In our Quarterly Carat, we take a closer look at the diamond market over the past three months and look ahead to key developments in the future.
There’s no doubt that sentiment in the rough diamond market remains cautious. Indeed, there remains a concern that future price growth for rough prices will be limited. Having said that, the global rough diamond sector has maintained its consistent, upward trend since the dark days of 2015. Rough diamond prices have appreciated with the De Beers price index indicating a 4% increase from June 2016 to June 2017 and the PG price forecast increasing 3% since the start of the year.
Nevertheless, we expect general prices to level out due to a number of factors, including an increase in output from major producers and weaker demand from the US, the largest consumer. Also to consider is the inventory unwind programme.
Contrary to other commentators, we do not forecast a steady decline in global production from 2019 given the potential from new operations to maintain sufficient global stockpiles.
As far as the rest of 2017 is concerned, we do not foresee a significant reversal in the negative pricing trends for polished prices. Polished prices remain under pressure, and we date this back to 2012 and what is now a five-year hangover for the mid-market. Recent bankruptcies and defaults have compounded the problem for what is regarded as a weak link in the value chain.
Some categories have performed better than others but the overall trend remains negative. But we do note the commitment to increase overall marketing spend, mostly from De Beers. This is positive and we are optimistic that it can help to drive retail demand. But we can’t ignore the fact that a huge volume of goods is effectively warehoused in the midstream. And we believe that a major reason polished prices have underperformed rough prices for such an unprecedented period is due to the reduction in inventory levels at producers.
The summer is traditionally a quieter period and so, as always, the performance of retailers during the Diwali, Christmas and the Chinese New Year holds the key to restocking efforts in early 2018.
Sentiment towards diamond retail remains mixed with demand in the US moderating since Easter while increasing consumer confidence in Japan, China and India has translated into stronger retail figures. In the latter regions, major retailers have reported positive diamond jewellery like-for-like sales for the first time since 2014.
Fancy colour diamonds – those outside the normal colour range – remain popular, in particular, blue diamonds which were the best performing segments of the coloured diamond market. The Fancy Colour Research Foundation’s Fancy Colour Diamond Index for blues rose 5.5% year-on-year, in contrast to flat prices for fancy-colour diamonds overall. Put into context, over the past ten years the yellow diamond index is up around 50%, the blue index by 300% and the pink index by almost 475%.
While we stand by our view of moderate growth in rough diamond prices, we believe that, conversely, diamond mining equities are again approaching good value, but driven by their individual merits rather than a generic commodity investment case.