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De Beers Sees Gem Price Rebound as Jewellery Sales Hit $81 Billion

 

(Bloomberg) — De Beers, the world’s biggest diamond producer, expects gem prices to rebound as cutters and polishers restock after the market was depressed by “softer than expected” holiday season sales.“We should see a slight rebound,” Chief Executive Officer Philippe Mellier said in an interview with Bloomberg Television. “Now we think that polished prices have bottomed and rough prices have also bottomed,” he said, referring to polished stones sold in jewelry and the uncut gems it mines.Rough diamond prices fell in the fourth quarter as banks that lend to the industry tightened credit. De Beers said the outlook for diamond jewelry growth in 2015 is positive across all the main markets after sales rose 3 percent to $81 billion last year.

Demand in the U.S., the biggest diamond market, rose 7 percent to $37 billion, while sales in China rose 6 percent to 62 billion yuan ($10 billion), according to De Beers, a unit of Anglo American Plc.

To contact the reporter on this story: Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Dylan Griffiths, Tony Barrett

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Henry Sapiecha

http://worldwidediamonds.info/files/2013/09/pink-diamonds-line.jpg

This pink diamond gold coin is set to make history

This pink diamond gold coin is set to make history

The Perth Mint unveiled Tuesday a gold coin worth over US$6,000 (almost A$9,000), which features a rare Argyle pink diamond to depict a Kimberley sunset over a boab tree in the northwest wilderness region of Western Australia.

Struck in two ounces (56 grams) of 22-karat gold to proof quality, the 2015 Kimberly Sunset Pink Gold High Relief coin comes at a special moment, says the Mint, as the end of mining at Rio Tinto’s (LON:RIO) Argyle mine is around the corner.

This pink diamond gold coin is set to make history

Reports estimate the Argyle open-pit mine, where the coin’s gem is from, will remain open about five more years.

The reverse side of the piece, the first Australian legal tender gold coin to include a rare Argyle pink diamond, features an effigy of Queen Elizabeth II and the monetary denomination.

This pink diamond gold coin is set to make history

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Henry Sapiecha

http://worldwidediamonds.info/files/2013/09/pink-diamonds-line.jpg

Term contract pricing in the diamond market- Paying for supply security

antwerp_diamond_bourse-image www.worldwidediamonds.info

————————PRICING METHODS———————–

A term contract for a commodity is a long term agreement where material is transferred at intervals over the contract duration for a certain price. The price paid can take many forms; fixed price, tiered price, formula price etc. A common pricing form is an indexed price where the price of each delivery references a pricing index. This is typically the corresponding spot market for the type of material being contracted. Various adjustments take place surrounding quality aspects and timing with a quotational period (average of month/quarter + 1/2/3 months of delivery).

————————PRICE DISCOVERY———————–

The essence of a term contract is that the price is being set in the spot market. Now this poses a question for price discovery mechanism – is the spot market an accurate reflection of the total market preferences?

When we look at market efficiency and try to see if the market is thick (enough buyers and sellers to transact), we typically think of liquidity – are enough transactions going through the spot market exchange in order for the prices to be fair? However, this doesn’t go far enough. To be sure the market is efficiently pricing we need to ensure that the right market participants are transacting in the spot market.

If we were to find the equilibrium for the market as a whole (i.e. all transactions through spot), all demand preferences would be ordered from the highest willingness to pay to the lowest and the supply preferences ordered from the lowest cost to the highest. If participants are split into term and spot markets would arrive at the same price as the total market if the highest willingness to pay buyers and lowest cost sellers entered into the term contract. These market participants hold preferences that always lead to transactions regardless of the price. This then leaves the more marginal players in the spot market to arrive at the clearing price and quantity.

Ins4Luckily, the incentives are such that market participants act in this way and self-select. Those with high willingness to pay want to enter into term contracts to ensure security of supply and avoid volume risk. Those with the

Luckily, the incentives are such that market participants act in this way and self-select. Those with high willingness to pay want to enter into term contracts to ensure security of supply and avoid volume risk. Those with the lower willingness to pay would not want to lose their flexibility and so will be less inclined to enter long term agreements.

Inefficient outcomes can occur when term contract buyers are receiving material but have a willingness to pay less than the market clearing rate. In this case the buyer would want to leave the long term contract and be replaced by the high bidders in the spot market.  This process might take some time, but as an intermediary measure, material could be resold (subject to resale clauses etc.) in the spot market in order to increase quantities available here and reduce clearing price.

Ins5 www.worldwidediamonds.info

————————PRICE DISCRIMINATION DYNAMICS———————–

If buyers are willing to reveal their preferences and self-select as being a high willingness to pay by requesting a term contract then we should expect some interesting games surrounding how sellers to use this information. Producers could start charging a premium for the privilege. Any price greater than the market clearing would incentivise high willingness buyers to shift over to the spot market under the expectation that they would achieve the market clearing price and avoid paying the premium.

Buyers would be unlikely to entice over any low willingness buyers into term contracts because of the perverse price effects (market clearing price would increase because it would be set by the high willingness buyers in the spot market). The market would probably shift onto a full spot exchange with the same clearing prices as before any attempt to charge a premium.

However, the fact is that risk is reduced for the buyer and seller under a term contract. Quantities are known in advance and with certainty. There is also a market failure risk with unknown timing problems where supply may be thin for nothing other than mismatches between when producers and consumers enter bids and offers the exchange. This will have positive value and suggest a premium would be paid for by the weaker bargaining party.

————————TERM CONTRACT AUCTIONS———————–

A good way to allocate term contract volumes to those that are willing to pay the most are to use an auction approach in order to help reveal true preferences. Obviously careful planning of the auction would be necessary in order to avoid collusion between buyers. Self-selection could also be used to allocate. If term contracts were offered with an estimated premium attached then only those with the highest willingness to pay would take them up.

Henry Sapiecha

pink diamonds line image www.worldwidediamonds.info

Evidence from commodity markets that have implemented a competitive auction of term contracts have realised a c3% premium relative to the underlying spot index.