Industry
Indigestion in the Pipeline
Diamantaires sought a confidence boost in January from lower rough prices, Far East polished demand for the Chinese New Year and post-Christmas restocking in the U.S.
By Avi Krawitz
Sentiment in the diamond market was relatively weak, with trade falling below the levels usually seen in January. Jewelry retailers held off on building up inventory, resisting the tendency at this time of year to replenish goods sold during Christmas and to add stock in preparation for the Chinese New Year. With retail buying soft, attention within the trade shifted to the rough market, where manufacturers have deep concerns about their thinning profit margins. Manufacturers came under pressure as polished prices fell in 2014 and inventory levels remained relatively high through the end-of-year selling season. Furthermore, liquidity was tight because the banks have reduced their financing to the industry.
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De Beers responded to the weak market by telling sightholders they could defer up to 25 percent of their allocated January supply to February or March. That broke with the company’s usual deferral policy, which allows sightholders to postpone taking a box from one sight to the next, but no later, once every half year. In addition, current policy allows sightholders to refuse up to 10 percent of the carat volume of each box, which is then held in inventory for the next sight. The January sight had an estimated value of $450 million after many sightholders took up the option to defer their supply. De Beers also lowered its prices by an average of 4 percent at the sight. A De Beers spokesperson noted before the sight that there is some short-term “indigestion” in the midstream resulting from issues relating to inventory levels and liquidity. He added that the company still expects a steady level of retail restocking in the months ahead because of decent consumer demand for diamond jewelry during the holiday season. While that inventory replenishment tends to take place in January — stimulating polished demand and price increases in the first quarter, as it did in 2014 — De Beers expects that restocking to come a bit later this year. Similarly, Petra Diamonds lowered its rough price guidance for the next six months due to “some short-term indigestion in the pipeline caused by issues relating to liquidity, polished inventory levels and the impact of the strong U.S. dollar on U.S. dollar-denominated diamond prices,” Johan Dippenaar, Petra’s chief executive officer (CEO) said.
Sightholders, meanwhile, had already reduced their rough intake toward the end of 2014 and Indian manufacturers have lowered their polished production by 20 percent to 30 percent since returning from the Diwali break in November. India’s rough imports fell 1 percent year on year to $3.98 billion in the fourth quarter of 2014 (see India’s Rough Diamond Imports chart in Slideshow), which was its lowest level of the year, according to Rapaport estimates based on monthly data published by the Gem and Jewellery Export Promotion Council (GJEPC). By volume, rough imports dropped 8 percent to 38 million carats. In a similar indication of the cautious market, there was a lot of turnaround in India’s polished trade in the fourth quarter as diamantaires sent out a lot of goods, offering lower prices to clients in an attempt to boost their sales turnover. India’s polished exports rose 9 percent to $5.23 billion, while polished imports spiked 42 percent to $1.92 billion. However, India’s net polished exports — calculated as exports minus imports to signal the net amount that was exported to overseas clients — fell 4 percent to $3.31 billion during the fourth quarter (see India’s Polished Diamond Trade chart in Slideshow).
Some in the industry believe that rough and polished inventory levels have been sufficiently depleted so that the polished demand may start to improve beginning in February. “With four consecutive small sights, an American sales season behind us in which consumer sales are believed to have surpassed those of 2013 and isolated gaps starting to appear in polished inventories, there is cause to believe that we have reached the bottom of what has been a long and drawn-out downturn,” Mike Aggett, managing director of H. Goldie and Company, a De Beers–accredited broker, wrote in a Sight Report on his company’s website. However, he added that the industry still faces significant challenges in the short term and that the recovery is going to take some time. Much depends on the upcoming Chinese New Year on February 19 and the national Golden Week holiday that follows. Dealers note that jewelry retailers in the region currently have relatively large inventory as a result of buying fairly aggressively in the first half of 2014, after which sales stagnated. Expectations dropped further after China reported that its gross domestic product (GDP) grew 7.4 percent in 2014, which was its slowest pace in 24 years (see China’s Gross Domestic Product (GDP) Growth chart in Slideshow). The slowdown was also evident in the weaker retail sales at the large Hong Kong–based jewelers. Chow Tai Fook reported that same-store sales of gem-set jewelry fell 12 percent during the three months that ended on December 31, 2014, while Luk Fook Holdings reported that its same-store sales of gem-set jewelry declined 8 percent. That caution filtered to the diamond market with lower demand for laboratory-graded diamonds, affecting prices of .30-carat to .49-carat diamonds during 2014. While there was some improvement in demand for Gemological Institute of America (GIA) dossiers in January in advance of the Lunar New Year, the market continues to be supported largely by stability in the U.S. Diamond manufacturers have accordingly shifted to polishing piqué goods to satisfy that U.S. demand. For many, it appears the current softer market conditions will continue at least through the first quarter, which is usually a period of strong trading for the industry. The verdict is still out on whether the January rough price correction will help restore manufacturers’ profit margins or if retailers will start buying for inventory again. Polished suppliers are still waiting to see the extent to which U.S. retailers will replenish inventory sold during Christmas and whether Chinese demand will sufficiently improve in the coming month to spur polished demand and prices. That would bring a welcome confidence boost to the trade for 2015, even if it comes later than usual.Article from the Rapaport Magazine - February 2015. To subscribe click here.
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