SENTIMENT IMPROVES

The eyes of the trade turned to India in August as polished diamond suppliers sought out price stability in advance of the all-important fourth-quarter buying season. Trading at the India International Jewellery Show (IIJS) met their diminished expectations and they did not leave disappointed. But the bar had been set low.

   Price-sensitive Indian buyers were looking for inexpensive, small diamonds and were pushing for deeper discounts. However, suppliers held their prices relatively firm overall, despite the presence of some diamond manufacturers with significant liquidity challenges. There was good demand for low-color, SI-clarity stones at IIJS, while demand for better-quality VVS goods remained weak. There was also steady demand for fancy shape stones, particularly pear, heart, princess and emerald cuts. Cushions remain strong in the U.S. market.
   Indian retailers continue to keep their inventories low but signaled some intention to buy diamonds before the upcoming Diwali and wedding seasons. In addition, Indian polished suppliers noted that Chinese buyers have begun to inquire about goods again, slightly raising expectations for the September Hong Kong show. That was encouraging news to dealers in Belgium and Israel, who returned from their annual vacations still uncertain about market conditions. For additional IIJS coverage, see India market report on page 72.
   The RapNet Diamond Index (RAPI) held relatively steady during August, at least easing the downtrend that had prevailed in the preceding months. For the period August 1 to August 27, RAPI for 1-carat diamonds declined by .8 percent, while RAPI for .30-carat stones rose .6 percent. RAPI for .50-carat diamonds was flat for the period, as was the index for 3-carat stones (see chart on opposite page, top).
   RAPI for 1-carat diamonds is down about 10 percent so far in 2012 following sharp declines that began in May, when Far East and Indian demand grew cautious. Indian consumers are facing rising inflation and interest rates and the weaker rupee — down about 21 percent over the past year — is taking its toll on consumer confidence, while pushing gold prices in rupee terms to record levels.

GOLD AND JEWELRY DEMAND DOWN
   As a result, India’s total gold demand fell 34 percent year on year to $9.38 billion in the second quarter of 2012, with gold jewelry demand down 26 percent to $6.46 billion, according to the World Gold Council (WGC). Jewelry wholesalers reported steady demand for gold products at IIJS but noted a shift toward lighter-weight gold jewelry. Similarly, total gold demand in Greater China, including Hong Kong and Macau, was flat at $8.08 billion, while gold jewelry demand dropped 2 percent to $5.33 billion.
   WGC explained that China’s economic slowdown and the lack of clear direction for gold prices were the main factors behind the year-on-year decline in domestic gold demand. “Chinese consumers prefer to buy into an established trend in the gold price and the period of consolidation during the second quarter therefore acted as a deterrent to gold jewelry demand,” WGC explained.
   Global demand for gold jewelry fell 9 percent year on year to $21.6 billion while in volume terms, demand declined 15 percent to 418 tons, its lowest quarterly volume level in two years (see chart at right, bottom).
   Diamond suppliers reported that Far East buyers, who have been largely absent from the market in recent months, have begun to return. The hope was that their return would impact sales at the Hong Kong show, which begins on September 19.
   While retailers have held off from large-scale diamond buying for much of 2012, many sense they are ready to raise the bar as they prepare for the fourth-quarter buying season that incorporates China’s October 1 Golden Week, India’s November Diwali festival and Christmas. Despite some encouraging signs from the East, diamond dealers maintain that the U.S. is still the best market to sell polished at the moment.

HIGH-END CAUTION
   However, suppliers are being careful not to raise their hopes too high, especially given the prevailing economic uncertainty and the fact that high-end consumers have also cut back on their discretionary spending.
   “Not surprisingly, sales growth has been affected by economic weakness in a number of markets,” luxury jeweler Tiffany & Co. explained after reporting that net sales rose just 1.6 percent to $887 million in the second quarter that ended on July 31, 2012 (see chart at left). The group’s same-store sales fell 3 percent, while the Americas market posted a 5 percent drop, and Asia-Pacific and Europe both saw 7 percent declines. The company reduced its full-year outlook given the challenging economic environment.
   Other major retailers did better. Signet Jewelers reported that net sales rose 7 percent to $853.9 million, with its U.S. same store sales up 8.2 percent and its U.K. same store sales increasing 2.1 percent. It should be noted that at Signet, growth was driven by the company’s midpriced Kay stores, where sales rose 12.5 percent, while its higher-end Jared division posted a more lackluster 2.4 percent sales increase.

LIMITING SUPPLY
   Caution also continues to emanate from the supply side, where manufacturers have curbed their buying of rough diamonds. Russia-based ALROSA, the largest diamond supplier by volume, reported that it lowered its supply to the market in the second quarter and that it approved the sale of $130 million worth of rough to Gokhran, the Russian treasury, for the first time since 2009.
   Diamond Trading Company (DTC) sightholders, meanwhile, rejected De Beers goods at the June and July sights, complaining that overpriced rough was hurting their liquidity. The August sight, which was beginning at press time, was expected to be lower than anticipated.
   In light of its own concern about the weak overall economy and the decline in rough prices, midtier miner Gem Diamonds delayed its expansion project at the high-value Letšeng mine in Lesotho and development of its Ghaghoo mine in Botswana. The company saw net profit slide 51 percent year on year to $14.3 million in the first half of 2012 as revenue fell 8 percent to $180.2 million. The average price of its rough sold from Letšeng fell 30 percent to $2,133 per carat (see chart at right).
   The mining company noted that reduced liquidity and a decline in emerging market demand for rough diamonds during the second quarter created especially challenging trading conditions, which led to higher polished and rough inventory levels in the manufacturing centers.
   Cutters in India acknowledge that the bigger diamond manufacturers are holding large inventories of goods but added that they may not possess the right type of goods. Some have cautioned that there is a pending shortage of well-made SI goods and fancy shape diamonds, which have maintained relatively steady demand. Some smaller manufacturers have closed their factories until they sense an improvement in market conditions.
   It’s been suggested by some that IIJS may have signaled a turning point for the industry. Even though it was not a boom show, it was good enough to raise hopes that Hong Kong could provide the boost that the market needs in advance of the holiday season. But expectations remain deliberately low. As IIJS proved, it’s not necessarily the amount of trade taking place, but the sentiment surrounding it that boosts confidence.

 

Article from the Rapaport Magazine - September 2012. To subscribe click here.