Industry
“Wait and See” for Industry
The holiday season gave dealers an opportunity to take stock of the year and assess inventory levels required for the first quarter.
By Avi Krawitz
December is really about retail, a fact diamond dealers tend to stress when asked how the market is doing at this time of the year. While filling last-minute orders, which seem to come in later each year, they can only sit back and observe consumer trends during the holiday shopping season. Their hope is that steady jewelry sales will spur stronger diamond trading when retailers restock during the first quarter. There was some reason for optimism this December, despite the pending political transition in the U.S. The Federal Reserve’s decision to raise interest rates by .25 percent signaled improving economic conditions, with particularly solid gains in the job market. The stock market rally and strengthening of the dollar since the U.S. presidential election also raised hope among diamantaires that consumers were empowered to spend more freely this holiday season. Furthermore, many expect the election of Donald Trump to the White House will result in better trading conditions for the industry. “It’s likely to be positive, certainly in the short term — lower taxes, more jobs — which translates into more disposable income, which translates into more diamond purchases,” Bruce Cleaver, De Beers CEO, said in an interview with Bloomberg.
While sentiment was relatively positive over the holiday shopping season, diamond dealers also had reason for caution. There was some uncertainty in Belgium and Israel as both countries introduce new tax regimes applicable to the diamond industry in 2017 — even as the new laws in both countries were largely seen as positive. More tellingly, the Indian government’s demonetization policy continued to restrict demand for lower-quality and small diamonds — both rough and polished — typically traded for cash in India. While larger export-focused manufacturers have been less affected by the policy, polished production remains stalled at small-to-medium size factories, with many remaining closed since Diwali. The RapNet Diamond Index (RAPI™) for 1-carat diamonds fell .8 percent for the period December 1 to 27. RAPI for .30-carat diamonds edged up .1 percent, while RAPI for .50-carat stones dropped 2 percent. RAPI for 3-carat diamonds declined 1.2 percent during the period (see RapNet Diamond Index [RAPI™] chart in slideshow).
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De Beers reported its rough price index of like-for-like diamonds fell 5 percent during the year, following a 15 percent drop in 2015. Dealers and manufacturers note that profitability consequently improved in 2016 even if there is room for further improvement. Analysts at ABN AMRO observed a change in rough buying behavior, which the bank attributed to lower availability of credit. “Buyers of rough diamonds are more price-sensitive. They will not buy rough diamonds at any price any more as part of their own liquidity is at stake,” ABNAMRO wrote in a report. “Moreover, there also needs to be an improvement in end-demand. This means that they will only buy rough diamonds if there is end-demand or if there is a temporary price discrepancy to arbitrage.” Bain & Company cautioned midstream inventories could swell if retail demand does not strengthen in proportion to the significant rise in rough sales seen in 2016 compared with the previous year’s lows. Already, the number of diamonds listed on RapNet, Rapaport’s diamond trading network, increased 20 percent in 2016, having approached the peak levels of mid-2015 (see Change in Quantity of Diamonds on RapNet chart in slideshow). While the number of stones listed contracted slightly in December — largely due to India’s manufacturing hiatus during Diwali — dealers will rely on the post-holiday restocking by retailers to reduce that inventory. “Looking ahead, the outlook for the diamond industry in the medium term remains challenging, as new supply is expected to come on line and uncertainties cloud the social, political and economic environments in key markets,” said Olya Linde, lead author of the Bain report. “Although demand for rough diamonds has rebounded so far in 2016, the holiday season will determine the retail and midstream segments’ full-year performance.”Article from the Rapaport Magazine - January 2017. To subscribe click here.
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