Rough Prices Set for Slump - Analyst

RAPAPORT... Rough-diamond prices are likely to fall 5% this year asweakness in the industry continues, Panmure Gordon analyst Kieron Hodgson haspredicted. The investment bank has lowered its expectations for themarket, having previously forecast price fluctuation in 2019 ranging from flatto a 2% decline. Mining companies' results from the first half were in linewith Hodgson's cautious view of the market, he added. "Significant storm clouds have coalesced, leaving thenear-term outlook for diamonds decidedly gloomier than at any time this year,"the analyst wrote in a report last week. "We have cautiously reduced our priceforecasts, whilst at the same time the industry is again contemplating reducedsales volumes." Sales at De Beers' sights and auctions dropped in thefirst half due to declining liquidity for the trade and the release of excessgoods into the market following recent bankruptcies, Hodgson explained. DeBeers' rough revenues fell 18% to $2.38 billion in the first half of 2019,according to Rapaport calculations. Sales were down year on year at four of thefive De Beers sights that took place in the first half, indicating a "moreentrenched trend" rather than a "short-term blip," the report continued. Hodgson does not expect rough sales to collapse as theydid in 2015, when a slump in consumer demand led to a sharp slowdown in themarket. However, major mining companies may hold back supply in response to thelower demand in a repeat of their actions four years ago, he noted. Miners must mitigate six main risks that have affectedthe industry during every wave of weak prices in the past 10 years, he noted.They include the oversupply of rough relative to demand, challenges withinventory management, and the reduced availability of finance. In addition, high rough prices and the strength of the USdollar against other currencies risk impacting margins at the manufacturersthat buy rough, while the US-China trade war could hurt retail demand in Asia.Finally, growth in synthetic-diamond production may undermine confidence innatural stones, he explained. Panmure Gordon expects an improvement from next year,predicting flat rough prices in 2020, followed by a 2% increase in 2021.Image: A rough diamond in kimberlite from the Big Hole Museum in Kimberley, South Africa. (Ben Perry/De Beers)