Rough Diamond Market suffers

DiamondWatchMay14Accounting Issues, price hikes and a quiet market, all are to be held responsible for the deprived rough diamond market worldwide. De Beers price change, new sight holder contract; financial requirements and Alrosa sales are some of the key factor impacting rough diamond market.

The rough sector of the global diamond pipeline has always been in a good state until recently. With De Beers proposing a new contract – simplified, with important additions, but still troubling in a way, Alrosa making apparent moves to protect itself from possible sanctions by the U.S. and European Union and price hikes has been affecting the market acutely. 

De Beers Price Changes

De Beers’ Sight three was a good size estimated at $650-$680 million, and included some price hikes for a total change of an estimated 3.5-4.0 per cent and very few goods were left on the table by Sightholders. This is due to a certain cooling in the market, which raises the question – why so many goods, at a higher price and with few refusals.

De Beers’ price hikes in January and February is viewed as a late reaction to the hot market. De Beers had maintained prices earlier. Few buyers believe that if the company had left prices untouched, it would have had a stabilizing impact on the market and stopped, or limited the seasonal price seesaw – that rose in first quarter, reduced in summer and declined in the last couple of months.

As per one of the seasoned trader, the March price hikes affected the market negatively. De Beers, on the other hand, feels that not raising prices would have resulted in wild speculative purchases ahead of price hikes in April or May. De Beers is proposing changes to the Sightholder contract in the next contract period, including foregoing the thick questionnaire known as the CPQ. Without it, all current Sightholders will likely remain clients and their supplies (Sights) remain the same. This will result into Sightholders stocking up on more and pricier goods.

Now that a new financial year begun, the need for these goods by the larger firms drops and the price hike missed the tide. Worse, many of the polishers that use these goods are smaller companies with fewer financial resources that now can’t afford them, so the price hike may have actually harmed the real demand for these goods.

New Sightholder Contract

As early as last year, former DTC CEO Varda Shine said that the next Sightholders contract won’t include the CPQ, the in-depth questionnaire that was part of the Sight application that helped De Beers determine who will get a Sight, which goods will be included in the Sight and what percentage of a specific item will be allocated. In the eyes of many, the CPQ was overly intrusive.

 

However, without the CPQ, all current Sightholders will have their contract renewed (unless there is a major problem, such as a breach of Best Practices Principles – BPP). The issue is that without the CPQ, there is no way for De Beers to really assess the changes in Sightholders’ need, and therefore there is a good chance they will get the same or a very similar Sight. Some are grumbling about it because they are seeing a growth in their business and would like to get a larger Sight.

Financial Requirements

An important component considered for the new contract is a more rigorous financial compliance criterion. De Beers wants to require Sightholders to adopt a stricter financial reporting standard, IFRS compliant.

The financing banks are also demanding the same to track the money they have lent. With a growing need for transparency, Basel III requirements, the rising cost of lending and higher risks, banks want their borrowing clients to adopt corporate accounting standards that would make it easier to understand what is happening in a company. Banks want to know how the financing is used, what is bought and where the goods are going, as well as to track payments to understand how the money is flowing in.

Alrosa Sales and New Options

Alrosa may be better than De Beers. At a time when there are many goods in the secondary market, Alrosa offered fewer goods and did not increase prices, much to the relief of its clients. When a large miner, such as De Beers or Alrosa, has a long-term supply contract with a company, it delivers the rough diamonds to where the company is based. The exception is with De Beers’ Sights in beneficiation countries.

Alrosa, perhaps worried about possible sanctions by the US and EU as a result of Russian intervention in the Ukraine, has circulated amongst its contracted clients a questionnaire asking about other legal entities that are part of the clients’ group of companies and where they are located. The idea is that if an Antwerp-based client has a company in Mumbai, the goods could be delivered to India instead of Belgium in the event that the EU imposes sanctions on Alrosa.

This would be bad news for Antwerp as a center. Antwerp imported 22.8 million carats of Alrosa diamonds worth $2.8 billion, accounting for 25 percent of Antwerp’s total import of rough diamonds, according to the AWDC. From Russia’s perspective, Antwerp accounts for 50 per cent of its total rough diamond exports in terms of both volume and value.