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Industry
Trade Report
By Avi Krawitz
Miners Profit, Manufacturers Squeezed Steady Chinese New Year jewelry sales and a stable U.S. market inspire confidence but high rough prices are still a concern. Polished markets were stable in February as sentiment in the Far East improved following the Chinese New Year. The festival, which occurred in the first week of February, reflected robust demand for commercial-quality jewelry while luxury sales declined due to a government crackdown on luxury gift giving to officials. Reports that jewelry sales rose by double-digit percentages in select provinces renewed some confidence in the China market, whose economy remains in a state of flux. Economic growth has slowed as the government implements its reforms to transition from a government investment-driven economy to a consumer-focused one. Jewelry consumer demand in China continues to be driven by gold products, with Chow Tai Fook reporting that same-store sales of gold product rose 19 percent and gem-set jewelry increased 13 percent during the holiday season. Luk Fook Holdings, the third-largest jeweler in the region, reported that its gold same-store sales grew 16 percent, while gem-set jewelry declined 2 percent, dragged down by its performance in Hong Kong and Macau. According to the World Gold Council (WGC), China ranked as the largest gold market in 2013. Gold jewelry demand in China slowed slightly toward the end of the year as the buying frenzy subsided in October before resuming in preparation for the Chinese New Year. However, demand still increased 10 percent year on year to 150.7 tons in the fourth quarter of 2013 (see Gold Jewelry Demand in China chart in slideshow). By value, China’s gold jewelry demand fell 18 percent to $6.18 billion, a casualty of the slump in gold prices during the year.
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There was concern that the polished market was lagging behind the rough after prices rose in January and were anticipated to increase again at the De Beers sight that took place in late February, after press time. Rough trading on the secondary market remained strong in the weeks before the sight and De Beers boxes were selling at premiums in presight trading, with Indian cutters dominating the market. However, dealers who expressed concern that the rough market was rising too fast out of sync with trends in the polished market, anticipate rough trading will slow down in the second quarter. In particular, there is concern that liquidity will be squeezed later in the year because banks have reduced their credit lines for rough purchases. Furthermore, dealers expect a seasonal slowdown in the market following the first quarter. De Beers management noted that diamond manufacturers, particularly in India, face continued pressures regarding levels of bank financing, and cautioned that further volatility of the rupee may affect rough diamond sales in 2014. The company added that industry fundamentals are expected to strengthen as production plateaus and demand continues to rise in the medium to long term. Already, De Beers has raised its production outlook to 30 million to 32 million carats in 2014 after production rose 12 percent to 31.159 million carats in 2013. Similarly, ALROSA is ramping up its operations and reported that production increased 7 percent to 36.912 million carats in 2013 (see ALROSA & De Beers Production chart in slideshow). De Beers prices rose 5 percent in 2013 and rough sales increased by the same margin to $5.8 billion for the year. Total revenue grew 5 percent to $6.4 billion as the contribution of sales from Element Six and Forevermark grew to $604 million. Operating profit grew 23 percent to $1 billion for the year. Members of the trade viewed the results in the context of the current market conditions and expressed concern that the recent rough price hikes are further fueling mining company profits while manufacturers’ profit margins are being squeezed. They may have enjoyed some respite in February when polished goods were being sold at stronger prices from rough that was bought when the market deflated a few months ago. That may explain the current liquidity and spurt of rough buying but many expect the market to slow late in the second quarter. De Beers projected a “slight strengthening” in growth of diamond jewelry demand in 2014, driven by gradual improvement in global economic conditions, with the U.S. and China maintaining their role as the engines of growth for the industry. While that certainly was the case in February, the question remains whether manufacturing profits can be maintained throughout the remainder of the year.Article from the Rapaport Magazine - March 2014. To subscribe click here.
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