Rough-diamond prices are likely to fall 5% this year as weakness in the industry continues, Panmure Gordon analyst Kieron Hodgson has predicted.
The investment bank has lowered its expectations for the market, having previously forecast price fluctuation in 2019 ranging from flat to a 2% decline. Mining companies’ results from the first half were in line with Hodgson’s cautious view of the market, he added.
“Significant storm clouds have coalesced, leaving the near-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 price forecasts, whilst at the same time the industry is again contemplating reduced sales volumes.”
Sales at De Beers’ sights and auctions dropped in the first half due to declining liquidity for the trade and the release of excess goods into the market following recent bankruptcies, Hodgson explained. De Beers’ 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 the five De Beers sights that took place in the first half, indicating a “more entrenched trend” rather than a “short-term blip,” the report continued.
Hodgson does not expect rough sales to collapse as they did in 2015, when a slump in consumer demand led to a sharp slowdown in the market. However, major mining companies may hold back supply in response to the lower demand in a repeat of their actions four years ago, he noted.
Miners must mitigate six main risks that have affected the industry during every wave of weak prices in the past 10 years, he noted. They include the oversupply of rough relative to demand, challenges with inventory management, and the reduced availability of finance.
In addition, high rough prices and the strength of the US dollar against other currencies risk impacting margins at the manufacturers that buy rough, while the US-China trade war could hurt retail demand in Asia. Finally, growth in synthetic-diamond production may undermine confidence in natural 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)