Price Bubble In The Offing?

By Kishori Krishnan Exclusive To Diamond Investing News

Following emerging signs of a financial recovery across the world, the question facing the global diamond market is – will the market report a full recovery in 2010?

With the news that global diamond-mine production is forecast to fall to $8 billion this year from $13.1 billion last year, according to Toronto-based RBC Capital Markets, the shine appears to be fading.

Many hope that by next October, prices for rough as well as polished diamonds would have recovered sufficiently, a sentiment shared by DeBeers, the world’s largest producer of diamonds.

Experts maintain that the coming year is likely to be a year of growth for the diamond industry, given that there is a “new normal” that traders have to contend with.

Global recovery and related issues came up for discussion during the 2009 Presidents’ Meeting of the World Federation of Diamond Bourses (WFDB) and of its sister organization, the International Diamond Manufacturers Association (IDMA) in Antwerp, Belgium.

The meet held between Nov 15-19 was attended by presidents of 28 affiliated bourses of the WFDB. Member-bourses of the WFDB are spread across all the five continents.

The highlight of the world meet was the introduction of a WFDB price list for polished diamonds. WFDB President Avi Paz told the gathering that the pricelist would be supported by the entire supply chain of polished diamonds – from manufacturers to retailers, and even customers.

The list is part of the WFDB’s overall plan to increase customer confidence on polished diamonds, given that customers have been squeezed by flat retail prices.

Financial crisis

Maintaining a doomsday attitude, Eyal Atzmon, whose Antwerp-based company El-Ran polishes and trades diamonds, told the gathering: “A lot of companies are going to be out” of business because of higher rough prices.

He was not far off the mark though. All four diamond miners who control 90 per cent of global production have cut down drastically on production. Whether it is De Beers Group, Rio Tinto, BHP Billiton or Alrosa Co – a seismic wave shot across the luxury market. Things could be heading back to normal soon.

De Beers mauled output by more than 90 per cent in the first quarter. Alrosa too, sold all its production to the Russian state in the first half, rather then sell roughs to their regular customers.

Symposium talk

Also discussing diamond market economics was the second annual Antwerp Diamond Symposium held on November 16 by the Antwerp World Diamond Centre (AWDC). Inaugurated by chief executive officer Freddy J Hanard, the AWDC is the official representative of the Belgian diamond sector, charged with managing the relationship between the diamond sector and government, and promoting the interests of the Belgian diamond industry worldwide.

Last year was the first time that the seminar was held when the sector was on the brink of the recession. Hanard told the gathering that the need for holding a second symposium was felt because of changing world conditions.

A section of the participants felt that recovery would be underway but would be slow. Moderator Chaim Even-Zohar and economist Pranay Narvekar said the retail market would post a 0.4 per cent rise next year.

However, because of destocking in the pipeline that has taken place this year, the modest increase in retail sales will result in a 25 per cent increase in polished sales in cutting centres to $17.1 billion.

A detailed report on the Symposium is available here

Mid-symposium delegates expressed fears that the speculative bubble in rough diamonds market was likely to pop by mid-2010, making the industry go into a tailspin yet again. The period could see a re-run of last year’s industry crisis, said Sergey Oulin, vice-president with the world’s second-largest producer, Russia’s state-run Alrosa.

Concerns around Alrosa itself were raised earlier, as was skepticism, as the firm had continued to maintain near-full production even during the economic downturn in contrast to other mining majors. It then sold of its output to Russia’s state depository, Gokhran.

The company’s sales reached approximately US$ 2 billion in the first ten months of the calendar year, an estimated $1.2 billion of which were comprised of sales to Gokhran.

Clearing misgivings on this front, Oulin said that Alrosa atleast had announced that despite the difficult economic circumstances, the Russian authorities had no intention of flooding the market with rough diamonds in an effort to make a quick buck.

Prices down

Prices for uncut diamonds roughly halved from August 2008, peaked in March 2009, but have since pulled back about 50 per cent, without an appreciable pick-up in polished prices or consumer demand for diamond jewellery.

Last year’s price crash prompted by the collapse of the global markets led to job losses for a majority of the 800,000 workers in India, the centre of diamond cutting and polishing.

But measures such as slashing of output and banks not pulling credit helped stabilize the situation. In fact, what had helped keep Antwerp’s 1,800 diamond companies afloat through this period of crisis was the financial “help” extended by two banks, the Antwerp Diamond Bank and the ABN Amro Holding NV’s diamond and jewellery division.

These two entities maintained credit lines to the diamond companies even as business dipped. Till last year, this industry was staring at a debt of $15 billion.

Victor van der Kwast, international diamond and jewellery group head at ABN AMRO, one of the main names in the business, told Reuters on the sidelines of the conference that the recovery was fragile and warned market players not to “jump too fast”.

Looking East

The diamond industry is looking to emerging markets, notably China and India, on its way to a recovery. Experts beg to differ though, saying neither country will be able to completely make up for shortfalls in the developed world for now.

The United States of America that consumes approximately 40 per cent of the world’s diamonds has reported encouraging sales figures in the run-in to Christmas (November).

The period November to December accounts for about 40 per cent of annual sales. US imports of polished diamonds in the first nine months of this year dropped 43.5 per cent. According to a report released in the second week of November, rough diamond imports by the US also remained low in September.

US gross rough diamond imports totaled $22.09 million on imports of 14,142 carats, an average value of $1,562.28 per carat. Net imports stood at $6.41 million.

Overall, the global retail demand for diamond jewellery is expected to decline by almost 10 per cent this year after having fallen 9 per cent in 2008. In 2010, analysts expect a very modest pick-up of only 0.4 per cent.

Deals on

BRC DiamondCore Ltd (TSX:BCD) has signed a letter of intent with Rio Tinto Mining and Exploration Limited whereby Rio Tinto will fund the exploration of certain parts of the company’s Tshikapa kimberlite project located in Kasai-Occidental province in the Democratic Republic of the Congo.

The joint venture property does not include the ground covered by the ACACIA sprl exploration permits. BRC DiamondCore is an African-focused diamond explorer with projects in the Democratic Republic of the Congo.

Rio Tinto will earn a 75 per cent interest in a joint venture company which would hold the ownership interests in the property, with the company retaining a 25 per cent interest. Drilling on the property is expected to commence this month.

More meets

In view of the success of the “town hall” meetings held earlier this year in Antwerp, Ramat Gan and Mumbai, two more such meetings are planned in Gaborone and Johannesburg later in November.

Like in the first three meets, De Beers managing director Gareth Penny will make presentations on the state of the diamond industry, followed by an open question and answer session. Anybody related with the industry is allowed to attend.

In Botswana, Penny will be joined during the Q&A session by minister Ponatshego Kedikilwe, Minister of Minerals Energy & Water Resources; Permanent Secretary at the Ministry of Minerals Energy & Water Resources Gabaake Gabaake; Diamond Trading Company (DTC) managing director Varda Shine; and Debswana managing director, Blackie Marole.

The Gaborone diamond town hall meeting, moderated by Chaim Even-Zohar, will be held on November 24, at 5 pm at the Grand Palm Hotel, hosted by the Botswana Diamond Manufacturers Association. The Johannesburg meeting will be held on the following day, November 25 at 4.30 pm at The Pyramid Conference Centre in Johannesburg, hosted by the Diamond Council of South Africa.

Be there!