RAPAPORT... By most accounts, diamond trading was slow in October as
businesses in Ramat Gan, Antwerp and New York closed for the Jewish holidays,
and Indian cutters closed early for the Diwali festival, which began October
26. Dealers and cutters used the time to take a step back to assess recent
market trends and to weigh varying forecasts for the coming months.
The underlying concerns, which have been prevalent at least
since August, remain, with the European debt crisis continuing to fuel global
uncertainty. Anxieties seemed to rise in proportion to the delays in finding an
amicable solution to the European situation. These were somewhat alleviated
when political leaders struck a deal to bail out Greece. Under the October 27
agreement, private banks and insurers agreed to voluntarily accept a steep 50
percent loss on their Greek government bonds, while euro zone leaders agreed to
raise the European Financial Stability Facility — its bailout fund — above its
initial cap of $600 billion. Still at issue is how the fund will be leveraged
to raise a higher amount. Among the possibilities being considered are offering
insurance or guarantees to euro debt purchasers in the primary market,
designing a special-purpose investment vehicle to attract foreign investors or
a combination of the two.
While negotiations were underway in Europe, there were
encouraging signs in the U.S. market, where retail sales are holding steady and
unemployment at least is not getting worse. On the flip side, consumer
confidence in the U.S. remains low, as does the third-quarter economic growth
forecast. Even in China, which has been one of the rare bright spots in the
global landscape, the pace of gross domestic product (GDP) growth softened in
the third quarter — although still impressive at 9.1 percent — as export growth
slackened.
These global factors combined to fuel uncertainty in the
financial and commodities markets, to which the diamond industry is not immune.
Polished Prices Soften
As a result of so many negative forces, polished prices
continued to weaken in October, with the RapNet Diamond Index (RAPI™) for
1-carat polished diamonds decreasing by 2 percent during the period October 1
to October 23. The RAPI for .50-carat stones dropped 5 percent, and the RAPI
for 3-carat diamonds fell 4 percent (see chart at right, top).
Still, the industry labored on, and recent data from the main
centers — India, Belgium and Israel — indicated that polished trade by value in
the third quarter of 2011 was at least in line with that registered in the same
period a year earlier (see chart at right, bottom). Of course, those stable
value numbers reflected the price increases experienced in the first half of
2011. However, the volume of polished goods traded was down from a year ago —
with the exception of Belgium. Polished import and export values during the
quarter also were boosted by increased participation in the Hong Kong Jewellery
& Gem Fair in late September.
Lower Rough Volumes
Rough trading, meanwhile, remained quiet, with buyers
continuing to press for deeper discounts. The major rough producers, De Beers
and ALROSA, pledged to keep their prices stable while awaiting the expected
return to growth in early 2012. In the meantime, their goods were being offered
at double-digit discounts on the secondary market. Sightholders urged a decline
in supplies to ease their own buying pressures because they are reluctant to
reject goods offered to them by the major producers.
Already in the third quarter, the volume of rough sent to
the cutting centers fell compared to 2010, while values increased, again
reflecting the market’s higher prices. India’s rough imports by volume fell 13
percent year on year to 29.318 million carats during the three months that
ended on September 30, while the value of the imports increased 40 percent to
$3.65 billion, according to provisional data published by the Gem and Jewellery
Export Promotion Council (GJEPC) (see chart at left). The data suggested that
the average price of India’s rough was 61 percent higher than a year earlier.
In the current environment, diamond cutters have no choice
but to work with lower volumes, especially since bank credit has remained
steady, and tight, throughout the year. Scarce liquidity poses a considerable
challenge to the diamond manufacturing sector at a time when cutters are
starting to plan their stock replenishments at higher prices compared to a year
ago.
’Tis the Season
Some attributed the recent trading lull to the seasonal
nature of the industry’s dynamics and pointed to the strong buying that
occurred in the first seven to eight months of the year, which filled the
pipeline. “It’s not only this year. Usually, the pipeline is full in the fourth
quarter and everyone is waiting for the selling season to close before
replenishing stocks,” Philippe Mellier, De Beers chief executive officer (CEO)
told Rapaport News. “So you have the seasonality of retail sales and you have a
season for refueling the pipeline. It’s quite normal.”
Watching anxiously for early clues to the strength of the
year-end holiday season, the trade was carefully eyeing retail trends in China
at the start of October during the National Day Golden Week festival, and
subsequently in India during Diwali. In both cases, strong gold demand spurred
jewelry sales as the yellow metal — with its $1,650-per-ounce price about 15
percent off its September high — remains an attractive asset for consumers and
investors alike, even if its “safe haven” status may have faltered in the past
month.
Tough Forecasting
Mellier, along with other miners, draws confidence from high
expectations for growth over Diwali, Christmas and the Chinese New Year, which
begins on January 23, 2012, after which they expect trading in the diamond
pipeline to return to stronger activity.
As a result, De Beers has kept its forecasts unchanged and
continues on course with its planned production program for the remainder of
the year. Output during the third quarter grew 3 percent to 9.305 million
carats, which was the highest level since the fourth quarter of 2009 (see chart
at right). De Beers production is expected to reach about 34 million to 35
million carats for the full year, compared to 32.997 million carats in 2010.
Among the other large mining companies, Rio Tinto’s diamond
production was flat at 3.534 million in the third quarter but down 18 percent
to 8.765 million carats for the nine months, while BHP Billiton’s diamond
output fell 35 percent to 457,000 carats during the quarter and by 28 percent
to 1.584 million carats for January through September. ALROSA had not published
third-quarter data at press time.
The mining companies are banking on a satisfactory
fourth-quarter retail performance to unfreeze the pipeline come 2012 and the
rest of the industry is hoping they’re right. But in the current environment,
with tight margins, low liquidity and economic doubts, skepticism lingers. Even
as dealers return from the holiday-induced October quiet, planning ahead — and
assessing which forecast to follow — has proved difficult indeed.
Article from the Rapaport Magazine - November 2011. To subscribe click here.