Another Newsletter. Why?
I’ve been working at this job for 43 years now. But what do I do every day? I don’t do much selling; I’ve got a great sales team for that. I don’t cut the diamonds; I’ve got a terrific team for that too.
I think, and I plan. At least I try to….
Frankly, it’s tougher now than ever before. The market is changing faster and the issues are more threatening than ever. So deciding what to buy, how much to buy, and when to buy are gut-wrenching decisions that test my experience daily.
The same questions apply to manufacturing. Expand in China? Build in Botswana? Each question is connected and intertwined with dozens of other issues.
I find myself writing down the questions, the issues, and unraveling them one by one. And, when I re-read my notes, I actually find them interesting. And, I’m hoping you will too. In each issue, I’ll share with you some snippets of what I see happening, and some insights as to the why’s and how of what’s happening. If you have any thoughts about my thoughts, please do share them. My email is email@example.com. Enjoy.
Market Regulators. Then and Now
40+ years ago, DeBeers (or the Syndicate, as they were called) controlled 85% of the rough diamond markets. When retail sales slowed, and there was a surplus of polished or rough, they simply cut back supply, and stockpiled more rough until the market was ready to absorb more goods.
All that came to an end about 20 years ago when Russia, Australia and others left the umbrella of the DTC (Diamond Trading Company) and started selling on their own, competing with the DTC. Naturally, that led to more volatility as normal market forces of supply and demand caused diamond prices to fluctuate, sometimes quite severely.
But, there are still some market regulators acting as emergency brakes to oversupply. And, exactly that happened in January at the sight in Botswana.
Leaving goods on the table
Disclaimer: I’m not focusing on the accuracy of my numbers. You can probably get better and more accurate numbers from other publications. My focus is on the theory of what is currently happening.
The January sight was supposed to be approximately $650 million. DTC actually sold only about $500 million. What went wrong? The answer is, boxes were left on the table.
As bank credit to Indian cutters has tightened, manufacturing margins have narrowed, and the middle market (sightholders, dealers, wholesalers) have no incentive to hold more goods than they need for immediate sales. Hence, if offered more than they need, they leave it behind. This is actually a good thing. Currently, supply is tightening in India, and instead of seeing big price drops, there is actually strength in some areas, with no deep discounting.
Rough prices are weak, but not plunging, and the new market regulators are doing a pretty good job at controlling supply, as did the monopolies of old. There is little rough trading of boxes from the January sight. Buyers are offering low, and sellers do not want to take losses. That’s a microcosm of the market at large.
At this moment, the February allocations are being announced. Looks like it will be a very small sight. There are lots of shortages. Are these shortages a result of DTC holding back, buyers not willing to buy, or did the mines actually produce less? I think it’s a combination of the first two reasons, more than the last one.
The Diamond Futures Contract
While the concept of trading diamond futures is very old, it has never happened. Probably never will. Actually, there is a diamond futures market already in existence. It is the rough market for DTC boxes. The rise and fall of rough premiums is a very clear window into the future of polished diamond trends.
And, that is what I will focus on bringing to you in this newsletter every month. You may not be in the rough business, but this window to sight and rough activity, is as good a barometer on future diamond prices as exists today.