RAPAPORT... The price of diamonds had been steadily rising until June, but appears to have hit a brick wall recently. All the reasons given for the high diamond prices — the weak U.S. dollar, rising oil prices, record prices for gold and other commodities — have been negated. The dollar has gained in value over all other currencies and the prices of gold and oil and other commodities have been testing new lows and continue to fall. The Hong Kong equity market index dropped below the support level of 21000 and, if things don’t improve in the near future, it might head into lower territory in the coming weeks.
One of the main reasons for the weak demand for diamonds in 2008 is that, in past years, even if the demand slowed down for the summer, retailers would still purchase stones if they could find a good buy in anticipation of better demand in the fall. This year, however, diamonds have become more expensive, due to recent increases in the price of rough and the shortage of more desirable merchandise. Local diamantaires are betting that, while the prices for large sizes might remain high, commercial goods will have to come down in price and diamonds hoarded by speculators will have to come back into the pipeline.
Oil is a good example of reversals seen recently. It was increasing in price due to higher demand and a perceived future shortage of supply, but it is now in decreased demand because consumers have altered their way of living to use less oil and there has been an increase in oil production. That has resulted in a glut of oil supplies and the subsequent lowering of prices.
Who’s Got the Rough?So where is the stockpiling of diamond rough occurring? Certainly not in the jewelry pipeline, which is suffering from indigestion at the moment. Is it at the mining producers’ end or with rough dealers? Hopefully, those who are speculating on rough have sufficient assets to hold on to their diamonds long enough to shore up prices. If there is a reversal in the prices of polished, there could be a repeat of the scenario of the early 1980s, when prices went into a free fall. It took more than a decade for diamonds to come out of that slump.
Whatever happens, diamonds will continue to sell. The only questions are at what price levels and which qualities will find favor with consumers. Already, there has been a shift in size preferences. Two-carat sizes, which were neglected for a long time as consumers wanted ever-bigger diamonds, are now becoming more popular as 3-carats-and-larger diamonds move into stratospheric price ranges.
There will always be the super-rich who go only for the best and rarest and that is why really big diamonds larger than 10 carats continue to find buyers. Since 1-carat sizes are still moving well, that might predict an increase in demand for diamonds under 1 carat, too. Consumers could also become less demanding and decide to sacrifice clarity and make in order to fit their budgets.
This would not be entirely bad for business because, at the present moment, there are tons of diamonds remaining unsold because consumers in the region have been in the market only for diamonds with high clarities and makes and without any fluorescence. The result may be an increase in demand and sales.
Retail Ups and DownsWhile the Olympics in China opened to great fanfare, the games failed to generate an expected boom in retail sales. In its quest for a drop in the air pollution around the Olympic venues, the Chinese government closed factories around the hosting cities in China for the duration of the Olympics. Virtually all of the country came to a standstill, with everyone concentrating on the outcome of the games. Rather than an increase, most jewelry retailers in China saw a drop in their sales compared to 2007.
In Hong Kong, consumers seemed also to prefer watching the games rather than pursuing their favorite sport of shopping. In fact, this summer was one of the slowest in the city in memory. The jewelry trade has not seen such a slowdown since the severe acute respiratory syndrome (SARS) epidemic in late 2002 and early 2003.
On an up note, Jewelry chain Luk Fook Jewellery announced a surge in profits of 58.5 percent for the year so far, compared to the same period in 2007. The company attributed the increase to the rise in the price of diamonds, which account for 53 percent of its sales, and to an 18 percent increase in its turnover.
For the majority of jewelry retailers, however, things are not as rosy and many have virtually stopped buying into inventory. They rely mostly on memo goods as demand is at an all-time low.
The Marketplace
• Demand continues for 10 carats and larger but is much slower for 3 to 5 carats.
• Demand is stable for 1-carat sizes and there is a shortage of VVS goods in all ranges. Demand is growing for SI in all colors.
• Demand is steady for fancy cuts in heart and pear shapes and moderate for princess cuts. Emeralds are weak.
• Demand is steady for 0.50 and larger, both in dossiers and uncertified goods.
• Demand for smaller sizes remains weak and is concentrated in specific sizes.
Article from the Rapaport Magazine - September 2008. To subscribe click here.