Decline in the upper part of the diamond pipeline
De Beers and ALROSA reported a decrease in sales volumes and a decrease in prices. De Beers reported a 9 percent drop in sales to 13.3 million carats in the first half of 2015. The cost of diamond sales fell 23% to $ 2.7 billion. In response to the deteriorating market conditions, De Beers revised its production forecast for 2015 to 29-31 million carats. This is in line with my prediction of a reduction in supply.
ALROSA reported a 22% decrease in sales. In the first half of 2015, the Russian diamond-mining company sold 18 million carats for $ 2.1 billion. The average price per carat of diamonds of jewelry quality in the second quarter was $ 176, which is 3% lower than in the previous quarter, and since early 2015 it fell to 6%.
Reports of diamond mining companies cover the period until the end of June. Prices for diamonds have since continued to decline, as there has been a stagnation in the activity in the market. Is this just a price adjustment, or is it a wider change - market adjustment? Most industry participants agree that too many companies compete for a very small "piece of cake." The current crisis is so severe that companies with less strong fundamentals may be out of the game, which leads to a reduction in the number of companies operating in the diamond pipeline.
The confusion in the middle part of the diamond pipeline
Since the beginning of the year, I warned about structural problems in the middle part of the diamond pipeline. Over time, these problems have become a serious concern. The following series of questions are highlighted:
- One of the bankrupt companies was engaged in yellow and brown diamonds, for which there is a rather high demand, which suggests that even the most powerful sectors of the market are in a difficult situation.
- The market is almost inundated with expensive diamonds (that is, diamonds made from expensive diamonds) weighing 0.30-0.40 carats. What will happen to companies that have large stocks of such diamonds, especially if they specialize in this?
- Orders for the smallest diamonds (0.01-0.20 carats) are insignificant.
- Approximately 100,000 cutters and other workers were fired from factories in Surat, the diamond production center in India.
- Prices for rough diamonds are gradually deteriorating, but not at a pace that reflects the decline in diamond prices in the retail sector or the turmoil in the polished diamond sector.
- Prices on tenders also fell a little, but there it is about smaller lots that remain attractive and affordable for medium-sized producers of diamonds.
- Customers of large suppliers say that the goods are expensive and do not move, and therefore, a steady decline in the purchase of rough diamonds is expected.
- Most of the activities currently in the manufacturing segment are to resolve problems with debts and loans to prevent bankruptcy in the future. In addition, everyone is asked questions "who can be trusted?" And "to whom can I issue a loan?".
- Until recently, delaying payment of debt was a common tactic in the diamond trade. At the same time, the goal was to get enough revenue to make the necessary payments and support credit lines. But at some point this leapfrog will come to an end, and then the banks will need to act.
In addition, the debts to the banks are huge, and the payment of interest on these debts is only an additional burden for the participants in the middle part of the diamond pipeline.
Will Indian banks continue to lend and finance diamond producers with large production and large overheads? It is likely that the realities of today will encourage diamond producers to reduce their participation in capital-intensive operations, which will create more efficient companies with a more solid foundation, displacing those who can not optimize production.
Then companies will have to make more reasonable purchases of diamonds. Another result can be vertical consolidation. De Beers has already taken a small step towards vertically integrated companies such as Tiffany & Co., Chow Tai Fook and Sterling; All of them are sightholders, diamond manufacturers and retailers. De Beers itself, with De Beers Jewellers and Forevermark, is moving in the same direction towards vertical integration.
I am sure of one thing - the market of diamonds and diamonds will never remain the same. We will never go back to the existing structure. Since De Beers lost its monopoly share on the market, which led to the shift of business to the middle part of the diamond pipeline in 2000, a new business was born. A business that expands and passes through painful growth processes. I believe that from the ruins that we see today, a business with a more perfect structure will be born. A business that is more profitable has a sound economic logic, and in which all participants understand the value of money and how much revenue they should be in both polished diamonds and in any other business in any other industry.
Change in consumer trends
The assumption that the market can annually absorb diamonds for $ 23 billion, has never been confirmed. In fact, it's unlikely that the market is able to absorb more than $ 18 billion in diamonds. Clearly, a new approach is required.
We know that the demand for precious jewelry fell for some time:
- The volume of retail sales in the US has been steadily declining since October 2014;
- retail prices for jewelry are also declining, and losses were over 11% in less than a year.
Dry figures show that consumers are losing interest in diamond jewelry. This can be explained by changing tastes, lack of marketing or other economic reasons.
Diamonds grown in the laboratory cause fears
Diamonds grown in the laboratory continue to cause concern and are a burden for the diamond and diamond industry. I have already mentioned my feeling that there is a place for them as for a niche product if they are properly advertised.
Until recently, the issue was connected with unannounced diamonds grown in the laboratory, including mixing them with natural diamonds, and with the fact that they were given out for natural ones. The motive for such an illegal action is the difference in profits. The cost of diamonds grown in the laboratory is much lower than the cost of natural diamonds. By selling synthetic diamonds as natural at prices on natural diamonds, dishonest traders can get higher profits than they can have when selling natural diamonds.
This problem has recently extended to diamonds with the invention of CVD (chemical vapor deposition) diamonds that look like natural diamonds. At the present time in the middle part of the diamond pipeline there are growing concerns about the penetration of undeclared CVD diamonds grown in the laboratory. In particular, there are concerns that CVD diamonds will mingle with natural diamonds from Africa and other producing countries.
According to a report by HRD Antwerp, a Chinese company produces almost colorless CVD diamonds with octagonal and other "natural" shapes and small sizes - 0.01-0.04 carats. Unsuspecting buyers may find themselves in a situation where they cut and polish them and pass on these lab-grown diamonds as natural diamonds - unintentionally unintentionally. This can put such buyers in a compromising position, without their knowledge. Now it is not known how many cases of the offer of undeclared CVD-diamonds were.
The lack of control over compliance with laws and requirements to document production, trade and production of synthetic diamonds can lead to the emergence of a new type of conflict diamonds, thereby undermining the tremendous achievements of the Kimberley Process that cleared the sector of natural diamonds from conflict diamonds.
http://www.ehudlaniado.com/home/index.php/news/entry/diamonds-in-crisis-call-for-an-overhaul
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