the option to defer delivery of goods, changing their original request schedule (ITO – Intention To Offer) and they did so ahead of the June Sight.

 

Sightholders can also ask for goods beyond their ITO (ex-plan), but refrained from such requests because of the low demand. This further decreased the amount of goods at the June Sight.

 

A third option Sightholders exercised was leaving goods on the table. We understand that many Sightholders refused many of the boxes. One estimate is that as much as 15-20 percent (!) of the goods were left on the table.

 

All of these actions trimmed down supply to the market, with the Sight estimated at $500 million or less. Is that a message Sightholders are sending De Beers CEO Philippe Mellier?

 

Many Sightholders are quietly – and off the record - criticizing Mellier and the new management style. The undeclared philosophy of “sell as much as we can, for as much as can” is viewed as short sighted. Many Sightholders will not dare say they need less. They will not dare admit to the DTC that they can't afford the goods.

 

With that sense of growing resentment at the DTC's perceived unwillingness to recognize the current difficult economic reality, Sightholders are offering the goods to the secondary market, which has no need for the goods either.

 

Knowing well the Sightholders position, offers for boxes are below DTC list price, sometimes as much as 10-15 percent below. And Sightholders are selling – at a loss. Not a 15 percent loss, but even at 8 percent below the list price, after costs and brokers' fees the real loss can be as deep as 11 percent.

 

According to one Sightholder, in certain goods there is a sense of panic. A box sold at a very low price, sets a price precedent in the market.

 

Sightholders are, however, selling the goods at a loss, mainly to generate turnover.

 

It should be added that De Beers does not always have the goods it is supposed to have according to the ITOs. Therefore, many boxes were not available. Overall, about 40 boxes, including the entire Crystals and Fancy selection, were apparently not offered at the June Sight.

 

Many Reasons for the Current Situation

The early summer time is traditionally a slower period. After last year's wild price ride – fueled by new stores creating an initial inventory (mainly in China) and gold jewelry shops adding diamond jewelry (mainly in India) – this year's lull is also being caused by retailers. They can see that polished prices are declining, and are holding off their purchases.

 

The slowdown in Europe, the hesitant improvement in the U.S., concerns in China that the consuming markets are buying less and tough financing in India are all contributors to the current situation. However, consumers in China and India are still buying diamond jewelry.

 

This is leading to some hope that the situation will turn around as soon as retailers are forced to replenish their inventories.

 

Prices

In some areas, the DTC hiked prices. This included the Colored Sawables 3 grs / +7 up 3.1 percent and Preparers Low 2-10 cts, up 8 percent, although the assortments are not better either. In the case of the Preparers box, demand was low, making the price increase out of tune with the market (see demand for DTC boxes below). Round Makeables 4-8grs, with an improved assortment, was up 4.7 percent to $1,270.

 

In many other places, the price decreased. Fine Sawables 4-8 grs was down 6.5 percent to $1,029. Select Makeables 2.5-4 cts were down 4.1 percent to $1,554.

 

While more boxes are at lower cost, everyone agrees the prices are still very high. They are too high to manufacture at current polished prices, and too high offer to the secondary market at a profit.

 

Alrosa, which just announced improved revenues (+4 percent) and profit (+8 percent) in the first quarter, recently reduced prices by 3 percent on average. The price of the high quality smalls were reportedly reduced by as much as 10 percent.

 

At BHP Billiton, prices mostly decreased for the 2.5 cts with bigger goods, losing up to 10 percent. The two exceptions were the 2.5-10ct ZMC BRN and 2.5-10ct CL/Lo White, which were up 3.5 percent and 4.5 percent, respectively (see table 2 below).

 

Outlook

The outlook is murky at this point and for the near future. If the Hong Kong show, which opened today, is a success (contrary to traders’ expectations), then the turnaround is near.

 

A more realistic expectation is that matters won't improve before September.

 

Demand for Key DTC Boxes following June Sight

Article Demand Remarks on Demand Fine 2.5-4 ct & Fine 5-14.8 ct Medium demand for 2.5-4 ct and low demand for 5-14.8 ct Lower demand than last month. Trading just above list. Crystals 2.5-4 ct & Crystals5-14.8 ct Low demand for 5-14.8ct and medium demand for 2.5-4 ct Same demand for 2.5-4 ct compared to previous Sight. Trading below list. Commercial 2.5-4 ct & Commercial 5-14.8 ct Medium demand for 2.5-4 cts and low demand for 5-14.8 ct Better demand compared to previous Sight. Trading below list. Spotted Sawables 4-8 gr Medium demand Better demand compared to previous Sight. Trading just above list. Chips 4-8 gr Low demand Lower demand than last Sight. Trading below list. Colored Sawables 4-8 gr & Colored 2.5-14.8 ct Medium demand for both sizes Lower demand compared to previous Sight. Trading just above list. Makeables High 3 gr +7 Low demand Lower demand than previous Sight – trading below list. Preparers Low 3-6 gr Low demand Lower demand than previous Sight. Trading just above list. 1st Color Rejections (H-L) Low demand Lower demand than previous sight. Trading just above list.  Table 1

 

BHP Billiton April Spot Prices*

Item May 2012 Price P/C June 2012 Price P/C % Change 2.5-6ct Z White $3,517.18 $3,425.00 (2.6%) 2.5-6ct Z/Low White $2,583.04 $2,583.05 0.0% 2.5-6ct MB High $3,112.00 $3,026.00 (2.8%) 2.5-6ct MB Low $2,603.72 $2,499.00 (4.0%) 2.5-6ct Fancy $1,637.00 $1,631.48 (0.3%) 2.5-6ct CLIV WHITE $1,503.00 $1,481.11 (1.5%)         2.5-10ct ZMC CTD $1,260.00 $1,127.00 (10.6%) 2.5-10ct ZMC BRN $1,207.00 $1,249.00 3.5% 2.5-10ct CL/Lo White $576.00 $601.91 4.5% 2.5-10ct CL/Lo BRN W $169.76   .+2.5ct RJNS $105.18 $102.50 (2.5%) Table 2 *All BHP Billiton price data collected from third parties