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Look to the Holidays to Gauge the Trade’s Foreseeable Future
Insights
Oct 8, 2015 8:00 AM
By Avi Krawitz
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RAPAPORT... If things in the diamond trade were business as usual, strong sales during Christmas and the Chinese New Year in early February would reduce retail inventory and by March bring fresh orders for goods throughout the distribution chain.
But there is little about the trade this year that is usual, as it enters traditionally the most important period of the year, having just endured arguably its toughest three months since the 2008 financial crisis. With the third-quarter-from-hell now behind it, the holiday season should offer some hope that the ‘normal’ trading cycle will be restored in 2016.
That traditional post-holiday inventory replenishment didn’t happen in first quarter 2015. Why? Retailers – mainly in China – overbought in early 2014 and last years’ holiday period exposed a slowdown in consumer spending in emerging markets, that was made all the more apparent by a U.S. shopping season that was far from stellar.
De Beers CEO Philippe Mellier gave a “situation assessment” in the company’s September 2015 Diamond Insight Report:
“With consumer demand for diamond jewelry at the end of 2014 being a little softer than anticipated owing to unfavorable currency movements and a slowdown in emerging market growth, many industry participants began 2015 with more inventory than planned. This led to a period of ‘indigestion’ in the diamond value chain and as a result we expect 2015 as a whole to be a more challenging year.”
Seeking Relief
Diamantaires were seeking relief from that “indigestion” coming into the September Hong Kong Jewellery and Gem Fair. Instead, they encountered a market still clogged with excess goods despite the decrease in polished production over the past year. Buyers at the show bought only what they needed to fill existing orders and avoided building up inventory.
Suppliers pointed out that Chinese buyers are particularly hesitant to make large-scale inventory purchases during a down-trending market. Even more so, given the sharp declines witnessed in the third quarter which influenced the Rapaport Group to make changes to the Rapaport List in July, August and again in early September.
The RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds fell 6.3 percent during the three months that ended October 1, while RAPI for 0.30-carat diamonds dropped 10.4 percent and RAPI for 0.50-carat diamonds fell 8.5 percent. RAPI for 3-carat diamonds declined 7.9 percent during the quarter (see graph).
The RapNet Diamond Index (RAPI™) is based on the average asking price of the 10 best asking prices for round, D-H, IF-VS2, GIA-graded, Rapaport Specification A3 or better diamonds, which are offered for sale on RapNet - Rapaport Diamond Trading Network.
Demand Sputters, Stalls
Trailed by five consecutive quarters of polished price declines, not much has changed at the consumer level to signal a significant and sustainable upturn during the coming holiday period. For its part, De Beers is seeking to improve consumer demand with a generic marketing campaign to complement its Forevermark advertising in the U.S. and China. While ALROSA and other stakeholders have also recognized the need for wider-scale advertising, they still haven’t committed money to the cause.
Flat to low single-digit growth in the U.S. is anticipated for the balance of the year after America’s jewelry retail sales eked out a meager 0.6 percent increase in the first seven months of 2015, according to Rapaport estimates based on data published by the Bureau of Economic Analysis (BEA). This is in contrast with otherwise encouraging news that consumer confidence rose above expectations in September with the Conference Board reporting that its index of consumer attitudes increased to 103 from an August reading of 101.3.
At the same time, China remains under pressure and the double-digit growth that stimulated diamond market activity for the past few years is unlikely to return. The country’s transition from a state-investment and infrastructure-centric economy to a consumer-driven one is expected to bring uncertainty in the near term. Meanwhile, the government’s anticorruption campaign continues to curtail overt displays of wealth affecting the entire luxury market.
Analysts at the World Economic Forum noted in the group’s Global Competitiveness Report 2015-2016 that recent developments – including the weakening of the yuan, the stock market crash, rapid credit growth, and a stalling property market – have cast doubt on China’s economic prospects. Perhaps investors anticipated those risks as the Shanghai Composite Index slumped about 41 percent by October 1 from a peak on June 12.
An indication of how much those factors have affected the jewelry market should be evident when sales data for the October 1 Festival is released by the region’s top jewelers in the coming week. Considered China’s second-busiest retail period after the Chinese New Year, Golden Week results will reflect the mood among Chinese consumers at home and abroad.
Early indications aren’t encouraging. Luk Fook CFO Kathy Chan told Bloomberg Television on October 6 that despite an increase in store traffic in the initial days of China’s Golden Week festival, “I don’t feel we should be optimistic about the figures.”
Restoring the Cycle
Inevitably, there will be some inventory replenishment in the first quarter of 2016 that was severely lacking earlier this year. While inventory remains relatively high – mainly comprising lower-quality goods – and manufacturing levels sufficiently reduced, the stock should be sufficiently diminished to stimulate stronger activity come January. Lower retail inventories should result in stronger rough buying and greater production activity to meet the renewed polished demand.
That said - the question is: Will trading increase to satisfy rising levels of consumer demand for diamond jewelry or will it simply maintain the new-normal, lower inventory levels apparently set in 2015? While the July-September period was the toughest since 2008, a successful fourth quarter could set the industry up for consistent growth going forward. Even though a boom in jewelry sales seems unlikely at this stage, the forthcoming holiday season will prove critical in determining where the diamond trade is headed in the foreseeable future.
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Avi Krawitz, insights
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