Industry
Stock Market Slump Weakens Demand
Rough producers have eased supply in an ongoing weak market, while slow economic growth and the stock market decline highlight deeper challenges for the diamond market.
By Avi Krawitz
Sightholders arrived in Gaborone for the De Beers August sight more concerned about the stock market than their rough diamond supply. After all, they were already granted greater flexibility by De Beers to refuse over-priced rough, diminishing the element of surprise at the event. Rather, there was fresh uncertainty from the demand side as Asian stocks tumbled, along with expectations for a recovery in discretionary spending. The Shanghai Stock Exchange (SSE) Composite Index lost 8.5 percent on August 24, which was the first day of the sight, posting its biggest one-day fall since 2007 and accelerating the declines experienced since June. At press time, the index had wiped out the 60 percent gains charted in the first five months of 2015 (see U.S. & Asian Stock Market Performance in 2015 chart in Slideshow), inducing global caution and causing other markets to fall. The Dow Jones Industrial Average (DJIA) subsequently fell 3.6 percent on the same day. Analysts noted that a burst to the bubble was inevitable, particularly as economic growth in China has slowed. Industry concerns were deepened as the People’s Bank of China allowed the yuan to depreciate by 3.5 percent in an effort to boost exports and economic activity (see Hong Kong Market Report in the International section). However, diamantaires were more worried that consumers have lost wealth in the stock market and will be even more restrained in their luxury spending. Already in May, Bain & Company gave a stagnant outlook for Asia’s luxury market largely due to general weakness in Hong Kong and Macau. Bain explained that growth in luxury spending was projected to decline by 2 percent to 4 percent this year influenced by ongoing restrictions on spending and shoppers shifting toward a more price-sensitive attitude that benefits off-price sales and purchases abroad.
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Despite the upcoming show, manufacturers note that U.S. demand is supporting the market with U.S. cash buyers sensing some excellent opportunities to source goods before the holiday season. There is stable demand for piqué goods for the American market and for 1-carat to 3-carat, F to I, VS to SI, triple EX diamonds. U.S. polished imports were valued at $12.25 billion in the first half of 2015, which was consistent with last year’s levels, while polished exports declined 12 percent year on year to $10.16 billion. In contrast, Hong Kong’s polished imports dropped 4 percent to $9.35 billion during the same period while its polished exports fell 2 percent to $6.63 billion (see U.S. & Hong Kong 1H Polished Diamond Trade chart in Slideshow). Still, manufacturers are not yet ready to increase production levels, having reduced output by an estimated 40 percent in recent months. They argue that there remain a lot of goods on the market that are not easy to move. Consequently, suppliers are pushing inventory, hoping that jewelers will adjust their design requirements to the goods that are available.
As manufacturers reduce their inventory, they continue to be cautious in the rough market, while stressing that there was no profitability in their rough purchases. De Beers responded by informing sightholders they can defer up to 75 percent of their allocated rough supply at the August sight in light of ongoing weak market conditions. The company also enabled sightholders to rephase when they would take their remaining allocation, without penalty, across the remaining six sights of the contract year that ends on March 31, 2016. ALROSA made similar gestures. “We put a note on the sightholder extranet yesterday to say that we’ve looked at how our sales approach for the remainder of the current intention to offer (ITO) period can provide sightholders with maximum flexibility and support through this difficult period,” said Lynette Gould, De Beers head of media relations. Initial reports from the August sight, which had just begun at press time, suggested that De Beers also reduced prices by 5 percent to 10 percent on a number of boxes. Gem Diamonds noted in its interim report that the challenging market conditions have had a negative effect on prices achieved for commercial-quality production from its Ghaghoo mine, while high-end diamonds from its Letšeng mine has been more resilient. The average price achieved at Letšeng fell 18 percent to $2,264 per carat during the first half of 2015 (see Average Price of Sales From Letšeng Mine chart in Sildeshow). The company expects that Letšeng prices will stay firm in the second half of the year and Ghaghoo prices should stabilize. Clifford Elphick, Gem Diamonds’ chief executive officer (CEO), cautioned that there remain inventory and liquidity concerns in the market, but expressed hope that by withholding supply De Beers and ALROSA will help stimulate trading. However, while manufacturers have resigned to lower supply, they’re more concerned about levels of demand at this juncture. As one sightholder who spoke off the record told Rapaport Magazine, “There’s just nothing special going on and we have excess capacity and inventory,” he said. “But the biggest problem is that the industry hasn’t invested in demand for the long term. We don’t have enough demand for polished.” In the short-term as well, the market will be assessing the extent to which that rings true in September in light of the recent stock market slump.Article from the Rapaport Magazine - September 2015. To subscribe click here.
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