On the surface, diamond cutters and dealers are maintaining a positive outlook for the market in 2012. But their mood as the year opened was marred by economic data that suggested a slowdown may be forthcoming. They reacted with restraint in January in response to relatively slow demand from both the U.S. and the Far East.
While the U.S. was experiencing its traditional post-holiday lull, the Chinese market lacked the usual buzz associated with preparations for the Lunar New Year festival, even though there was some last-minute buying taking place. Confidence among Chinese diamond buyers was influenced by volatile financial markets and indications that the global economy was slowing, which would have an impact on the local economy.
China’s gross domestic product (GDP) grew by 8.9 percent in the fourth quarter of 2011, which was the slowest growth in about two years. The World Bank cautioned that developing countries, such as China, should prepare for further downside risks because euro debt problems and weakening growth in several big economies are dimming global growth prospects.
The bank further explained that the global economy will grow by 2.5 percent in 2012, down from its estimated 2.7 percent growth in 2011 (see chart on opposite page, top), because it is “weighed down by ripple effects from the 2008 financial crisis. The sovereign debt crisis in Europe, which took a turn for the worse in August 2011, coincides with slowing growth in several major developing countries — Brazil, India and, to a lesser extent, Russia, South Africa and Turkey — mainly reflecting policy tightening begun in late 2010 and early 2011 to combat rising inflationary pressures from overly fast growth.”
These issues were foremost on diamond industry minds in January when many predicted that economic pressures would be the strongest influencing factor on the diamond market in 2012.
Polished Stability
The industry was encouraged that the polished market, while slow, held relatively stable during the month, as reflected in the RapNet Diamond Index (RAPI™) for certified polished diamonds. The RAPI for 1-carat stones fell a marginal .6 percent in the period from January 1 to January 24 (see chart at right, bottom). The RAPI for .30-carat diamonds increased a slight .1 percent, while the RAPI for .50-carat stones grew .8 percent. The RAPI for 3-caraters was down .1 percent for the month to date.
Despite these signs of stabilization, the volume of trade continues to be down, as it was in the fourth quarter of 2011 (see chart on page 20). India’s polished exports fell 26 percent year on year to $4.56 billion during the quarter, while its polished imports declined by 35 percent to $2.85 billion. Trade is expected to slow further since the government introduced an immediate 2 percent import tax on polished diamonds.
The trends in other centers made for slightly easier reading, with Israel’s polished exports down 2 percent to $3.36 billion during the quarter, while the country’s polished imports rose 8 percent to $1.57 billion. Only Belgium showed significant year-on-year growth, with its exports up 18 percent to $3.57 billion and imports increasing by 30 percent to $3.45 billion. However, the volume of trade fell considerably in all three centers in the fourth quarter.
The Antwerp World Diamond Centre (AWDC) suggested that the market slowed in December due to the typical calm associated with this period. Still, most viewed the market with caution, particularly as rough trading was weak, with ALROSA and De Beers goods selling at discounts in the dealer market.
Rough Softens
Both companies responded by lowering prices by about 2 percent to 5 percent at their respective ALROSA and Diamond Trading Company (DTC) January sights. The move did not come as a great surprise given the discounts, but it was welcomed by most in the trade because it eased pressure on margins, even as they remained tight.
Dealers and cutters were hoping that rough supplies coming onto the market from the major miners would remain subdued in the first quarter of 2012 since there currently appears to be sufficient supply in the market. The influx of rough from Zimbabwe’s controversial Marange mine to India with Kimberley Process (KP) certification already has helped alleviate supply and price pressures, especially on the smaller, lower-quality goods.
In addition, companies throughout the pipeline — including retailers, wholesalers and manufacturers — are keeping smaller inventories than they used to, buying mainly to fill their short-term needs. They are hesitant to hold excess stock, cautious that prices may still decline further. Rough buying by Indian manufacturers was also limited by uncertainties caused by the recent depreciation of the rupee against the U.S. dollar. While the rupee depreciated by about 17 percent between August and December 31, the currency rebounded to rise 6 percent in January.
Mining companies are displaying similar caution and planning their production accordingly. Rio Tinto’s diamond production fell 7 percent year on year to 2.967 million carats in the fourth quarter of 2011 and by 15 percent to 11.733 million carats for the full year 2011 (see chart at right). Similarly, BHP Billiton’s diamond production fell 29 percent to 481,000 carats in its second fiscal quarter that ended on December 31, 2011. Neither De Beers nor ALROSA’s fourth-quarter production figures were published at press time.
Challenging First Half
Des Kilalea, an analyst at RBC Capital Markets, suggested that stability in the rough market will largely be determined by the manner in which ALROSA and De Beers sell in the first quarter. “The pace of sales from De Beers and ALROSA will be important,” he said. “Should both companies restrain sales in the first half, it will help the diamond sector regain confidence after the knock to profits in the third quarter, when rough prices fell sharply.”
While Kilalea forecasted that rough prices have bottomed out, he stressed that sustainable strength will only be possible if the two major miners show restraint and the U.S. market picks up. He concluded that the first half of this year could be challenging for the diamond sector, with rough and polished prices remaining fragile and volatile.
Many diamond cutters who spoke with Rapaport Magazine shared that sentiment, particularly those in India. But while they expressed concern about projected rough supply, exchange rate volatility and liquidity levels, they continued to worry about the impact that a global economic slowdown will have on consumer demand for diamonds. They are treading carefully, expecting the fragile environment to remain until growth returns in the second half.
Article from the Rapaport Magazine - February 2012. To subscribe click here.