Relatively Speaking… Business is Okay

Most in the diamond trade acknowledge that confidence began to resurface after businesses returned from the Jewish holiday and Diwali festival breaks. Rough prices appeared to be holding steadier than before, influencing some polished price stability. Both these factors spurred better trading activity.

As the Thanksgiving-Black Friday weekend approached, officially kicking off the U.S. holiday season, wholesale buyers and retailers increased their purchasing but maintained a conservative attitude, buying only to fill specific needs or new orders. Retail inventories remain relatively full following the strong buying that took place in the first half of the year.

In India, although sales during the Diwali season fell below expectations, they improved with the start of the local wedding season. Similarly, wholesale buying in China and Hong Kong improved slightly with the approach of Christmas and the Chinese New Year that follows. But there, too, buyers still appear to be holding back as they assess the sustainability — and volatility — of the current economic environment.

Volume Down

The RapNet Diamond Index (RAPI™) for certified polished diamonds reversed the downtrend experienced since August by posting modest gains in November, most significantly in 1-carat stones. The RAPI for 1-caraters rose 2 percent during the period November 1 to November 21. The RAPI for .30-carat stones was flat, as was the RAPI for .50-carat diamonds and the RAPI for 3-carat diamonds (see chart at right, top).

The cautious outlook for the season persisted as the volume of trade continued to decline. Polished imports to the U.S. by volume fell 10 percent year on year to 3.353 million carats in the third quarter of 2011, Commerce Department data showed (see chart at right, bottom). By value, imports rose 24 percent to $5.5 billion, with the average price of imports 38 percent higher than a year earlier. Similarly, U.S. polished exports by volume dropped 36 percent to 4.327 million carats (see chart at right, bottom), while by value they rose 26 percent, reflecting the fact that average prices jumped 97 percent.

The U.S., the world’s largest consumer of polished diamonds, was a net polished exporter by volume in the third quarter, as it historically has been for the past seven years (see green trend line in chart at right, bottom). Net polished imports, representing imports less exports to indicate the amount of goods that remained in the country for consumption, rose 68 percent to a negative 973,715 carats during the quarter. Despite the year-on-year improvement, the data still indicate that more goods are leaving the U.S. than staying in.

Rough Prices Firm

To a large extent, the polished market has taken its cue from the rough sector. The volume of rough supplied to the market is down, while signs of price stability have started to show. The Diamond Trading Company (DTC) held a small sight in November with an estimated value of $300 million. The De Beers company made last-minute  adjustments to its assortments at the sight to realign its prices with the market. As a result, the prices of DTC goods sold on the secondary market firmed slightly. Similarly, tender prices rose in November from the previous month, after the market had weakened in the third quarter.

Gem Diamonds Chief Executive Officer (CEO) Clifford Elphick noted that prices during the third quarter softened, especially for lower-quality diamonds, while output from Gem Diamonds’ Letšeng and Ellendale mines continued to achieve strong prices for their exceptional quality, top-color diamonds. Sales from the Letšeng mine rose 46 percent year on year to $55 million in the third quarter, with the average price of these goods increasing 44 percent to $2,426 per carat. However, both measurements were significantly down from the second quarter, which is traditionally a strong period for the company (see chart at left).

Politics are Significant

Deeper concerns were expressed about the significant corporate and political developments that made headlines in the rough market during November. Diamantaires were somewhat sentimental about the Oppenheimer family’s decision to sell its 40 percent stake in De Beers to Anglo American. At the same time, there was a lingering sense that a more corporate, Anglo-led De Beers could result in a more aggressive pricing strategy, and perhaps a less personal relationship between the company and the trade.

In addition, the decision by the Kimberley Process (KP) to allow rough exports from Zimbabwe’s Marange mines has many questioning the potential impact these goods may have on the market, both in terms of supply levels and consumer attitudes toward the industry.

Watching Retail

For now, most traders are carefully eyeing trends in the retail market — as well as in the global economy — for a hint at how sales during December and January will evolve. While reports indicate that jewelry continues to outpace other product sectors in the retail market, many of the larger U.S. department stores posted sales declines in the third quarter when consumers tightened their belts.

The fact remains that except for those at the top of the income charts, most consumers have limited discretionary spending capability. That was apparent in the jewelry sector, where demand for gold jewelry fell 10 percent to 465.6 tons in the third quarter, according to the World Gold Council (WGC). India, the largest consumer of gold, was a big factor in that decline. Gold demand in India fell 26 percent due to persistently high domestic inflation that impacted both disposable income and consumer sentiment, WGC explained. By value, global gold jewelry demand increased 24 percent to $25.5 billion, again reflecting the sharp rise in gold prices over the past year (see chart at right).

WGC forecasted that Indian demand should rise for the remainder of 2011 due to the wedding season, while demand for gold jewelry in China, the second largest market, will remain buoyant as the year-end holiday season approaches. Sales there are being driven by rising income levels in the third- and fourth-tier cities.

The extent to which these trends will impact diamond demand remains to be seen. Diamonds could mirror the experience with gold in India, where consumers sought lighter weights to compensate for higher prices during the third quarter. Likewise, in the face of higher prices, diamond buyers might decide to compromise on quality in their fourth-quarter purchases. Overall, many in the trade are expecting a sustainable level of retail activity during December, large enough to motivate some growth at the start of 2012 — growth that is relative, of course, to the latter half of 2011 — but still growth.

Article from the Rapaport Magazine - December 2011. To subscribe click here.