Supply Shortages Prop Up Prices

Although polished prices have stabilized, trading volume remains low and manufacturers continue to struggle to profit from their rough supply.

By Avi Krawitz

Diamond markets stabilized in May as polished supply shortages supported prices and dealer demand for select items. India-based manufacturers have maintained low polished production during the summer vacation period by either closing their factories for an extended break or reducing their operating hours.
As a result, the RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds rose .5 percent during the period May 1 to May 22. RAPI for .30-carat diamonds fell .9 percent, while RAPI for .50-carat diamonds declined .4 percent. RAPI for 3-carat diamonds increased .8 percent during the period (see RapNet Diamond Index^® chart in Slideshow).
As prices stabilized, sentiment improved although trading volume remained relatively low. Demand was focused on filling orders as they came in and there was still very little buying to build up inventory. Dealers were preparing for the Las Vegas shows that took place at the end of May, with the hope that U.S. retailers would resume stronger inventory buying, after having shown restraint since the beginning of the year.
U.S. independent jewelry retailers, at least, are managing with lower inventory levels and are no longer building up excess stock as they did in the past. There is a sense that they are focused on holding the right type of inventory as they continue to struggle with low margins.

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U.S. & Hong Kong
Still, U.S. demand has been stable, while Far East demand remained weak during May.
Polished diamond imports to the U.S. rose 5 percent year on year to $5.73 billion in the first quarter of 2015, having displayed steady growth in the past three years (see U.S. & Hong Kong 1Q Polished Trade chart in Slideshow). However, more goods are also leaving the U.S. as polished exports from the U.S. increased 12 percent to $4.9 billion during the quarter. Consequently, U.S. net polished imports, representing the amount of goods that stayed in the country for local trading and consumption, fell 23 percent to $830 million. Essentially, the numbers suggest that the U.S. trade contracted during the quarter.
The data further indicated that exports of smaller diamonds below .50 carats continued to grow, as the U.S. has become a supplier of these goods to major diamond trading centers and emerging markets in the Far East. U.S. net polished imports — imports minus exports — of those smaller goods were flat during the quarter, while net imports of diamonds larger than .50 carats grew 21 percent.
Indeed, Hong Kong’s imports of polished diamonds below 1 carat from the U.S. increased 15 percent during the quarter, according to data published by the Diamond Administration of Hong Kong, China. Hong Kong’s total polished imports fell 2 percent to $4.84 billion, while polished exports were flat at $3.5 billion. Net polished imports fell 6 percent to $1.4 billion during the quarter.
Sentiment remained fairly weak in Hong Kong’s diamond trading community in May. Dealers have been cautious due to weak global diamond demand, soft polished prices and the slowing of China’s economic growth.
Furthermore, the government’s campaign against corruption and conspicuous consumption continues to affect open displays of wealth and luxury spending. While sales of commercial-quality gem-set jewelry were steady during the Chinese New Year Spring Festival in February, the season still failed to inspire stronger diamond trading. Hong Kong trading continued to be based on inventory replacement for existing orders and jewelers have avoided unnecessary buildup of inventory, as is the case in the U.S.

Manufacturing Profits
Weak polished demand has affected the manufacturing sector, especially as rough prices have not come down sufficiently to enable profits. De Beers reduced its rough diamond prices by an average of 3 percent at the May sight and sightholders noted that the quality of the assortments also declined in many categories.
The sight had an estimated value of $470 million and sightholders had expected a relatively small sight due to the seasonal nature of rough diamond demand. However, the amount of goods deferred or refused at the sight was much lower than previous sights this year. Manufacturers are expected to begin ramping up their polished production from the current depressed levels when the Indian market returns from vacation in June. De Beers boxes were trading on the secondary market at very slight premiums and with credit terms that averaged 90 days.
Sightholders refused about 30 percent of rough supply from De Beers in the first quarter of the year and De Beers sales are projected to have slumped in the first half of 2015. The lower intake was reflected in India’s rough imports, which fell 17 percent to $3.43 billion in the first quarter (see India’s Rough Diamond Imports chart in Slideshow), according to data published by the Gem and Jewellery Export Promotion Council (GJEPC). During April, India’s rough imports plunged 31 percent to $1.37 billion.

Realigning Supply
The diamond mining companies may be forced to realign their production programs to contend with weaker rough demand. Already, De Beers lowered its full-year production guidance. The company now expects production of between 30 million and 32 million carats, compared with its previous projection of between 30 million and 34 million carats. Anglo American, De Beers parent company, noted that the decline in planned production was due to weaker trading conditions in the rough market.
The mining companies are likely holding larger-than-usual rough inventory given their weak first-quarter sales, especially since the major diamond miners in fact increased their production in the first quarter. The combined production of De Beers, ALROSA, Rio Tinto and Petra Diamonds, which together account for about two-thirds of global production, rose 6 percent year on year (see Diamond Production of Select Companies chart in Slideshow) during the first three months of 2015.
While the first quarter has historically been a period of lower diamond production, the mining companies are expected to maintain reduced production levels. After all, manufacturers continue to exert caution in their polished production.
Still, rough demand is expected to improve in the coming months, even though manufacturing profitability remains problematic. Having reduced their polished supply in the past six months, manufacturers are expected to raise their output slightly in the second half of the year, particularly as jewelry wholesalers and retailers start to prepare for the fourth-quarter holiday shopping season.
By then, the hope is that rising demand will stimulate improved market activity. After all, until now, and certainly in May, the market was driven by supply dynamics, and the shortages created to contend with weak demand.

Article from the Rapaport Magazine - June 2015. To subscribe click here.

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