Industry
Supply Shortages Push Prices Up
Market sentiment improved in January. However, suppliers would rather have a market driven by rising demand than the prevailing shortages in supply.
By Avi Krawitz
Diamond dealers expressed some optimism about the market in January and were confident that the worst appears to have passed for the trade. Sentiment improved as polished prices continued to firm amid supply shortages, while rough demand increased. However, uncertainty lingered as consumer demand remains sluggish due to the weak global economy and plunging stock markets. While the focus of the trade shifted from the U.S. to China ahead of the Chinese New Year Spring Festival early this month, expectations about China diminished as the Shanghai Stock Exchange slumped 17 percent from January 1 to 25. China’s economic growth slowed to 6.9 percent in 2015, while weaker-than-expected December manufacturing data signaled that the slowdown is likely to continue into 2016.
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Diamond demand was fairly stable in January, with steady U.S. demand compensating for weaknesses in China and other emerging markets. There was some buying for inventory among U.S. jewelers looking to replenish goods sold during the holiday season. However, on the whole, demand was selective and the price increases experienced in the past few months were driven by supply shortages rather than higher demand. The RapNet Diamond Index (RAPI™) for 1-carat, Gemological Institute of America (GIA)–graded diamonds rose .9 percent from January 1 through 25. RAPI for .30-carat diamonds grew 4.5 percent, while RAPI for .50-carat diamonds increased 3.9 percent. RAPI for 3-carat diamonds edged down .2 percent during the period (see RapNet Diamond Index (RAPI™) chart in slideshow). There is steady demand and shortages for .30-carat to 2-carat, D to H, VS to SI2, RapSpec A2 (triple EX, none) diamonds. Demand for melee was slightly weak with dealers still holding a lot of lower-quality inventory after the Rapaport Melee Index declined 16.9 percent during 2015. However, trading is still well below levels recorded in previous years as businesses across the distribution chain are carefully managing their inventory. Polished trading dropped significantly in the fourth quarter of 2015, as evident in the data published in the major diamond centers. Polished exports from India fell 17 percent year on year during the final three months of the year, while exports from Israel dropped 16 percent (see 4Q Polished Diamond Trade at the Major Centers chart in slideshow). Belgium’s final 2015 data was not available at press time.
Despite lower trading, inventory levels have been depleted, especially for better-quality RapSpec A2 (triple EX, none) diamonds. Shortages became increasingly evident in the past few months as manufacturers kept polished production at an estimated 30 percent below capacity after the November Diwali break and dramatically cut back on their rough purchases. India’s rough imports fell 19 percent year on year during the fourth quarter, while Israel’s rough imports slumped 33 percent (see 4Q Rough Diamond Trade at the Major Centers chart in slideshow). Rough demand increased notably in January as manufacturers started to raise their factory output in order to fill the polished supply gaps. De Beers and ALROSA reportedly sold all the goods on offer at their respective January sales. De Beers reduced prices an estimated 5 percent to 7 percent at its sight, while the company reported rough sales — including at its sight and auctions — valued at $540 million in January, compared to $248 million in December. Trading on the secondary market improved, with De Beers boxes reportedly selling for cash at premiums of around 5 percent. Rough demand on the auction circuit also rose, with some market sources noting a double-digit increase in auction prices during the January cycle.
One sightholder suggested that De Beers goods are now the most attractive on the market following the January price correction. While 2015 was characterized by excess supply in the market, De Beers is expected to continue to limit its supply and keep prices relatively stable at upcoming sights. Johan Dippenaar, chief executive officer (CEO) of Petra Diamonds, said he expects prices to remain steady in the first half of 2016 after Petra’s rough price index fell 9 percent in the final six months of 2015. Petra’s sales slumped 28 percent year on year in the fiscal half-year that ended December 31, with the average price achieved at its auctions down 23 percent (see Petra Diamond Sales & Average Price chart in slideshow). As rough prices are anticipated to remain stable and supply limited, diamantaires are hoping that polished prices will continue the recent uptrend and that trading levels will rise along with demand. However, most anticipate that prices will continue to be supported by shortages as rough bought in January is only expected to come to market as polished in three to four months. By then, dealers should have a better sense of whether demand is improving in 2016. For now, much hinges on the Spring Festival, as a strong retail season in China will motivate jewelers to return to the market for goods and help stimulate diamond trading after the festival. Dealers have described the Hong Kong shows from March 1 to 7 as an opportunity to assess that prospect. But while stock markets slumped, oil prices plunged and the outlook for global economic growth slowed in January, few expect a boom in diamond demand. Rather, trends in January suggested that the diamond market is likely to remain in a supply–controlled environment in the first half of 2016, while the industry still needs to figure out how to stimulate demand in such volatile economic conditions.Article from the Rapaport Magazine - February 2016. To subscribe click here.
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