Industry
Events Stir Activity, Raise Hopes
Sentiment improved toward the end of September after a weak third quarter, providing some hope that trading will gain momentum ahead of the U.S. and Chinese holiday seasons.
By Avi Krawitz
If ever the diamond market needed a pickup it was in September after the trade endured one of its slowest periods in years during the third quarter. The various trade events that took place from the end of August, including India Diamond Week at the Diamond Dealers Club (DDC) of New York, the International Diamond Week in Israel, and the Hong Kong Jewellery and Gem Fair helped lift the mood in the trading centers.
“It is crucial that our bourses hold this sort of event as a way of creating activity and business among members,” Ernie Blom, president of the World Federation of Diamond Bourses (WFDB), wrote in a message to the organization’s members. “At a time when the diamond industry is going through a challenging period, interbourse buyers’ events have proven to be a financially viable way of bringing together diamantaires from across the globe.”
The trade was also largely focused on the Hong Kong show as an indicator of pending holiday demand. Exhibitors traveled to the show with fairly low expectations but reported a relatively positive atmosphere even if sales were not booming (see Hong Kong Market Report the International section).
Still, there were lingering concerns about Asia Pacific demand as China’s economic growth has slowed in 2015 and jewelry sales in China, and Hong Kong in particular, have slipped. The Chinese government’s anticorruption campaign has curtailed overt displays of wealth and luxury spending, while the recent stock market slump — with the Shanghai Composite Index down 39 percent from June 1 to September 21 at press time — has reduced consumer wealth and fueled additional caution in the diamond market.
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Diamond prices softened significantly in the third quarter, influencing the Rapaport Group to make changes to the Rapaport List in July, August and again on September 3. The RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds fell 5.5 percent from July 1 to September 21 at press time.
For the period September 1 to 21, RAPI for 1-carat diamonds declined 2.2 percent, while RAPI for .3-carat diamonds dropped 2.6 percent and RAPI for .5-carat diamonds fell 1.7 percent. RAPI for 3-carat diamonds declined 3.2 percent during the period (see chart at right, top).
Other sectors have also been impacted by the slowdown in Asia. The Federation of the Swiss Watch Industry reported that Swiss watch exports to Hong Kong, its largest market, fell 20.8 percent from January through July. Consequently, Swiss watch exports to all markets have declined for most of 2015 (see chart at right, bottom).
Market observers suggest that the jewelry and watch segment has lost market share as consumers are spending more on electronics and lifestyle experiences. For years, diamantaires have complained that the lack of investment in advertising has led to stagnation of diamond jewelry sales.
The dire market conditions spurred De Beers to restart its investment in generic marketing as the company launched a “call to action” advertising campaign that will target men purchasing diamond jewelry as gifts for partners during the holiday period. The industry welcomed the campaign, which will focus on the U.S. over Christmas and subsequently in China for the Chinese New Year season.
ALROSA, meanwhile, hosted a meeting with members of the manufacturing and jewelry sectors, during which company Chief Executive Officer (CEO) Andrey Zharkov stressed that it was necessary to bring back promotional programs to stimulate consumption. “Having given up generic diamond promotion some 15 years ago, today our industry faces the first negative signals,” he said.
Zharkov added that it was important to maintain balance in the market, noting that ALROSA reduced prices by 6 percent in the first half of the year and cut supply at its recent trading sessions. However, rough market conditions deteriorated in the third quarter and ALROSA reduced prices by 8 percent to 10 percent at its September sale, following the price cuts of similar margins made by De Beers in August.
ALROSA allowed its clients to defer 50 percent of their allocated supply at the sale, having stressed in a September 1 conference call that it is content to build up its own rough diamond inventory for the rest of the year. The alternative of scaling down its operations and reducing production is too costly, the company explained.
In fact, despite the weak market conditions, only De Beers has reduced its 2015 production plan among the five major publicly listed diamond mining companies, which account for more than two-thirds of global supply. The cumulative output of ALROSA, De Beers, Rio Tinto, Dominion Diamond Corp. and Petra Diamonds rose 8 percent year on year to 47.26 million carats in the six months that ended June 30, 2015. Given their respective plans, production is slated to advance 5 percent to more than 50 million carats in the second half, the highest level of combined half-yearly output from these companies since the 2008 financial crisis (see chart at left).
The midtier miners have also felt the pinch of the slow market. Petra Diamonds noted that its prices fell 10 percent on a like-for-like basis during the fiscal year that ended June 30, 2015. Petra explained that since it sells its rough through competitive sales tenders, accepting the highest bid for each parcel, its pricing is subject to pure market movements. While Petra forecasted on July 27 that its prices would be flat for the current fiscal year, the company said that volatile market conditions since then may result in deviations from its stated guidance.
Similarly, Dominion Diamond Corp., which sells most of its production via long-term contracts, said that the weak market influenced it to reduce rough prices at its most recent August sale so that its prices are down an average 5 percent for the fiscal year to date. The company has achieved higher prices from its 40 percent share of the Diavik mine — which is majority owned by Rio Tinto, while prices achieved from its Ekati mine were down in 2015 from 2014. (see chart at right).
Dominion explained in its second-quarter earnings report the effect that slower growth in China was having on the market: “Polished prices continued to stagnate as slow retail growth in China instigated a more cautious approach to purchasing by jewelers. Diamond polishers have responded by reducing capacity, which has alleviated pressure on the stocks they hold. These declining stocks should in time need replenishing, allowing a sell-through at all stages of the pipeline and a return to steadier prices and more normal levels of business through the end of the fiscal year.”
Many were looking at the various industry events that took place in September for signs that trading levels are starting to return to normal. While reports from Hong Kong suggest that demand is still order-specific with little inventory replenishment taking place, there was at least some activity after the August lull. That alone has spurred some hope that trading levels will improve in the coming month ahead of the holiday seasons in the U.S. and China.Article from the Rapaport Magazine - October 2015. To subscribe click here.
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