Activity in the diamond trading centers slowed in April as
dealers took a break during the Passover and Easter holidays, while protests by
Indian jewelers against higher proposed taxes impacted confidence there. At the
same time, demand in the consumer markets was stable, with steady requests for
goods from the U.S. and a slight improvement in Far East demand ahead of its
May 1 holiday weekend.
Buyers continue to focus on commercial-quality diamonds,
with .50-carat to 1.10-carat, G to H, VS to SI goods proving the most popular.
There is also continued improvement in demand for fancy shape stones, which
offer buyers better price points than rounds, although some argue that this is
being driven by the apparent shortage of well-made fancy shape diamonds in the
market.
Overall, polished prices remained firm in April. But
polished dealers and manufacturers maintained that their profit margins were
tight because rough prices are considered high in relation to the resulting
polished product.
The RapNet Diamond Index (RAPI) for 1-carat diamonds fell a
slight .7 percent to 93.73 during the period April 1 to April 23 (see chart on
opposite page, top). The RAPI for .30-carat diamonds rose .5 percent to 16.34,
while RAPI for .50-carat stones was flat at 34.49. The RAPI for 3-carat
diamonds increased 1.2 percent to 346.43.
Polished trading was subdued, primarily in response to the
shuttered Indian market. Jewelers were on strike from March 17 until April 6 in
protest of government proposals to effectively double excise and customs taxes
on gold, gemstones and unbranded jewelry in its 2012-2013 state budget.
Confidence was restored after the treasury agreed to review the tax proposals
and the strike ended, with shops reopening and jewelry trade resuming.
India’s trade in polished diamonds already has declined
significantly in 2012 since the introduction in January of a 2 percent import
duty on polished diamonds. The country’s polished imports fell 71 percent year
on year to $2.32 billion in the first quarter of 2012, while its polished
exports declined 42 percent to $5.33 billion. Other markets fared better, with
Belgium’s polished exports rising 4 percent to $3.57 billion and its imports up
16 percent to $3.71 billion (see chart at right, bottom).
ROUGH FIRMING
In contrast, Indian diamond manufacturers have started to buy
rough again and many attributed the recent strength of the rough market to
their influence. “Demand growth from emerging market buyers, especially India,
was most pronounced and our view was, is and remains that demand will continue
to grow as we negotiate sales into the second quarter,” said Neil Ventura,
chief executive officer (CEO) of Diamdel, following the company’s March auction
cycle.
Diamdel reported that demand for near-gem and grainer
categories showed the greatest increases, followed by rough larger than 2
carats. The company said that demand for smalls and large categories dropped
slightly from its January-February auctions but added that demand for these
goods was still robust, with the highest levels seen since the previous market
peak in July 2011.
Similarly, Gem Diamonds noted that rough diamond demand
continued to stabilize in the second quarter of this year. The Gem Diamonds
Price Index, which measures prices for diamonds mined at its Letšeng and
Ellendale mines on a like-for-like basis, rose 7 percent during the first
quarter. Rapaport estimates indicate that the average price of De Beers Diamond
Trading Company (DTC) goods has increased at approximately the same pace during
the same period.
The price increases came as De Beers production fell 16
percent to 6.2 million carats in the first quarter. The company explained in
January that its strategy was to focus on maintenance and waste mining during
the period of market softness toward the end of 2011 and this approach
continued during the first quarter of 2012 (see chart at left). The decline in
production volume also reflected De Beers sale of its Finsch mine in South
Africa to Petra Diamonds during 2011. As a result, the new DTC contract period
began on April 1 with fewer sightholders expecting less supply than before.
The net effect on the market, however, may be positive
because Petra Diamonds continues to ramp up production at its portfolio of
former De Beers mines. In addition, Rio Tinto has started to increase
production again, with mining focused on the higher-grade open pit at the
Argyle mine in Australia before underground mining starts in 2013 and with
underground production rising at the Diavik mine in Canada. Rough diamonds from
Zimbabwe’s Marange mines also continue to filter into the market and the
combined current production at the four Marange mines is estimated at around
3.5 million carats a month.
HOPE AHEAD
Still, as rough prices strengthen, diamond manufacturing
profit margins have slimmed and liquidity tightened. Many in the trade are
hoping the JCK Las Vegas show in June will signal an uptrend in the polished
market that will help ease those pressures, particularly since demand in the
U.S. market has been relatively robust so far in 2012.
Some of the major retailers have also noted strength in the
U.S. market. New Zealand-based Michael Hill, which operates nine stores in the
U.S., mainly in the Chicago area, stressed that third-quarter sales were
satisfactory in New Zealand, Canada and the U.S., while the Australian market
continued to be difficult for the group due to tight retail conditions there.
Luxury retailer LVMH Moët Hennessy Louis Vuitton noted that
it experienced particularly fast growth in Asia and in the U.S. and good
progress in Europe, despite the “contrasting environment” in that market. The
company added that the Japanese retail market has also made a good recovery
since 2011’s devastating earthquake and tsunami.
LVMH reported same-store sales in its watch and jewelry unit
rose 17 percent year on year in the first quarter of 2012. Total revenues at
the division jumped to $827 million during the period following LVMH’s June
2011 merger with Bulgari Group. The combined sales of the two companies have
shown steady growth over the past few years (see chart at right).
Such numbers have helped spur confidence in the trade but
the retail sector continues to tread cautiously, particularly the independent
jewelers. As a result, few retail and wholesale diamond buyers are making
large-scale, bulk purchases to build up inventory. They are not yet certain
that there is sufficient consumer demand to warrant it, or if price levels will
be maintained in the short term.
Las Vegas may be their testing ground to decide whether to
start buying more aggressively, and the show might provide an impetus to drive
a stronger uptrend in the second half of the year. Faced with strengthening
rough prices, polished dealers and manufacturers are certainly hoping so.
Article from the Rapaport Magazine - May 2012. To subscribe click here.