Liquidity Concerns Rising

Polished trading was cautious in November as lower prices and high rough costs squeezed profit margins within the trade.

By Avi Krawitz

Polished diamond markets were cautious in November as suppliers lowered their prices in order to improve cash flow. Indian dealers returned from their Diwali break in mid-November pressured by liquidity issues that remained the biggest challenge facing the diamond manufacturing sector. As a result, a buyer’s market emerged in advance of the Christmas shopping season.
Despite the favorable conditions for buyers, there was limited purchasing for inventory during November. In fact, inventory levels were relatively high throughout the pipeline since U.S. jewelry retailers had already placed the bulk of their orders for the Christmas season in August and September, and Far East markets remained sluggish and uncertain.
Diamond prices consequently fell, with the RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds declining .9 percent during the period November 1 to 24. RAPI for .30-carat diamonds fell 2.3 percent and RAPI for .50-carat diamonds dropped 1.2 percent. RAPI for 3-carat diamonds declined 1.1 percent during the period (see Rapnet Diamond Index (RAPI™) chart in slideshow).

YOU MUST HAVE JAVASCRIPT ENABLED TO VIEW THE SLIDESHOW

Stable U.S. Demand
Diamond dealer demand was stable in the U.S. but relatively weak in the Far East. Caution engulfed the trade in Hong Kong as the Occupy Central protests continued to disrupt traffic as well as business activity. Chow Tai Fook reported that its sales in the city fell 17 percent year on year during October, which included the all-important National Day Golden Week shopping season. While the protests quieted in mid- to late-November, uncertainty lingered in the market due to the Chinese government’s anticorruption campaign, which has dampened the gift-giving luxury goods sector. In addition, restrictions on money transfers have raised concern within the trade that buyers might default on their payments.
The mood was more positive in the U.S. The Israel Diamond Week that took place in mid-November created a buzz in the New York Diamond Dealers Club, but actual trading was mixed. While demand for large diamonds above 3 carats was subdued, there was good demand for round .25-carat to .60-carat in H to K and VS to SI and for 1-carat to 1.50-carat H to K in SI to I2 diamonds. Buyers, who were mainly from the New York trade, were primarily interested in filling immediate orders and sellers expressed hope that more retailers would attend similar events in the future.
Still, overall, the U.S. polished trade has maintained an uptrend in 2014. Polished imports rose 7 percent year on year to $5.83 billion during the third quarter, while polished exports grew by the same margin to $4.91 billion. Net polished imports — calculated as imports minus exports to indicate the value of goods that remained in the country for consumption — increased 9 percent to $929 million (see U.S. Polished Diamond Trade chart in slideshow).
The data signaled a continued rise in the export of small diamonds below .50 carats, evidence the U.S. has become a prime source of these goods for emerging markets such as China. Exports have consistently exceeded imports in the smaller diamonds category since the third quarter of 2004 (see U.S. Trade of Polished Diamonds Below .05 Carat chart in slideshow). Those numbers mirror the growth in the Chinese and Indian economies that has driven global demand for smaller pointer-size diamonds.
Simultaneously, the recycled diamond market in the U.S. grew amid economic volatility, presenting the Baby Boomer generation with a new means to generate liquidity by selling old jewelry, predominantly to pawn shops. Building on that business, the U.S. has evolved to become an important supplier of smaller recycled diamonds to other countries, despite maintaining steady local demand and its status as the world’s largest diamond consumer market.
The Israel Diamond Week in New York also signaled fair interest in fancy yellow diamonds and good demand for pinks and blues. In general, the market for fancy shape diamonds improved in November, with increased dealer demand due to oversupply and limited profitability on rounds. Manufacturers and dealers are looking for creative ways to improve profitability, especially as they deal with persistently high rough prices.

Disappointing Rough Trends
De Beers made minor adjustments to its prices and assortments in different categories of rough at the November sight, which had an estimated value of $550 million. Sightholders observed that while the adjustments slightly improved the profitability of some boxes, certain categories still cannot be manufactured into polished diamonds at a profit.
In general, there was disappointment that De Beers did not reduce overall prices at the sight given the recent steady decline in polished prices. De Beers management has stressed that its pricing policy is focused on making minor adjustments at each sight that reflect the company’s long-term view of the market, rather than implementing blanket increases or decreases in response to short-term trends.
Predictably, as sightholders struggle with tight profit margins, there were some refusals and box deferrals at the sight — though not at significant levels. Similarly, rough trading on the secondary market reflected the prevailing tight liquidity and thin profit margins, with some boxes trading at a discount and most on credit terms.
Manufacturers consequently reduced their rough buying in the past two months and India’s rough imports fell 17 percent year on year to $1 billion in October, representing its lowest October level in three years (see India’s Rough Diamond Imports chart in slideshow). India-based manufacturers cut back on their rough purchases partly due to factories closing during the Diwali festival, which occurred a bit earlier this year than in 2013. Businesses closed from around October 21 for Diwali, with most workers staying away at least until November 10.
The drop in India’s rough imports followed strong buying during the third quarter, when manufacturers increased their factory output in order to have their year-end holiday inventory ready before the Diwali break. Still, trading continues and sightholders explained that current rough purchases are geared toward ensuring that their factories have enough polished ready when retailers begin to restock their stores after the Christmas shopping season.
By the end of November, Indian manufacturers and dealers had resumed normal activity with an eye on the U.S. holiday season. They, like the rest of the trade, were fairly confident that there would be steady jewelry retail sales over Christmas, which would help boost orders and trading activity as the industry moves into the New Year. However, against the backdrop of high rough prices and reduced bank credit, there remains a deep unease among manufacturers and dealers that their liquidity concerns might not abate.

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

« Previous Article Next Article »

Comment

Email

Print

Facebook

Twitter

Share

Tags: Avi Krawitz