RAPAPORT... Inflation, stagflation, recession — these words seemed to dominate all economic reviews in July. Equity markets lost most of their gains of the past few months and the slide appears to be continuing. Consumers have definitely slowed down in their spending and this has put pressure on retailers. The cost of replacing inventory is going up and demand is dropping.
The diamond market in Hong Kong has mirrored the world situation as retailers and dealers have become very cautious in their purchases, only buying against orders in hand. Some of those who have the financial clout are taking advantage of the situation and are buying only if the price is dirt cheap.
On the other hand, we have the increases in the price of diamond rough announced by the Russians in June, followed by the Diamond Trading Company (DTC) announcement of an increase in the price of rough in July.
There was some concern among Hong Kong diamantaires that the prices of the Rapaport list might be increased again, beyond the increases announced in May, to reflect the new, higher rough prices, even though most felt that the May round of price increases was already high enough. They were all relieved that the list remained unchanged.
While it is true that merchandise suitable for the Chinese markets continues to be in very high demand, there is still a limit to how far the Chinese consumers will be willing to follow higher prices. With a short time remaining before the August 8 opening of the Olympics, the country is still riding high, despite the very evident decline in Chinese exports, the main bloodline of its economy.
Due to security measures against terrorist attacks, the government has made it difficult for Chinese citizens to travel out of the country. Foreigners must give proof of their reasons for traveling inside China and provide itineraries and addresses of where they will be staying. Border and customs controls have also been tightened so that trade for many who were not importing diamonds through the official channels has come to a complete halt.
Whether the shortage of higher clarities in medium colors is real or the result of hoarding by speculators, the main problem is that this euphoria of all the tourism will not last long and, once the Olympics are over, demand will certainly be less.
THE PARTY’S OVERThere is a certain amount of skittishness among diamond suppliers as they, too, realize that the mad rush for their diamonds has slowed down to a crawl. And, while they are anxious to make sales, they are stymied by the higher price they are being asked to pay for the rough.
Over the past year, there has been some movement toward SI goods in Hong Kong, which compensated for the weaker market in the U.S. But now, the main part of the latest price increases by the DTC is focused in this area. The only reason SI goods became attractive was that the price for the higher-clarity goods that were a staple for Hong Kong became increasingly more expensive and retailers were looking for merchandise that would allow them a better margin of profit.
It seems to be the case that if any item affords a profit, it is quickly mopped up by a cost increase. That seems a shame because, if SIs do become popular in Hong Kong, with time, they will also become acceptable in China. Once that happens, the potential boggles the imagination. You only have to visit China to realize it is a clone of Hong Kong in every respect. Buildings, entertainment, restaurants and shops are identical to many in Hong Kong. The local Chinese regard Hong Kong as being more sophisticated and whatever is popular there, also finds favor with them.
Profit is the name of the game and if a business can’t make enough to cover expenses, the players go bust. Profit allows retailers to expand and grow. If profits are pared down to razor-thin levels, the only way to make more profit is to sell more. But an increased sales volume brings with it other major problems that accompany any change in the economic climate of the country.
We have all seen what has happened in what had long been a booming U.S. jewelry industry. Large U.S. companies have gone belly-up in recent months and have taken along with them a large number of diamond suppliers. This same scenario could occur in other booming markets as well. China and India are considered the emerging markets for diamonds and it’s true that, until recently, there seemed to be no end to how much they would grow. Undoubtedly, they are still the markets of the future. But, as with any child, there will be growing pains, and there might be some problems with collecting payments as they come off their peak.
BACK TO THE FUTURE
Hopefully, the present situation is only a summer holiday nightmare and things will look brighter in the fall. Even if it does not get better, the industry must take a few steps back and put things in perspective to pave its way to the future. The future will be as we build it.
The Marketplace
• There is general apprehension in investing in large, expensive stones for fear prices might soften. The exceptions are G-I colors in VVS clarities.
• Fancy cuts are being sought as cheaper alternatives to rounds. Marquise, hearts and princess cuts are preferred.
• While there is steady demand for triple EX goods, buyers are increasingly comfortable buying slightly off makes or goods with medium fluorescence if discounts are larger.
• G-I colors in VVS clarities in all sizes continue to be in very strong demand, as reflected by a shortage in supply.
Article from the Rapaport Magazine - August 2008. To subscribe click here.