Which is another sign of a growing split between De Beers and its customers

If you try to be an optimist, you can hear the voices of those who say: "De Beers, finally, understood and lowered prices." Although this may be true and important, but the question concerns not only the price but also the quality. While the global diamond industry is struggling to move forward, the United States government has revised its performance in terms of jewelry sales. According to revised data, sales volumes were worse than previously reported. As for the future, it does not look too good either.

VALUE AND VOLUMES OF DIAMOND RAW MATERIALS

As expected, De Beers lowered prices for rough diamonds on the May website. Prices were reduced by an average of 2.5%, and prices for some goods were reduced by as much as 8 percent. This price reduction became necessary because the price of diamonds is relatively low. From the point of view of diamond manufacturers, this means that cutting and selling diamonds are an economically ineffective option. If consumers do not hunt for diamonds actively, then prices for diamond jewelry are either reduced, or such jewelry is simply not sold. This drop in demand reduces the price of diamonds. From this point of view, prices for rough diamonds need to be lowered to meet the real demand and prices for diamonds.

At the same time, the decline in prices for diamonds is a double-edged sword. It not only does not help the diamond producers, it can also harm them, because a decrease in the price of diamonds will reduce the value of the stockpiles in which they have invested serious money. Therefore, although diamonds producers need to reduce prices for diamonds, they also want it to be weighed, even moderately.

Puzzled? Let me add one more aspect to the issue related to the price - sightholders complain that prices have not been sufficiently reduced - not enough to again make diamonds profitable. This is quite true and brings us back to the issue of volume.

The reduction in supply does not reduce the burden of stockpiling, which is not sold quickly enough (and by reducing the volume of purchases of rough diamonds, they can also create a positive cash flow more easily), and reduce the amount of capital associated with large inventory. In addition, there is also a deficit, which contributes to higher prices. Thus, the combination of a moderate price reduction with a reduction in supply will be better not only for diamond producers, but also for retailers.  

The estimated size of the May site was known exactly: ~ $ 400 million - the usual offer, another ~ $ 50 million - special offer and about $ 50 million - an unscheduled offer for a total of $ 500 million, perhaps a little less. Applications for an unscheduled proposal related to special products that are still profitable. De Beers satisfied these applications - when sightholders asked for unscheduled deliveries, they received them.

This gives a signal that De Beers will not cut the offer if it is within its power. The reduction in supply depends (at least in part) on sightholders. De Beers will express its intention to make the proposal (ITO) in full and offer an unscheduled amount to anyone who asks for it. With additional reserves of about $ 0.5 billion, which is almost another site, De Beers is more than happy to supply at any time and as much as it can.

De Beers produced 7.7 million carats in the first quarter of 2015, a 2% increase year-on-year, mainly due to a higher content at the Venetia mine. Currently, the company does not need this additional stock, so it recently announced that "in the light of current trading conditions" it will cut production from 32-34 million carats to 30-32 million carats (~ 6.5%). In 2014, the company's production volume was 32.6 million carats, so like it or not, De Beers expects demand for rough diamonds will be lower, at least until the end of this year.

SITE 4: NEW CONTRACTS, EXISTING PROBLEMS

In the secondary market, there was a very low demand for De Beers products. Boxes of Collection and Fine stones weighing 5-10 carats were not interested in buyers on the Bluedex marketplace. On the other hand, stones with imperfections were in demand.

Failures amounted to approximately 5% of the volume of goods at a cost, which is a bit. This is reasonable, given the reduction in prices and the limited supply.

Traders claimed that the assortments of many of the 3-6 graders and the Indian boxes of the Cleavage category were not good. Assortments of boxes Preparers and Commons in weight in 2,5-10 carats became better. This improvement, combined with a drop in prices in price lists, made these two types of goods profitable. Premiums in the secondary market amounted to about 2-3% with terms of the loan, which meant that the sellers were losing about 1 percent.

Changes in De Beers price lists, by the way, varied - from a drop of more than 10% to an increase of about 26 percent. This is a very wide range, but keep in mind that this is the assortment that determines the final cost of the box and the real price.

NO CASE FOR CELEBRATION

In problems of ensuring an uninterrupted supply - and De Beers recognizes them - there usually comes a short pause in order to celebrate the usual new contract period. But the new accredited buyers (Accredited Buyers), and the traditional dinner, and a slight change in the sightholders list were far from celebratory and joyful. In fact, several leading traders decided not to attend the dinner, which is another sign of a growing split between De Beers and its customers.

In past times, the new contract period meant a certain change of guard - several new companies were added to the category of sightholders, and some left. This time, very little was added, but only two left. This is in line with the new selection process, characterized by simplifying the filing process and virtually preserving existing clients until there is a good reason to part with them (see attached full list).

THE GREEK TRAGEDY

The May site - the first in the contract period 2015 - 2018 - was planned to be small: sightholders applied for a cautious schedule of deliveries (under the procedure "intention to make an offer, ITO"). Of the 10 sites by the first year of the contract period, the requested ITOs were facilitated for the first site due to the fact that sightholders stated that they did not need a lot of supplies at that time.

On the contrary, it is expected that the following sites that are to be held in June after the Las Vegas trade fair (JCL Las Vegas) will be large, which raises the question of whether diamond manufacturers will face greater overproduction?

Frankly, not only they suffer. The decline in demand and prices, combined with the large amount of failures in the last few months, have dealt a serious blow to the cash flow of De Beers, as well as to Anglo American, the parent company that depends on De Beers, which is the source of 28% of its revenue.  

According to one insider, De Beers "is trying to stay afloat." She has big overhead costs for labor and energy, and she needs a push for her cash flow from an external source. If the exhibition in Las Vegas is a low activity, as expected, and will not profit, then the sightholders and De Beers will reach a "critical point", he added. Sightholders will be asked to postpone the delivery of the goods and may refuse the goods that are not profitable. De Beers will try to pass as much as possible into the hands of its customers, which will lead to an arm wrestling competition, which will end with the loss of one side or both. Even if one side loses in this struggle, the consequences are such that both will be paid. From my lessons in literature, if I remember correctly, this is called "Greek tragedy."

ANOTHER BAD NEWS FOR THE MARKET RETAIL TRADE

During the Cold War, Western intelligence services usually monitored changes in the Soviet regime, looking at photos from events that attended the top management. Historical analysis, for example, the absence of a general in the official photos of the May parade a few years after they were made, showed that this man fell into disgrace.

The US Department of Commerce, the source of the most reliable data on retail trade, on May 13 published revised data on retail sales of specialized products. He analyzed the history of the jewelry market of the United States, which indicates that this segment of the market in the United States is gradually acquiring the status of persona non grata.

When reviewing the period in seven years to January 2008, all sales figures were reduced. The most dramatic revision was made in 2013 and 2014, for which sales volumes were reduced by 8.9% and 9.3%, respectively, albeit shamelessly. Not that the real cash flow through the register has changed at the same time. At the same time, only more carefully "disguises" what actually happened on the market in those years since the crisis of 2008.
 
According to the revised data, sales of specialized jewelry companies in 2013 rose by only 1.8% year-on-year, and in 2014 they increased by 0.7% to $ 30.5 billion. Sales volumes in the holiday season in November and December fell to 4.4% year on year.

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