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DIAMOND MINING COMPANIES SITTING ON A GLUT OF INVENTORY, PRICE STRUCTURE OF MARKET DEPENDS ON HOW THEY GET RID OF IT

 

For several years already diamond market analysts have been predicting an impending shortage of rough diamond supply, triggered by a consistent rise in demand for polished goods, largely from the developing markets of Asia, coupled with a lack of new diamonds scheduled to come on stream over the coming decade. In the wake of the COVID-19 crisis, however, that problem seems to have placed on the backburner, as least for now.

According to Gemdax, an Antwerp-based advisory firm, as quoted by the Bloomberg news agency, the five largest rough diamond producers are probably sitting on excess inventories worth about $3.5 billion, and the amount could climb as high as $4.5 billion by the end of 2020, which is equal to about one-third of the current value of annual rough diamond production.

The original concern in the industry used to be that, with supply of rough diamonds dwindling in the face of rising demand, the price of goods would rise to heights that would elicit resistance on the part of consumers. In fact, many saw this phenomenon as paving a way for a two-tier market, with laboratory-grown goods occupying the lower tier and serving the needs of these selling less expensive jewelry items, while higher-priced natural diamonds would dominate the upper tier.

This eventuality could still come to be, but now the concern is largely about how the diamond-mining companies choose to offload their excess stock without flooding the market and precipitating the exact opposite effect, a sharp fall in the average price of rough diamonds.

FEW ROUGH DIAMONDS SOLD SINCE FEBRUARY

The reason for the glut in inventory is that the major rough diamond producers, while reducing but not shutting down completely production at their mines, have sold very few goods since February. Both De Beers and Alrosa stood firm on prices, holding them steady, but at the same time were prepared to allow clients on renege on contracts, essentially allowing them not to buy parcels if they declared that they were financially unable to.

De Beers cancelled its March sight week, one of 10 that had been placed for 2020. While it did have a sight week in May, Bloomberg quoted insiders as saying that the sale yielded only about $35 million, more than 90 percent down on the $416 million of rough diamonds that it sold during its May 2019 sight week.

De Beers is planning on moving ahead with the next sight week, scheduled for June 15 to 19. Reportedly, this time again it will not pressure clients to buy goods that they do not want.

Diamond mining operation at an Alrosa facility in Russia. While diamond mining companies have suspended some activities, they have not shut them down, adding to the amount of inventory they are holding.

Alrosa also did not provide rough sale value, but did report that its diamond inventories could rise to 30 million carats by the end of the year,  which is a similar number to the volume of rough diamonds its mines each year. The mining company added it wants to reduce inventory to about 15 million carats within the coming three years.

Diamond manufacturing has begun again in Surat, India, but worker capacity needs to be held at 50 percent per factory.

INDIA TO DECIDE THE FUTURE OF THE MARKET

From a price perspective the coming months will be critical, and all eyes are shifting to India, where the COVID-19 pandemic is still raging. Still, the Indian government is allowing manufacturing to restart in Surat, the polishing hub where more than 9 in 10 of very diamond is polished, although worker capacity needs to be held at 50 percent per factory. But even then, there may be a lag before there is tangible effect on the market, in part because Indian manufacturers to the large part are abiding by a temporary and voluntary mortarium on rough diamond imports.

The task of the larger companies to reduce their inventories without suppressing prices will be delicate one. “They’ve tried to restrict rough-diamond supply to protect the market and protect value,” said Gemdax partner Anish Aggarwal, as quoted by Bloomberg. “The question will be, how does this destocking occur? Can miners destock and keep protecting the market?”

In the meantime, while the larger companies are showing restraint, the more cash-strapped junior miners are less inclined to. Even before the lockdown started, have been offering discounts of as much as 25 percent in trading centers like Antwerp.

 

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