Rapaport Magazine

Trade Report

By Avi Krawitz
Demand Steady, Prices Firm
The diamond market concluded the first quarter with improved confidence but profit margins remain a concern for manufacturers.

All eyes in the diamond trade were on the much-anticipated Hong Kong International Jewellery Show that took place at the beginning of March, with polished dealers on especially high alert for signs of stability in the Far East market. They didn’t leave disappointed and the show met their expectations even if the market is not booming.
   That the show was okay was enough to ensure that the positive mood that has engulfed the diamond industry so far in 2014 will continue, at least in the short term. Buyers in Hong Kong wanted to buy and sellers held their prices firm, with demand trends mirroring activity seen recently in the trading centers (see full report on the Hong Kong show in the Shows section).
   Demand is good for Gemological Institute of America (GIA) dossier certificates for diamonds below 1 carat, with strong demand for .30-carat to .50-carat, H to L, VS to SI diamonds. The RapNet Diamond Index (RAPI™) for 1-carat certified polished diamonds rose .7 percent during the period March 1 to March 24. RAPI for .30-carat diamonds increased 3.4 percent, while RAPI for .50-carat diamonds rose 1.3 percent. RAPI for 3-carat diamonds increased 1 percent during the period (see RapNet Diamond Index (RAPI™) chart in slideshow). RAPI for 1-carat diamonds increased by about 2.3 percent in the first quarter of 2014, reversing the downtrend experienced in 2013 (see RapNet Diamond Index (RAPI™) chart in slideshow).
   There is also rising demand for diamond parcels, noncertified goods and .25-carat sizes due to shortages of .30-carat goods. The .30-carat shortages, as well as shortages in other high-demand categories, are being caused by delays at the GIA. The turnaround time for diamond grading at the GIA in March was about 50 days at its labs in Carlsbad and New York and rose to as much as 110 days in Mumbai. GIA has said it expects to see some easing of its backlog in the second half of this year.

Chinese Demand
   The Hong Kong show signaled that Chinese buyers are selective and price sensitive, but active, despite the cautious economic environment that has engulfed their country in the past year. The government is implementing reforms to transition the economy from a government investment-driven one to a consumer-focused economy. Local diamond and jewelry wholesalers who spoke with Rapaport Magazine believe the move is necessary to ensure that growth is sustainable in the long term, even if the reforms have a negative impact on demand in the short term.
   Still, caution about the Chinese economy lingers. Goldman Sachs downgraded its gross domestic product (GDP) growth outlook for China, noting the economy faces a “bumpy road ahead.” The bank lowered its 2014 forecast to 7.3 percent from 7.6 percent and also cut its 2015 outlook to 7.6 percent from 7.8 percent, representing a continued slowdown from the previous years of strong double-digit growth (see China’s Annual GDP Growth chart in slideshow).
   Economists at Goldman Sachs explained that trade and consumption — two factors they had expected to provide positive support to growth this year — disappointed in the first two months of 2014. Consumption was adversely affected by efforts to curb corruption through gift giving to officials, the bank noted, adding that it expects the impact from those efforts to lessen in the remainder of the year.
   As a result, there remains an undercurrent of caution in China and Hong Kong’s diamond and jewelry trade, even though sales have remained relatively steady in the first quarter of the year. In fact, Far East buyers were more willing than their counterparts in the U.S. to meet the higher asking prices requested by sellers. U.S. polished diamond demand is stable but buyers are resisting higher asking prices, which has resulted in a slight slowdown in activity.

Improved Margins
   Dealer demand in the trading centers of Antwerp, Mumbai and Ramat Gan was likewise steady. While activity naturally slowed slightly after the Hong Kong show, the mood in the trading centers was sufficiently positive. Diamond manufacturers and wholesalers enjoyed improved profit margins when De Beers kept its rough prices basically unchanged at the sight that took place in the final week of February, while polished prices edged up.
   There was some anticipation that De Beers would raise prices at the March-April sight that took place after press time, in part due to positive reports from the Hong Kong show, and also because demand at rough tenders remained steady in March. Anecdotal reports from the tender circuit suggest that prices for rough below 5 carats increased slightly, while larger goods remained firm during the month.
   Gem Diamonds reported that its high-value Letšeng mine in Lesotho has garnered higher prices so far in 2014 — partly due to the shift of production from the mine’s main pipe to the higher-grade, higher-value satellite pipe. Letšeng prices rose 49 percent year on year to $2,533 per carat in the fourth quarter of 2013 and increased further to $2,673 per carat at its first tender in 2014 (see Average Price Achieved at the Letšeng Mine chart in slideshow).
   Similarly, Petra Diamonds noted that the rough diamond market firmed up toward the end of 2013 and that the company saw solid prices at its February 2014 tender. Petra’s management said they expect market conditions to continue to firm throughout the first half of the year due to reports of “sound seasonal sales, increasing global economic confidence and restocking of the diamond pipeline.”

Managing Expectations
   There is a sense that diamond trading during the first quarter primarily replenished inventories that were depleted during the Christmas and Chinese New Year seasons. Many expect the momentum to continue during the second quarter, albeit at a more modest pace.
   While liquidity in the manufacturing centers has improved, it is expected to tighten in the coming months. Already, liquidity in India has begun to narrow, as it tends to in advance of the March 31 end to the local fiscal year, especially since the banks are expected to tighten their lending to the industry in the new financial year.
   Despite the improved trading in the first quarter, profitability remains a challenge for diamond manufacturers. Their margins may have improved slightly but rough prices remain a step ahead of the polished. Dealers and manufacturers note that polished prices need to rise considerably in the next two to three months in order for them to profit from their current rough purchases.
   Most are acting cautiously in managing their expectations for the market in the coming months, fully aware that the strong activity experienced in the first quarter may not be sustained throughout 2014. However, they’re satisfied that the Hong Kong show and subsequent activity in the trading centers signal continued positive sentiment in the diamond industry. 

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

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