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Wednesday 24 April 2019
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The Rough Guide: Who’s buying where and why

diamonds
There is an unusual calm about the rough diamond market, as both miners and manufacturers appear content with their performance in the first half of the year. Miners, Namibia included, are reporting significantly better sales than last year and managed to reduce some inventory built up in 2015, while manufacturers are seeing improved profit from the rough they are buying. That is in stark contrast to a year ago when higher rough prices forced manufacturers to refuse supply, resulting in a slump in sales at De Beers and ALROSA. The lack of profit from rough in 2014 and 2015 prompted many to question the value of long-term supply contracts with the major mining companies.

In its review of the diamond industry, the Rapaport Report, the jewellery industry standard for the pricing of diamonds, says De Beers, which sells 90 percent of its production on a schedule of 10 sights a year, has a total of 85 sightholders listed in its sightholder directory for the current contract year that ends on March 31, 2017. Of those, 75 receive rough from its main Global Sightholder Sales (GSS) division. Twenty companies receive beneficiation supply in Botswana, seven in South Africa, nine in Namibia and one in Canada. Four companies have a sight for a supply of industrial diamonds.  In addition, 10 companies have De Beers ‘accredited buyer’ status. That gives them the opportunity to purchase rough from De Beers on an ad-hoc basis depending on the availability of ex-plan – supply offered at a sight that is over and above sightholder applications.

A number of companies have multiple De Beers sights with Diacor International and Julius Klein standing out with four sights each, spanning GSS, Botswana, South Africa and Namibia. A few have contracts from more than one of the major miners with Asian Star, Diarough, Hari Krishna Exports, Laurelton Diamonds and Venus Jewel having penned contracts with all four miners.  The slump in sales seems to be less of an issue today. Rough dealers and manufacturers note they’re getting the best value from De Beers supply as the company has kept prices stable since it reduced in January. While ALROSA has not made any significant price adjustments since August, it’s having no problems selling and posted record results in the first quarter.  Both companies have implied they will limit supply and keep prices stable, at least for the next few months while the polished market is uncertain.  That stability and consistency of supply is what attracts manufacturers to prefer long-term contracts over competing for rough from auctions where prices tend to be more volatile and supply is not guaranteed. In fact, the larger manufacturers, which provide polished for jewellery retail programmes, argue they could not fill those ongoing polished orders without the guaranteed rough supply the major miners offer.

Therefore, it is contracted supply that sets the tone for the market. The days of the De Beers “monopoly” may be well behind us, but the market still takes its cues from the [dare I say] London-based company. ALROSA’s influence is on the rise, while Rio Tinto and Dominion Diamond Corp. are also worth noting, as they too sell via long-term contracts.  Those top four miners are arguably the only companies with large-enough production to guarantee a scheduled, consistent supply of rough to a set group of clients. Others such as Okavango Diamond Company and Grib Diamonds are said to be considering a shift to contracts, while Petra Diamonds probably has the volume but seems content with its current auction platform.  “However, for now, an estimated 60 percent of global supply is sold via long-term contracts among the four majors, while each also sells a smaller portion of their production through auctions. From their client lists, we can recognize which companies are the major buyers of rough on the market,” the report says.  The four miners recently updated their client websites, which Rapaport News has collated to present this year’s list of who is buying the bulk of global rough supply – and, de facto, producing a major portion of the polished.

The comprehensive list counts 135 companies, up from 127 named last year. While combined production across the four miners is expected to rise by an estimated 6 percent in 2016, and considering they have left over inventory from last year being sold, it makes sense that more diamonds are being spread between a slightly higher number of companies.
The list includes diamond manufacturers and rough dealers, as well as companies with downstream activities that extend into jewellery manufacturing, wholesale and retail.  It also reaffirms a trend among the major jewellery retailers to conduct in-house polished production as they have developed rough sourcing and manufacturing capabilities of their own. Signet Jewelers, Tiffany & Co. (Laurelton), Chow Tai Fook, Chow Sang Sang, Luk Fook, Gitanjali Gems, Graff Diamonds (SAFDICO) and Tasaki & Co., are all examples of retailers that appear on this years’ list.  Of the total, 43 companies are headquartered in India (the largest manufacturing centre), 41 in Belgium (the major rough trading hub), 14 in Israel, 10 in Russia, nine in the US, five in Hong Kong, three in the United Arab Emirates, two each in Canada, Japan and South Africa, and one each in the UK, Mauritius, Namibia and Switzerland.

Some 57 companies are listed as ‘ALROSA Alliance’ customers, while Rio Tinto has 21 ‘Select Diamantaires’, and Dominion sells its rough to 32 ‘Preferred Purchasers’. Ultimately, it will be left to those 135 companies to safeguard the balance in the diamond market. While it has taken some degree of discipline for the mining companies to limit supply, rough sales have still increased compared to last year. De Beers sales rose an estimated 12 percent in the first six months of the year compared with a period in the first half of 2015 when manufacturers were still willing to pay high prices and were fairly aggressive in the rough market.  That scenario became unsustainable in the second half of last year and prices fell about 15 percent as demand plummeted and mining company sales slumped. This year, as polished inventory levels reduced over the holiday period, rough demand has been stimulated once again. But, while polished demand remains sluggish, there has been some concern about over-exuberant rough demand again this year.

It will be up to these 135 contracted rough buyers, along with the mining companies, to ensure long-term stability in the market. After all, their ability to buy rough and sell the resulting polished sets a benchmark for determining the sustainability of the diamond industry. With their supply contracts in check, that’s a responsibility they shouldn’t take lightly.




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