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Diamonds – A Buyer’s Market

Posted by Saul Singer on July 14, 2012

Diamond markets are sluggish as Western centres enter into vacation period. The traditional downtime in market trading has been welcomed by many traders hoping that this lull will provide some respite from the very challenging market conditions.

Polished prices dropped around seven percent in the first half of 2012 marking this the biggest decline since the fallout of the global financial crisis in 2008-09. The downturn is not limited to polished markets with rough prices also falling by some 10 percent in June against the backdrop of low trading volumes. The market will be looking towards the DTC sight this week, which will set the tone in the market. We expect a small sight of below $500m in-line with the tough trading environment.

The upside of these tough market conditions is that there has been a clear shift during the first half of the year from a seller’s to a buyer’s market. With the drop in both rough and polished prices and many traders needing to move inventory to maintain their tight cash-flow cycles, we expect the emergence of more and more interesting buying opportunities. The encouraging element of this development is that those diamond houses that will take advantage of these opportunities are those companies with healthy balance sheets as the bank finance to the industry has been significantly scaled back over the last six months. This should circumvent the leveraged speculative trading activities experienced during 2011.

As has been the case over the last two years the very upper-end of the market has continued to buck the overall trend giving further credence to the fact that this niche sector of the diamond market is a market unto itself with its own dynamics and trends. The Russian mining diamond giant Alrosa held its first auction of large rough diamonds in New York earlier. The auction exceeded pre-sale expectations selling more than 80 percent of the goods on offer including two gem-quality stones weighing 57.47 and 79.65 carats respectively each fetching multi-million dollar prices. This followed the outstanding house-record sales price of $4.55 million for an 11.36 vivid pink rough diamond recovered by Namakwa Diamonds and sold by Fusion Alternatives Tenders in late June.

We expect the challenging market conditions to continue over the next month with low trading levels and soft rough and polished prices. The market will take direction for macro-economic indicators and subsequent trader sentiment as it emerges from the traditionally slower summer vacation period in mid-August.