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A Good Year

Feb 1, 2000 1:05 PM   By Martin Rapaport
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By Martin Rapaport

Last year was good. Very good. When one considers the dismal market performance and negative trade sentiment of 1998, the incredible turnaround experienced in 1999 looks miraculous. While sustained U.S. economic growth and the incredible capital appreciation of the equity markets played a decisive role boosting diamond demand, we should also recognize that De Beers restraint of rough allocations and historic shift to a demand driven supply-side strategy were critical elements in the restoration of profitability to the diamond trade.

The combination of sustained diamond demand and demand driven Central Selling Organization (CSO) allocation and pricing policies has set the stage for a very successful 2000. While the sustainability of the high-flying volatile equity markets is of concern, overall trade sentiment is more positive then it has been in years and U.S. consumer confidence is at record highs. The diamond trade is moving from “busyness” to business as a return to profitability motivates trade restocking and renewed marketing enthusiasm. While 1999 was a very good year, it looks like 2000 may be even better.

U.S. Market Trends

While the mature U.S. market is a reliable and consistent source of diamond demand, it is also a market undergoing rapid change and development. Over the past few years a trend towards more selective focused demand has gained strength. Consumers want to buy diamonds, but they are more selective about the size, quality and price of the diamonds they are open to buy. If you don’t have what the customer wants there is a very good chance that you will lose the sale.

In some instances, selective demand is so strong and specific that there are insufficient supplies of diamonds and sales are lost. A good example of this is the demand for oversizes (e.g. 1.30+ etc.) and F-G, VS-SI qualities. In other instances, the market has responded to demand by increasing supplies of suitable stones. Over the past year the trade has significantly increased the supply of fine cut diamonds and promoted various brands of top cuts such as “ideal cuts,” AGS-O’s, and “Hearts and Arrows.”

Seasonal buying was exceptionally strong this past year with almost all retailers reporting increases over last years strong results. Overall we estimate retail sales of diamond jewelry was about 12 percent higher this holiday was than last. General excitement about the millennium coupled with De Beers very successful generic “Millennium” campaign contributed to the strong results. It is hoped that the idea that the turn of the millennium is the appropriate time to buy diamonds will extend beyond the holiday season and include diamond purchases throughout the new year. A new campaign by De Beers to promote the “three stone ring” with three diamonds representing the past, present and future ties into the millennium concept and will play a role supporting in increased demand for 2000.

Internet

The general popularity of the internet among consumers has also created opportunities for firms that specialize in the sale of loose diamonds to the consumer online. A number of newly minted internet firms have raised enormous amounts of capital and introduced unprecedented levels of competition to the marketplace.

The internet firms are competing for consumer market-share by offering prices that are well below the levels that can be provided by traditional retailers. In many instances internet firms are losing money on their diamond sales — as diamonds have become a loss-leader — to attract consumers to jewelry-based websites. The internet firms are also competing against traditional jewelers for supplies of diamonds from the cutting centers. Often, e-tailers are paying higher prices for better quality certs. The extraordinary capital resources of the internet firms allow them to operate without the usual competitive market profitability constraints. At this stage in their development these firms really don’t care about profits. They are not interested in profits — only market share.

Internet marketing and education has also played a significant role in promoting the role of diamond grading reports (certs) over the past year. Since consumers are unable to physically examine diamonds before purchase, sellers are promoting the advantages of third party documentation as a way to increase consumer confidence in buying an unseen product. This approach is working and having a huge impact on the non-internet markets. Demand for certs has reached unprecedented growth levels. More and more smaller sizes (0.25+) and lower quality stones (SI and I1) stones are being graded by labs. The trend appears irreversible and it is only a matter of time before the U.S. market emulates the Japanese market in the broad range of diamonds being certed.

Far East Markets

While there have been significant improvements in the Far East markets over this past year, these markets remain a shadow of what they once were. Though some firms are relatively active and certain types of diamonds such as triple X-cut smaller size Japanese goods bring premiums over world price levels, the Far East in general is no longer a primary force influencing global diamond pricing.

The relative weakness of the Far East provides optimism for the year ahead.

Since Far East diamond demand is unlikely to get worse, surprises from the Far East over the next year are likely to be good. Indications from Hong Kong are that diamond demand is increasing although, there is strong resistance to higher price levels. In other words, at the current level of prices, the Far East will grow demand, but except for specialized items, it will not take a leadership position dictating new higher world price levels in the near future. In any case, demand for Far East items such as I-N, VVS-VS1 goods have been improving steadily over the past year and have now reached the point where we are seeing a reestablishment of the traditional market preference and pricing of these goods for the Far East.

The most likely scenario for the Far East is a slow but steady improvement of diamond demand that will provide the cutting centers with some relief in the form of much better demand for cleanish lower color goods. There might also be some sharp spikes in demand from Korea, Taiwan, and Thailand as these markets become more active again. Ultimately in about two to four years we would expect the Far East economies to develop a strong second cycle of economic expansion that will boost local wealth levels and have a significant impact on global diamond demand and pricing.

Prices

Diamond prices performed moderately well in 1999 with strong increases in the D-G colors and VS-SI clarities. (See special Diamond Price Statistical Report pages 24-37). Strong demand for higher colors continued to reflect the fashionable “white look” with white metals, particularly platinum, being the preferred setting for better quality jewelry. In terms of clarity, there was a definite preference in the United States for VS-SI goods reflecting consumer preference for medium price points and a tradeoff which preferred size over high clarity. European demand supported higher clarity diamonds particularly IF and VVS, G-I colors and these items did very well in spite of weak U.S. demand.

While 2/4 did not do particularly well in the second half of the year, there was a lot of certification for smaller sizes which proved to be attractive to internet buyers.

Regarding sizes, nothing could touch the oversizes. 60’s 80’s 1.30+, 7/4+ were extremely hot and in very short supply throughout the year. Discounts on these goods came way down reflecting almost perfect liquidity. In general these hot sizes brought 7 to 12 percent over straight sizes. Two-caraters also became a very strong item this year followed by 4-caraters. These sizes were also in short supply and brought relatively low discounts. Large stones did very well during the holiday season and were in very short supply reflecting CSO rough sales limitations for 5 to 10 carat and larger rough. Demand for the larger sizes as well as 2 and 4-caraters was also relatively strong in the VVS clarities as tight supplies encouraged a broadening of demand.

Fancy shapes held their own very well in relation to rounds. Emerald cuts, Radiants and particularly Princess cuts did extremely well with discounts coming down to almost Pear shape levels. Ovals were almost as strong as last year but larger marquises were weaker. Pear shapes had a comeback in the second half of the year and Heart shapes remained rather weak.

In general, discounts for the most popular items came down 4 to 8 percent over the year reflecting healthy liquidity. While off-makes continued to be difficult to move, fine cut stones brought premiums and sold quickly. Less expensive non-certed goods sold well through programs to the major retailers and there was much more liquidity than last year.

The outlook for prices in 2000 will be highly dependent on continued polished demand and CSO rough allocations policy. The CSO will be focusing on maintaining or increasing the level of rough sales from their stockpile rather than increasing prices. Competition between retailers in the stores and through the internet will also play a role in limiting price increases.

It is reasonable to assume that prices will remain relatively stable as everyone from De Beers through to diamond manufacturers and dealers adapts to a new system of diamond profits — one that is based on sell-through rather than price increases. The realization that it is possible to make reasonable profits without price increases is setting in. It looks like the diamond industry has been weaned off the necessity of a regular cycle of price increases to insure profits. Simply put, as long as the new pricing and allocation policies of De Beers provide sufficient differential between rough and polished prices to allow for profits there will be relatively little need for price increases. Indeed, it is very healthy for everyone in the industry to recognize that the best way to make money from diamonds is by selling them — not by holding them.
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Tags: Consumers, De Beers, Hong Kong, Jewelry, Labs, Market Trends, United States
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