Diamond sector update

Diamond prices weakening but still outperformed gold and silver. After rising by almost 40% from the start of the year, diamond prices have started to soften from August as a result of global economic uncertainty and liquidity issues which affected trade. Nevertheless, compared to other precious metals such as gold and silver, diamond prices has generally outperformed year-to-date. Sarin Technologies (SARIN SP), which has an exposure to the sector, recognised that uncertainties in the global economy may have a negative impact on the sector in the short term. We currently have a BUY recommendation on the stock with a target price of $1.41 in view of the revolutionary technologies it could bring to the industry.

Producers hold back supplies. According to Rapaport, major producers such as DeBeers and Alrosa may hold back rough diamond supplies in an attempt to firm prices as trading in the market weakens due to liquidity difficulties and lower confidence. Prices in the rough dealer market have fallen by as much as 30% from its peak in July/August this year and Diamond Trading Company’s (DTC) boxes are trading at double-digit discounts below its list prices.

Mixed expectations for polished market in the short term. The price index for 1-carat diamonds has fallen by about 12% from its high in August. Overall, the index is still up about 23% YTD. As we mentioned before, demand exists but buyers are negotiating for lower polished prices. A weaker 4Q is expected as businesses in major diamond centres in Israel and India were closed due to Jewish holidays and the Diwali season. Retailers would start stocking up in January next year after the holiday sales season in November-December and that should give a good indication of forward demand.

China and India to drive long-term growth. DeBeers estimated that demand for diamonds in China and India grew by 25% and 31%, respectively, last year. The Asia-Pacific region accounted for about 12% of global demand in 2008. Led by the strong demand in China and India due to rising affluence and growing desire for luxury items, the region’s share of demand could reach about 20% by 2018, according to estimates by Alrosa.

Anglo American takes control of DeBeers. On 4 November 2011, Anglo American PLC, an existing 45% interest in DeBeers, announced the buyout of the South African Oppenheimer family’s 40% controlling stake in DeBeers for US$5.1b cash. This would end the family’s more than 80 years of control of DeBeers.