Industry
Too Many Diamonds, Too Few Buyers
Trading conditions were tough for diamond dealers and manufacturers who continued to struggle with low profit margins in March.
By Avi Krawitz
Diamond market sentiment was weak during March as the various trade shows that took place during the month failed to stimulate better demand. Manufacturers expressed deep concern about their profit levels — or the lack thereof — as polished prices softened during the month.
Trading at the Hong Kong International Diamond, Gem & Pearl Show met dealers’ low expectations. There was neither urgent buying nor panic selling at the show or in the weeks following the event (see Slowdown at Hong Kong Shows). However, buyers were hesitant to deal because they suspected prices might soften further and, as a result, trading volume remained low. Similar trends continued through the Basel shows that took place toward the end of the month, although there were serious buyers there for high-end goods and exceptional diamonds continued to garner strong prices (see full report about the Basel shows in the Shows section).
YOU MUST HAVE JAVASCRIPT ENABLED TO VIEW THE SLIDESHOW
Leading up to first, Hong Kong and then, Basel, there was some expectation from the Far East market, particularly as initial reports about gem-set jewelry sales during the Chinese New Year Spring Festival in February were positive. However, Chinese buyers were largely absent from both shows, and the diamond market in general, in the month following the festival. Polished diamond inventory levels remain relatively high despite manufacturers reducing their polished production. Polished prices consequently softened and trading stalled.
The RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds fell 2.4 percent during the period March 1 to 23. RAPI for .30-carat diamonds declined by 2.4 percent, while RAPI for .50-carat diamonds dropped 1.7 percent. RAPI for 3-carat diamonds decreased by .7 percent during the period (see RapNet Diamond Index (RAPI™) chart in Slideshow).
U.S. demand was stable and continued to uphold the global trade with good demand for below-1-carat, H to M, SI to I2 diamonds. However, independent jewelry retailers are managing with lower inventory levels and have avoided large-scale purchases in 2015. Polished diamond imports to the U.S. fell 3.2 percent year on year to $1.83 billion in January. The average price of the imports dropped 7 percent to $1,727 per carat, which was the lowest level since September 2013.
The January decline reversed the upward trend witnessed in 2014 as polished imports rose 5 percent to $24.05 billion during the year. Polished exports grew 10 percent to $20.93 billion, largely due to a net outflow of smaller diamonds below .50 carats. Net polished imports to the U.S. — representing imports minus exports — fell 17 percent to $3.12 billion during the year as the growth in exports outpaced that of imports (see U.S. Polished Diamond Trade chart in Slideshow). The data suggests that dealers in the major trading centers of India, Israel and Belgium are continuing to tap the U.S. as a source of recycled smaller diamonds, possibly to recut for consumers in emerging markets. Still, while the U.S. market is relatively stable, dealers in New York expressed concern about declining prices, particularly from the manufacturing and trading centers.
Weak demand has restricted trading volume, putting additional pressure on prices and profit margins. Manufacturers are hoping that supply shortages will help stabilize the market because they already have reduced their polished output by an estimated 30 percent since the Diwali festival in October 2014. Production of better-quality diamonds fell by as much as 50 percent, according to manufacturers’ anecdotal reports.
Rough supply improved slightly in March and the De Beers sight, which began after press time, was expected to be a fairly large one, given that it was the final sight of the current contract period. While sightholders were allowed to defer taking goods in January and February, they were not afforded the opportunity again in March. De Beers reduced its rough prices at the January and February sights, and is expected to hold prices relatively stable in March, or make very minor adjustments. Small to medium-size mining companies have noted some stability at their auctions this year.
Lucara Diamond Corp. reported that prices started to firm at its January and February sales. However, the company expects flat sales overall in 2015 because rough prices had already dropped in the preceding months. Lucara reported that revenue rose 20 percent to $70.5 million in the fourth quarter, while the average value of its rough diamond sales increased 56 percent year on year to $675 per carat, albeit down from the third quarter (see Lucara’s Revenue, Profit & Average Price chart in Slideshow). Lucara declared a net loss of $16.8 million during the quarter due to a balance sheet adjustment related to its decision to sell its majority interest in Lesotho’s Mothae mine because it did not meet the company’s investment criteria.
While most mining companies continue to benefit from strong sales recorded in 2014, profits were not as strong for some as they might have been, given market conditions during the year. ALROSA reported a loss of $283.8 million in 2014, compared with a profit of $543 million a year earlier. The decline resulted from foreign-exchange losses on the company’s U.S. dollar-denominated debt, following the depreciation of the ruble in 2014. Revenue from diamond sales grew 23 percent to $3 billion. ALROSA estimated that there was very little change to rough prices due to market conditions during the year.
Although rough prices have softened in the first quarter of 2015, miners might be reluctant to reduce them further in the coming months, despite manufacturers’ complaints about their lack of profitability. Asian Star, an India-based diamond and diamond jewelry manufacturer, reported that revenue declined 29 percent to $114.8 million in the third fiscal quarter that ended on December 31, 2014. The company, which is a De Beers sightholder and long-term ALROSA client, saw its loose diamond sales plunge 31 percent to $98.3 million. Group net profit dropped 27 percent to $3.2 million (see Asian Star Quarterly Revenue & Profit chart in Slideshow).
The company’s data illustrated the thin margins with which manufacturers are working — at around 3 percent for loose diamond manufacturing. Margins are said to have been further squeezed in March as polished prices softened further. Therefore, cutters continue to try to reduce polished inventory levels by lowering manufacturing, even as rough supply increases. While demand and trading levels remain relatively weak at the start of the second quarter, it appears there are simply too many diamonds available for too few buyers in the market, for now.Article from the Rapaport Magazine - April 2015. To subscribe click here.
|
|