This is the lost year in rough diamonds Edahn Golan | Thursday, December 31st, 2015 What a horrible year it was. Miners, traders and retailers will remember 2015 as the year of lost capital, walking on the cusp of bankruptcies, lost opportunities and diminishing value of diamonds. How did it happen, could it been avoided and what lessons can be drawn from it – short term and long?.................................... Many warn of manufacturers returning to old buying habits of buying rough almost regardless of price. It would be a total disaster if it happens. Both miners and manufacturers should be vigilant and act with a long-term view. For the public mining companies, investor sentiment will continue to be challenging. As mentioned, investors are a lot less interested in mining companies in general. Underperformance and oversupply is standing in the way of price increases, according to Hodgson. A possible outcome could be consolidation. The perspective of judging a mining company for now is the ability to absorb weaker prices over an extended period of time. Come to think of it, this is true for manufacturers and retailers as well. Source Edahngolan.com

1. This is the lost year in rough diamonds
Edahn Golan | Thursday, December 31st, 2015
What a horrible year it was. Miners, traders and retailers will remember 2015 as the year of
lost capital, walking on the cusp of bankruptcies, lost opportunities and diminishing value of
diamonds. How did it happen, could it been avoided and what lessons can be drawn from it –
short term and long?
The last cycle of 2015 – Sight 10 and ALROSA
Sight 10, De Beers’ last supply week of the year, had many of the markings of what can and
should be done to revive the industry, while at the same time displaying how bad it got and
how it may remain problematic.
De Beers reportedly had some $250 million worth of rough diamonds offered in the last
cycle. The final tally is estimated atabout $210 million worth of rough sold, up an
estimated 167% from the previous month and down 68% year-over-year.

2. The good news: a small Sight with no reported ex-plan or specials (although there may
have been some specials offered at the South African Sight). De Beers did not ask or expect
Sightholders to meet their ITO commitments that included an estimated $1.5 billion worth
of deferred rough goods. The ITO, for all intents and purposes, is out the window.
De Beers has so many goods that it is not mixing refused boxes with the general supply or re-
sorting. Instead, for the first time, it offered boxes from Sight 8 and 9 as is. Yet
Sightholders could buy only some of the goods they were originally scheduled to receive, as
De Beers continues its efforts to reduce the volume of supply to the market. Prices and
assortments were unchanged, despite a hope among Sightholders (and an understanding
among everyone) that further price reductions are needed.
On the other hand, it must be asked why, at a time when drying up inventories is
recognized as an essential step towards reviving the industry, was supply more than
double that of Sight 9? The only thing that has really changed since early November is that
Diwali is over.
Indian Sightholders bought because of the return from Diwali and their interest in firing
up their manufacturing. The point is that demand is still low, as are prices of polished,
inventories are still high, and the price discrepancy between rough and polished is such
that many boxes still result in a loss. Then why buy goods at all? Many of the Israeli
Sightholders, for example, took advantage of the ability to further defer goods and bought
next to nothing.

3. The answer, according to several Indian Sightholders, is that they had no choice. The
alternatives are to have workers idly loaf around the factory or to send them home without
pay and risk losing them altogether. Either way, these clients chose to buy rough – but
focused on the lower cost items.
It would be safe to guess that these purchases were not meant to stock up on goods. The
general sentiment in the market is that De Beers needs to lower prices by another 10%-15%
and that prices will decline in January. This price reduction is not expected to be 15% or
even 10%, but rather around 5%-8%.
The bad news: the Sight took place as initial reports from the US and Chinese consumer
markets indicate a near flat demand compared to the already weak 2014 holiday season. The
requests for ex-plan ahead of Sight 10 and willingness to buy even in areas where there are no
shortages are a sign that at least some Sightholders are willing to revert to the proven
disastrous practices of buying in near disregard to profitability.
In a way, De Beers cooperated with these Sightholders by offering a relatively large supply at
Sight 10, which is not good for the dry up momentum underway.
ALROSA has kept prices largely unchanged in December, to the dismay of its clients
who want to see the Russian diamond miner further reduce prices. It sweetened the bitter
pill by offering all its clients a very low cost parcel to allow for some correction. Still, even
with the growing flexibility it too is showing, clients want it to reduce prices to match the
current market needs.
De Beers going out of its way
With hardly any trade in the secondary market and premiums at 1% to below box cost, there
is no logic in buying for trading or to simply dump unwanted goods. De Beers went out of its
way to supply its clients with only what they needed.
Sightholders could replace some of the goods they did not need with other, more useful
goods. Another example is the buyback program, where De Beers repurchases goods from
Sightholders, which was increased from 10% to 20% a couple of months ago.
There were not many buybacks, yet there are reports in the market that De Beers paid more
than usual for some of the goods in this program – enough to make the rest of the box
profitable. Further, there are several claims that the miner was even more flexible about it,
allowing Sightholders to do this with more than one box and more than 20%. As one insider
stated, De Beers is trying to be pragmatic.
ALROSA still expensive
In Moscow, ALROSA seems to be sending mixed messages to its clients. During a client
presentation last week, company executives told clients its plans are to keep producing
without slowing down despite the industry crisis. That was backed by a statement issued on
Tuesday stating that diamond production is expected to be upped to 39 million carats in 2016.
Putting this in perspective, in 2014 ALROSA produced 36.2 million carats, and in the
first nine months of 2015, it increased production by 15% to 29.6 million carats with the
aim of producing to 38.2 million carats in 2015. Production in the third quarter, when there

4. was absolutely no doubt that we were in the midst of a crisis, was actually accelerated
compared to the first half of the year when production was up 13%.
That said, in private discussions ALROSA executives stated that they may not increase
production completely out of tune with sales. The official sales goal for 2016 is also
ambitious. According to the company, rough diamond sales in 2016 are planned to total
$3.5 billion “taking into account a minimal demand growth.” This is close to the estimates
for their sales in 2015.
However, ALROSA is facing a different issue altogether. After reducing prices by an
estimated 20%, their contracted clients still state that ALROSA is pricing its rough too
high and further reductions is needed. The company may address this issue through
changes to its contracted sales system, already quietly admitting that their current allocation
system is not working well, especially in hard times.
The way to address this could be by stepping away from standard assortment mixes and
creating what one of their clients called “tailored” assortments. For starters, it would be
difficult to compare prices over time and so discourage talk of being expensive. Also, it would
allow the company to reduce prices discreetly and to fit their offerings more accurately to
market needs.

5. The lost year
Taking a longer view of the year, it is clear that the bullwhip effect that started with inventory
buildup among retailers in the main markets – the US, China, India and Japan – resulted in a
buildup in inventories in the manufacturing section of the diamond pipeline.
A faster response on the part of miners could have prevented a further detrition of the
situation or could have at least mitigated some of it. However, the drive to perform on a
quarter-by-quarter basis led De Beers’ CEO to make the ill-fated statement that it’s up to him
to take care of De Beers’ bottom line and up to the Sightholders to take care of theirs.
While that may be true, it proved shortsighted as the company saw sales drop 21% in the
first half of the year and take a potentially disastrous dip in the mid-term. Sightholder
sentiment was not just negative – it was downright contrary. Every time a Sight ended with
a high level of refusals, Sightholders chuckled vindictively. This was clearly not an
atmosphere conducive to doing business.
De Beers, as noted above, realized that it could not simply pump diamonds into the market
and dump responsibility on the midstream – it had to take action. After all, as the rate of
diamond companies calling it quits – through bankruptcies, quiet closures or by simply
shutting down operations such as polishing facilities in Botswana – has only increased, the
company had to make sure it’s not sawing off the branch it is sitting on.
Yet it started taking steps and initiatives in earnest only in the second half of the
year. We could argue that 2015 was the year of carrying 2014 mistakes. Producers ignored
the high inventories and continued to pump rough into the market. If they would have

6. reduced prices and volume early enough – instead of the price hikes – 2015 would have
looked very different.
Miners had it bad
Not only did diamonds take a hit this past year, but the entire mining sector fell as the Chinese
economy lost some of its steam.From an investors’ perspective, mining is a lot less
attractive, and diamond miners especially so. According to commodities and mining sector
analyst Kieron Hodgson, the lack of diamond price transparency makes them difficult to
judge and therefore investors are hesitant to pump money into the sector.
On the upside, the large number of special diamonds found by miners in the past year had a
casino-like quality – a chance to win big. This is something investors may like; otherwise, the
relative stability of diamond prices compared to other commodities makes diamonds seem a
bit boring.
What 2016 has in store
It is too early to predict when the market will improve. It will have to include continued
reduced rough prices, stabilized polished diamond prices and drying up of diamond
inventories along the pipeline, especially among manufacturers, who are already down by
about 20-30% since the start of the year according to one Sightholder.

7. Most importantly, it will require a revival of the consumer market. The signs are not
fully there yet. In the first ten months of the year, overall jewelry sales in the US increased
by a meager 0.8%, barely beating the inflation rate. For all intents and purposes, jewelry sales
are flat with the poor sales of last year.
For specialty jewelers alone – where diamond sales are more interesting, both in overall
value and per item – sales were still lagging behind in October. Reports from the market
suggest that the bigger chains are doing alright – with sales up 3%-5% compared to last year.
The rest of the many independents are suffering from a less than cheerful holiday season.
A finer look will show that although overall jewelry sales were poor in the first four months
of the year, they have improved since May and can end the year positively. However, that is
not the scenario specialty jewelers are facing. The slow year stretched into May, improved in
June and July and sank again in August–October.

8. Financing still an issue
It is important to remember that alongside the decline in consumer purchases, the main
complaint by many in the industry was in regard to financing. The financing crunch was a
result of continued rough diamond purchases alongside polished diamond slowing sales.
The midstream gets much of its bank financing against sales invoices to prove cash flow and
viability. Therefore, the continued rough buying expenditures while cash flow is dwindling
exasperated the financial woes and banks’ worries.
While today most are focusing on high rough prices, dwindling consumer demand and
low polished diamond prices, financing problems are still looming in the
background. High interest rates and a tendency to tighten credit supply are issues that will
jump front and center when matters improve – whenever that happens.
Miner uncertainties
Rough diamond prices just have to come down. The discrepancies in price are still there,
and manufacturers’ profitability has to be restored. A 20% price reduction is too harmful
and will erase too much value. A 5% reduction is enough to buy, but will not restore
profitability. However a 10% reduction will allow both profitability and balance.
The question is how to do it. A sharp one-time reduction creates an uneasy feeling among
most. One reason is the concern that it may result in a dash for goods. According to a few

9. industry members, the price reductions should happen in a couple of stages – in January and
again in February – and should be discrete.
A change in assortments that makes box price comparison impossible is one way of
doing this. That would go along with what ALROSA is entertaining already, and maybe De
Beers as well. Further, if the two reduce prices by 10% and keep volumes low in 2016, then
we can expect an improvement in the market.
Is better truly better?
No, this is not a Zen question, but a practical one. Once diamond jewelry retail sales are
revived, we may see another bullwhip effect – this time with the reverse trend of a strong
pull coming from downstream climbing upstream. This sudden demand could possibly
result in a sudden hike in rough diamond prices.
Many warn of manufacturers returning to old buying habits of buying rough almost regardless
of price. It would be a total disaster if it happens. Both miners and manufacturers should
be vigilant and act with a long-term view.
For the public mining companies, investor sentiment will continue to be challenging. As
mentioned, investors are a lot less interested in mining companies in general. Under-
performance and oversupply is standing in the way of price increases, according to Hodgson.
A possible outcome could be consolidation.
The perspective of judging a mining company for now is the ability to absorb weaker prices
over an extended period of time. Come to think of it, this is true for manufacturers and
retailers as well.
Source Edahngolan.com