Why Rough-Diamond Prices Must Drop

RAPAPORT... Rough-diamond prices are too high, and reducing them is a must.Not only is such a move necessary to ensure profitability formanufacturers, it would also raise market sentiment, which has beenuncharacteristically weak for a first quarter.In the long term, miners would gain from a correction as well, as itwould stimulate demand and prevent a market freeze that is inevitableif rough prices don't come down. That happened in late 2015, whenthe mining companies, after record sales the previous year, tried tomaintain rough prices until manufacturers started to reject goods atthose unsustainable and unprofitable levels. The current market is reminiscent of those days, even if rough supplyhas been subdued. Polished and rough trading has been cautious inthe first three months of 2019, usually the busiest time of the year.Polished-inventory levels are still high, due to a bottleneck createdin 2017-18 that, in turn, led to a decline in De Beers and Alrosa salesduring the first two months of this year. We believe the miningcompanies will have to lower their sales expectations for 2019, asoutlined in last month's Rapaport Research Report. In this March edition of the report, we stress the need to accompanylower supply with lower prices. Rough prices need to go down by atleast 10% to restore profitability in the manufacturing sector.While reducing prices will lead to lower sales for the miningcompanies this year, it will stimulate trading again. Ultimately, it willset the miners up for healthier growth moving forward. Besides, ifprices stay as they are, we expect manufacturers will start to rejectmore rough supply or start to leave the business. The midstream diamond trade needs to be viable to assure thelongevity of the product. Already, there have been reports ofmore manufacturers shifting to synthetics to gain better margins.Furthermore, the market needs to be driven by demand ratherthan supply. It's up to the mining companies to effect that dynamic by loweringprices. And if not, the manufacturers must force the issue by rejectingunprofitable rough. This article first appeared in the March edition of the Rapaport Research Report. To download a copy of the report, click here and log in with your username and password, or learn more and subscribe today.Image: A rough diamond. (Shutterstock)