Market players refrain from buying diamonds, preferring to wait for changes in conditions

Diamond prices continue to fall, as market activity declines. Partly the decline is due to the annual period of summer holidays, and in part the price adjustment in the weakened market continues.

But is this just a price adjustment, or is this a larger change - market adjustment? The majority in the market agree that too many companies compete for a very small "piece of pie". The current crisis is so severe that these companies with less strong fundamentals may be out of the game, which leads to a reduction in the number of companies operating in the diamond pipeline.

Growing difficulties

Many wonder: will the Indian banks continue to provide credit lines and finance local diamond companies that have large production and high overheads? Or are the realities now existing that will prompt them to reduce their participation in these capital-intensive enterprises? If this is the case, then the companies will become more optimized, more efficient and the foundations will be strengthened, and some companies will leave.

As part of this recovery process, companies can transform their purchases of diamonds into more rational purchases. One type of transformation resulting from this process is vertical consolidation. De Beers has already taken a small step towards vertically integrated companies such as Tiffany & Co., Chow Tai Fook and Sterling, all of which are sightholders, diamond manufacturers, jewelery manufacturers and retailers. De Beers, along with De Beers Jewelers and Forevermark, is moving in this direction.

The Belgian, Israeli and even American diamond centers - all of them passed through a period of accelerated growth, accompanied by a crisis and the process of formation, which led to the creation of smaller and more stable centers. Is India going through the same process? Are they suffering now from the stage of the crisis after growth, which will end in compression and consolidation? If so, then this is a positive direction of development, which will lead to a healthy market.

I am sure of one thing - the market of diamonds and diamonds will never remain the same. We will never go back to the existing structure. Since De Beers lost its monopolistic market share, which led the business to the middle part of the diamond pipeline in 2000, a new business was born. A business that goes through painful processes of expansion and growth. I believe that from the ruins that we observe today, we give birth to a business with a more perfect structure. A business that is more profitable has a sound economic logic, and in which all participants understand the value of money and what income it should be for their diamond owner and in any other business in any other industry.

De Beers

The weakening of the market was not spared by De Beers, which reported a 9 percent drop in sales to 13.3 million carats in the first six months of 2015. The cost of sales of diamonds fell by 23% to $ 2.7 billion.

In response to continuing market conditions, the parent company of Anglo American said that De Beers revised its forecast for 2015 to 20-31 million carats. This is consistent with my prediction of a reduction in supply.

This new policy probably served as a motivation for De Beers to make a decision to allow larger amounts of deferred purchases on the upcoming site than usual. In August, sightholders may postpone up to 75% of the amounts allocated to them. The company gives them the opportunity to change their mind after viewing the product and getting acquainted with the prices for it.

De Beers also announced that after the site, sightholders could change their planned delivery schedule for the rest of the volume for the current ITO (intention to make an offer), which ends in March 2016 - six more sites. This medium-term change allows you to make a decision on deliveries based on market conditions at the moment. This is different from the decisions that were made at the end of 2014, when the crisis has already come, accompanied by the hope that the market will improve in the near future. Since De Beers is the benchmark for the industry, I hope that all diamond producers will follow suit. This is a good opportunity to solve the main problem of the middle part of the diamond pipeline: the minimum rate of profit!

Identification of roots

To hope for an increase in the price of diamonds or diamonds is not a solution to the question. We all know the expression: "the dog is following a false trail." Why is this a false trace? Because the cat climbed another tree! Is the expectation of a price increase the same as taking a false track? I think that the problems of our industry are hidden in another tree.

There are several long-term problems that cause the current crisis:

• 5,000 companies making up the middle part of the diamond pipeline are fighting for a crowded market and minimal profits;

• financial structure and coefficient of self-capitalization;

• The oligopoly of distribution of diamonds (seven major diamond producers, several open tenders in the market and several diamond sellers on the open market - this is the whole supply of rough diamonds!);

• 200,000 wholesalers of diamonds fighting for sale at almost any price;

• Decrease in the level of consumer demand for diamond jewelry due to lack of specific marketing;

• The high price of diamond jewelry, which pushes consumers to alternative products;

• The unresolved and growing problem of undeclared diamonds and diamonds grown in the laboratory;

• and last but not least: the increase in the market share of the declared diamonds grown in the laboratory in view of the greater profits for their sellers.

Is not this a "cat sitting on another tree"? All these reasons make me believe that our industry will never be the same after this crisis. The expectation that prices for diamonds will rise is a cliche. As we saw in the past, when prices for diamonds are growing, so are the prices for diamonds. Margin never grows, remaining minimal.

The market of rough diamonds

The decline in the market means that the rest of the main sources of rough diamonds will reduce their supply and lower prices. This is unavoidable for many reasons, as summer holidays begin and, with such uncertainty, market participants say that they will wait until August or early September before deciding on what to buy and at what price they want to make these purchases.

Another aspect of this decision is abstention from large financial costs in the form of cash, when it is clear that the goods will simply lie in the form of stocks until people return to work after the holidays. There is no need to increase the financial burden without a reasonably good reason.

Market players refrain from buying diamonds, preferring to wait for changes in conditions. When asked what will happen if the price of diamonds starts to rise, they say they prefer to buy at higher prices when the market is stronger than under the current weak market. Many key players in the Indian market are reorganizing their manufacturing infrastructure and sales offices around the world. They do not expect much demand when they return from holidays.

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