Industry News

Market Downturn Creates Opportunities

Posted by Saul Singer on July 30, 2012

The summer vacation period could not have come at a better time for many diamond dealers who have been battling with a downturn in the market and very difficult trading conditions for the better part of the year.

Taking a queue from the lackluster macro-economic environment, polished diamond prices have slumped around ten percent this year, which in turn has fuelled the drop in rough prices over the last three months. Other factors such as the drying up of fiscal liquidity in dealer markets and volatile exchange rate movements especially in the Rupee have all combined to precipitate a clear downturn in the market and facilitate the shift of power from suppliers to buyers.

As is the case with all markets, whenever there is a fundamental change in market dynamics there are always opportunities. This is especially true in the diamond industry where developments in one sector of the diamond pipeline can take time to flow through to other sectors. This time lag creates at times tremendous opportunities usually for smaller-to-mid sized companies who due to their structures are more flexible and adaptable to changes.

In both polished and rough diamond markets there are essentially two trading methods; longer-term contract buying and trading and shorter-term spot or cash trading. Traditionally there has always been a preference for the former by diamond industry participants due to the inelasticity of prices and stability in trends. Most large diamond firms have built their business models on this preference which definitely served them well in more stable markets. However with the increased volatility over the last few years the spot market has been where the more prudent and flexible diamond firms have not only been able to navigate the turbulent market conditions but actually turn sizeable profits.

This dichotomy between longer and shorter-term trading models has become very prevalent in rough diamond markets whereby the major producers (De Beers, Alrosa, Rio Tinto and BHP) have a longer-term contract sales strategy which is very difficult to manage in a downward moving market and smaller to mid-sized producers have opted for real-time diamond tender platforms (such as those operated by Fusion Alternatives) to sell their inventories. The current tough market conditions have created an interesting scenario whereby major diamond houses have rejected goods offered to them by major producers as part of their contract buying program and have opted for buying at tender the same goods at fairer market prices. As such the sell-through rates of tenders, is considerably higher than longer-term buying contracts in more volatile markets.

With the increased market volatility not expected to dissipate in the near future we expect the shift to more real-time trading platforms such as tenders to continue which in turn should catalyze increased market efficiencies and price transparency.