With the major diamond miners keeping prices of rough diamonds steady for another cycle and the supply somewhat smaller than in the past few months, demand for some goods are on the rise. It seems that current demand correlates to size – the larger the goods, the higher the demand.

 

The May De Beers Sight was on the smaller side, estimated at $500 million-$550 million, compared to an estimated $650 million-$680 million at the previous Sight. A major reason for the decline in total value was the lack of ex-plan – no additional goods were offered beyond the regular allocation.

 

The reason for this is not clear. It could either reflect limited availability of goods or limited demand from Sightholders, or a combination of both.

 

While supply was some 20 percent smaller, prices seem largely unchanged, nothing more than a few small adjustments and some marginal changes to box compositions. After the price hikes in April, that were met with plenty of dissatisfaction by clients, the steady prices were welcomed by Sightholders who continue to struggle with constricted margins – even though polished diamond prices have inched up.

 

Further putting minds at ease is an understanding that De Beers does not intend to increase prices further in the next few months. This understanding, which Sightholders say comes from their talks with De Beers’ team, follows a statement that the company intends to raise prices by 5 percent every year. That statement appeared in an interview CEO Philippe Mellier gave Bloomberg, titled “De Beers Diamond Prices Rising as Anglo Chases Goal.”

 

So far this year, De Beers has already increased prices by an estimated 7 percent. Sightholders may take comfort in the thought that prices may be reduced later this year. In any case, Sightholders did not refuse goods at the Sight last week.

 

Alrosa Allocation Shrinks For a While

Alrosa’s supply must be examined before discussing current demand. The Russian company decreased allocations, according to one source, by nearly half. The company supplied, according to one estimate, $270 million-$280 million worth of rough this cycle, compared to some $500 million in the recent past.

 

Another estimate is that the current allocation is some 20-25 percent smaller. Either way, Alrosa has cut supply significantly and supply may remain constrained until September. The reason for the limited supply may have to do with a recent drop in production. In the first quarter of 2014, Alrosa mined 7.89 million carats, a 20 percent decline compared to the preceding quarter (Q4 2013) when it mined 9.86 million carats.

 

Demand Improving

With prices stable, smaller supply and an understanding that the volume may remain lower (or as diamond traders view it – a shortage), demand started to improve. There are additional reasons for the improved demand, mainly, as already noted, prices of polished diamonds are improving in some areas.

 

There is much better demand for 3-8 grainers than after the previous Sight and according to one secondary market trader, the situation is “crazy”. Next up, 2.5-4 carat goods are doing even better. The large goods, 5-10 carats, are doing especially well, and specials, 10.8 carats and larger, are the most sought after items.

 

The results of the last auction of diamonds at Sotheby’s highlights the strong demand for exceptional diamonds for investment and collection purposes, in turn explaining demand for larger rough diamonds.

 

At the same time, traders are reporting a decrease in demand for smaller goods, half carat and smaller. This could be either a result of an abundance of supply or lesser demand for the resultant polished goods.

 

Interestingly, demand for goods from De Beers is not as strong in the secondary market. As the table below shows, demand for boxes of De Beers’ rough is improving, but apparently not doing as well as rough from other sources.

 

New Contract

Demand rising or falling, Sightholders are very focused on a different issue altogether – the next contract.

 

Work on the new contract is still underway. One key component of the new contract, the demand for a 20-percent capital adequacy ratio, is now off the table. The issue led to strong resistance from the large firms with substantial turnover, as well as dealers who turn their goods 10 times a year.

 

The issue still in hot debate is the demand for IFRS accounting standards. According to one source, profits of a subsidiary are not recognized under IFRS unless transferred to the parent company. However, many diamond companies have a complicated tax structure aimed at decreasing tax payments. Bringing profits from subsidiaries in Dubai or Hong Kong (where there are no or low taxes) to a Belgian or Israeli parent company means that taxes will be very high and profits even further eroded, a painful issue for companies with a single-digit margin.

 

With the added need to state the value of the stock in a different way – something that raises further complications for Sightholders, one option on the table is some sort of dual reporting. The new contract is an issue that is highly likely to continue to occupy the agenda of the industry’s biggest firms for the near future.

 

Demand for Key DTC Boxes Following May Sight