Rapaport Magazine

Trade Report

By Avi Krawitz
Optimism Despite Tight Margins
Dealers are encouraged by positive industry sentiment but rough price hikes continue to squeeze cutters’ profit margins.

Polished diamond suppliers are optimistic that 2014 will bring continued economic recovery based on increased expectations for growth in developed countries. However, their hopes in the polished market continue to be dampened by trends in the rough trade that are squeezing manufacturers’ profit margins. Overall, sentiment remained positive in January and dealers feel the market has the basis to maintain healthy, although not spectacular, growth — at least in the first quarter of the year.
   The World Bank projected that global gross domestic product (GDP) will grow 3.2 percent in 2014, from its estimated 2.4 percent growth in 2013. Similarly, the International Monetary Fund (IMF) has forecasted 3.7 percent growth in 2014, up from 3 percent in 2013. “The performance of advanced economies is gaining momentum, and this should support stronger growth in developing countries in the months ahead,” said Jim Yong Kim, World Bank Group president.
   By the same token, the positive sentiment in the diamond market was driven by solid U.S. demand, while the Far East was cautious as jewelers completed their Chinese New Year purchases. While the focus of the trade shifted eastward in advance of the Chinese New Year Golden Week, which began January 31 and is considered the busiest retail period in the region, dealers still point to a satisfactory Christmas period in the West as the reason for their buoyancy.


The Polished Trade
   Polished diamond trading was stable in January with good demand for dossiers and .30-carat to .59-carat SI goods continuing to be the strongest category. The RapNet Diamond Index (RAPI) for 1-carat diamonds rose 1 percent during the period January 1 to January 27. RAPI for .30-carat diamonds increased by 1.1 percent, while RAPI for .50-carat stones grew 2.3 percent. RAPI for 3-carat diamonds fell .3 percent during the period (see RapNet Diamond Index (RAPI™) chart in slideshow).
   Prices increased as Chinese New Year demand was complemented by U.S. retailers beginning to replace inventory sold during the Christmas shopping season. Jewelers are planning their programs for the year and continue to manage with leaner inventory.
   However, there are also shortages in the market, particularly for the popular dossier goods, because wholesale and retail inventories were depleted during the year-end. Furthermore, with Indian factories closed in November, post-Diwali manufacturing has yet to come to market. The supply of goods also is being adversely affected by the reported backlog of goods waiting to be certified at the Gemological Institute of America (GIA).
   Still, the level of trade has increased compared to a year ago with a steady flow of goods among the major diamond centers. India, Belgium and Israel each reported a strong end to 2013, posting double-digit growth in their polished exports during the fourth quarter (see Polished Diamond Trade at Major Centers chart in slideshow).

The Rough Trade
   Despite the increased trade, tight profit margins remain the primary concern among manufacturers and polished dealers, especially since rough prices increased by around an average of 5 percent in January. Demand for rough increased in response to low factory inventory levels and the relatively long gap between the December rough sales and the sales in January.
   ALROSA raised prices at its mid-January sale, prompting strong demand on the secondary market amid expectations that De Beers would follow suit. In fact, De Beers increased prices by slightly more than expected at its large January sight that had an estimated value of $700 million. The trading on the secondary market that followed was a bit more restrained although boxes held their lower single-digit premiums.
   The buoyant market signals a change in rough market conditions after demand dipped in the second half of 2013. During the fourth quarter, rough imports to India fell 4 percent while Israel’s rough trade declined by similar margins and Belgium’s increased slightly (see Rough Diamond Trade at Major Centers chart in slideshow). Reduced trading in recent months may have influenced the current appetite for rough as manufacturers now need the goods to fill higher production requirements at their factories.

Production Prospects
   Mining companies are encouraged by the rise in demand as they plan their production and supply for the year. While ALROSA and De Beers, which together account for about 60 percent of global supply, are expected to maintain production in line with 2013 levels, the midtier companies are ramping up production.
   In particular, a number of expansion programs are coming to completion, raising prospects for the respective mines. These include Rio Tinto’s shift to underground mining at Argyle, Petra Diamonds’ programs at the Finsch and Cullinan mines and Lucara Diamond Corporation’s newly developed Karowe mine. Dominion Diamond Corp., formerly known as Harry Winston, also reported higher production in 2013, having bought the Ekati mine during the year, and said it expects further growth in 2014 (see Diamond Production at Select Midtier Mining Companies chart in slideshow).
   While few expect these projects to disrupt the dynamic between supply and demand, they do present rough buyers with diversified options of where to get goods. Rather, supply and demand are in equilibrium although rough prices continue to run ahead of the polished. Dealers expect further increases in rough prices in the first quarter of this year, accompanied by relatively modest increases in the prices of select polished goods.
   As a result, profit margins are projected to remain under pressure, as they were in January, and there is some skepticism as to whether the recent surge in rough trading will be sustained. For now, the market is relatively upbeat because manufacturers need rough to meet stable polished demand. That’s been enough to set a positive tone in the diamond market at the start of 2014.

Article from the Rapaport Magazine - February 2014. To subscribe click here.

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