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Rapaport TradeWire August 3, 2012

Aug 2, 2012 6:00 PM   By Rapaport
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Rapaport Weekly Market Comment Aug. 3, 2012

All eyes on India as polished suppliers reduce prices while Belgium and Israel are on vacation. Indian market under pressure as weak rupee reduces domestic retail demand and tight credit limits purchasing power and export financing. RapNet Diamond Index (RAPI) for 1 ct. -5.4% in July. Rough markets problematic as De Beers limits supply by overpricing sights. Global 2011 rough production +26% to $14.4B, volume -3% to 124M Cts., average price +31% to $116/ct. Petra’s FY12 production +98% to 2.2M Cts. Gem Diamonds delays development plans as Letšeng 1H sales -22% to $125M, prices -30% to $2,133/Ct. Botswana declines purchase of extra 10% in De Beers as Anglo American to claim 85%. Blue Nile 2Q sales +13% to $91M, profit -44% to $1.6M.

RapNet Data: Aug. 2
Diamonds   975,723
Value $6,194,288,526
Carats   1,035,451
Average Discount -27.38%

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      Lower prices are healthy and necessary for the diamond market as they allow trading to adjust to lower levels of demand. The diamond trade makes money by selling diamonds, not by holding them. Dealers must learn how to make profit when prices go down by selling and replacing inventory at lower prices. The value of inventory is its replacement cost.

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    RAPI -5% in July

    In July, the RapNet Diamond Index (RAPI™) for 1 ct. certified diamonds fell 5.4%, while RAPI for 0.3 ct. stones declined by 4.9%, RAPI for 0.5 ct. ‎diamonds ‎dropped 5.3% and RAPI for 3 ct. diamonds fell 5.1% during the month. During the first seven months of 2012, RAPI for 1 ct. diamonds fell 8.8% with the steepest declines occurring since May. RAPI for 1 ct. diamonds is down 18.3% from one year ago.

    The Rapaport Research Report, “Tough Opportunities,” described diamond markets as quieter than usual in July, while demand in the U.S. remained stable; the Far East retailers noted caution among Chinese consumers as economic growth has slowed. Polished dealer trading slackened ahead of the summer vacations in Belgium and Israel and as India’s weak domestic market has curbed activity there. Depreciating currencies against the U.S. dollar, including the Indian rupee, euro and Israeli shekel, is raising operating expenses and adding uncertainty to diamond trading. Cautious trading is expected to continue through the remainder of 2012. Polished inventories are sufficient to see through the summer as buying remains custom-based for specific orders. Expectations are low for the Mumbai show in August and the Hong Kong September show.

    Consumer Confidence Improves

    U.S. consumer confidence rose 11% year on year in July to 65.9 points (1985=100), according to The Conference Board. The Expectations Index rose five points to 79.1 and The Present Situation Index increase nearly 10 points to 46.2. Lynn Franco, the director of economic indicators at The Conference Board, explained that readings in July were slightly better than those taken in June. Nonetheless, all three indexes remain at ''historically low levels.''

    What was hot at JA New York?

    WATCH NOW: In this broadcast three exhibitors from the JA New York summer show describe which of their pieces were hot with retail buyers: Polly Wales of London; jewelry artist Pierre-Yves Paquette of Saint-Sauveur, Quebec, and the New York Diamond District's own Leon Mege of Leon Mege Inc., and of Art of Platinum.

    Rapaport Presents at NY DDC

    WATCH NOW: Martin Rapaport, the chairman of the Rapaport Group of Companies, presented the ''State of the Diamond Industry'' to the New York Diamond Dealers Club (DDC) on July 24. Rapaport's industry overview was the first in a series the DDC expects to schedule of guest speakers at the club in coming months.

    Blue Nile 2Q Profit -44%

    Blue Nile's revenue rose 13% year on year to $90.98 million in the second quarter that ended on July 1, however, cost of sales increased 16% to $73.79 million. As a percentage of net sales, gross profit was 18.9% compared with 21.3%. Blue Nile reported net income of $1.58 million or 11 cents per share, down from $2.8 million or 19 cents per share one year ago.

    Net cash provided by operating activities totaled $18.7 million on July 1, compared with $33.4 million for the trailing 12-month period one year ago. Blue Nile reported that the number of new customers rose 32% year on year during the second quarter. By region, Blue Nile's sales in the U.S. jumped 13% year on year to about $76.6 million, while international sales rose 13% to $14.4 million. The online retailer disclosed that U.S. engagement sales for the second quarter rose to $52.4 million from $43.9 million one year earlier. But non-engagement sales were basically flat at $24.2 million.

    Titan's 2Q Profit +9%

    Titan Industries, which owns the Tanishq brand, reported sales of $397 million, net profit of $28.1 million and expenses of $361.1 million --all reflecting a 9% year-on-year increase-- for the three months that ended June 30. Jewelry sales, including those from its flagship Tanishq brand, ‎rose 8% to $319.6 million and watch sales increased 14% to ‎‎$64.9 million. Growth from the jewelry division was affected by higher gold prices in rupee along with fewer wedding dates during the quarter. The ‎company opened 20 stores during the quarter to end the period with a network of 847 ‎stores across its watch, jewelry and eyewear product divisions.

    Renaissance Closes Quarter With a Loss

    Renaissance Jewellery Ltd. reported sales rose 2% year on year to $33.4 million for three months that ended on June 30, as jewelry segment sales decreased by 3% to $28.3 million. The company recorded a net loss of $1.6 million compared with a net profit of $233,951. Total expenditures increased 7% to $34.7 million.

    Roberto Coin Introduces Fifth Season

    Roberto Coin debuted a new brand, The Fifth Season by Roberto Coin, which is a silver jewelry collection, and introduces the company's designs to an entirely new generation of consumers with price points of $100 to $1,500. The Fifth Season by Roberto Coin features pieces inspired by Coin's tradition, while encompassing modernity and a youthful, fresh look. The collection is designed in sterling silver with yellow, white and rose gold finishes that features both diamond and semiprecious stone accents. The Fifth Season by Roberto Coin also bears the signature hidden ruby on each of the pieces.

    Drosos Joins Signet Board

    Signet Jewelers Ltd. appointed Virginia (Gina) C. Drosos to its board of directors on July 25. Drosos is the group president for Procter & Gamble's beauty, skin, cosmetics and personal care division. She intends to retire from that position on September 1. Drosos joined Procter & Gamble in 1987 and became group president of the company's global female beauty, beauty and grooming division in 2010 before assuming her current position in August 2011.

    In a separate announcement out of the U.K., Signet plans to reduce its headcount at headquarters by 99 employees. Those involved in the resource-action are reportedly in a 30-day consultation period with the firm to determine severance.

    Bonaparte to Head JA

    Jewelers of America (JA) appointed David Bonaparte ‎to serve as its next president to replace Matthew Runci, who ‎retires at the end of 2012. Bonaparte will work with Runci starting October 1 before ‎officially taking over on January 1. ‎Bonaparte has been heading JCK brands for Reed Exhibitions and will be tasked to expand JA’s membership, strengthen the ‎organization’s influence and resources, and continue its leadership role in public and industry ‎affairs as an advocate for its members and the larger jewelry industry.

    RBI Backtracks on EEFC

    The Reserve Bank of India (RBI) backtracked somewhat on guidelines for currency exchange trades held in Exchange Earner's Foreign Currency (EEFC) accounts by restoring its previous provision of allowing full credit on foreign exchange earnings to the EEFC account after requiring a 50% conversion into rupee in May. However, even with the new provisions, the earnings are still subject to the conditions that the sum of accruals in the account during a calendar month should be converted into rupees on or before the last day of the succeeding calendar month after adjusting for utilization of the balances for approved purposes or forward commitments. RBI said that will allow exporters to cancel and rebook forward contracts to the extent of 25% of the total contracts booked for hedging their currency exposure.

    Anglo to Hold 85% Interest in De Beers

    Botswana declined to exercise a preemptive right to raise its stake in De Beers, which allows mining giant Anglo American to complete its planned purchase from the Oppenheimer family (CHL) for $5.1 billion. The decision was largely expected. As a result, Anglo American will acquire an incremental 40% interest in De Beers for cash, subject to adjustment as provided for in its agreement with CHL, taking its total interest to 85% at some point before the end of September.

    Petra's FY Revenue +44%

    Petra Diamonds' revenue grew 44% year on year to $316.9 million in the ‎fiscal year that ended on June 30, but the company did not provide profit figures. Petra’s total production rose 98% to 2.208 million carats, while the ‎quantity of goods sold increased 77% to 2.084 million carats. ‎Production was boosted by the Finsch mine, which Petra acquired from De Beers in ‎September 2011. Petra announced plans to sell its fissure mines, which include the Helam, Sedibeng and ‎Star mines in South Africa.

    Moody's Upgrades ALROSA

    Moody’s improved its outlook on ALROSA’s ratings to ''positive'' from ''stable'' as analysts expects the mining giant to partially dispose of assets related to its Timir iron ore project by the end of the year, coupled with a strong pricing environment for rough diamonds. The positive outlook is further supported by the company’s substantial global market share and low cost reserve base, it noted. Moody's expects a ''relatively favorable'' diamond market to persist throughout 2012 due to strong jewelry sector demand driven by demand from the U.S. and Southeast Asia and underpin strong cash flow generation in 2012. 

    Gem Diamonds Reviews Capital Plans

    Gem Diamonds is reviewing its capital investment plans and could delay the development of future projects in Lesotho and Botswana as rough diamond ‎prices fell in the second quarter due to weak economic conditions. ‎Diamond trading deteriorated since May as tight liquidity and ‎reduced demand in India and other emerging markets have resulted in increased rough ‎and polished inventory levels in the manufacturing sector.

    ‎Gem Diamonds expects continued short-term volatility and diamond prices to weaken ‎further given that traders have become more cautious and due to the traditional slowing ‎of the market in July and August. ‎ Sales from Letseng, including ‎goods extracted for internal polishing, dropped 22% to $125.2 million during the first six ‎months of 2012. Sales from Ellendale rose 73% to $57.5 million boosted by the sales contract for fancy yellow diamonds with Tiffany & Co. 

    Kennady's First Strike Encouraging

    Kennady Diamonds Inc., a subsidiary of Mountain Province Diamonds, reported that the first drill hole at its Kelvin Lake property in the Northwest Territories of Canada intersected kimberlite more than 70 meters from a down-hole depth of approximately 102 meters. The current drill program is designed to provide an understanding of the size, shape and grade of the Kelvin and Faraday kimberlites. Core recovered from the Kennady North summer drill program will be sent to Saskatchewan Research Council analytical laboratory for microdiamond testing by caustic fusion.

    Catoca Lowers Forecast

    Angola's Catoca mining company reduced its revenue forecast 20% for 2012 to $400 million due to a 5% reduction in rough sales during the first half of 2012. The company has also reduced production approximately 9% to about 500,000 carats per month this year. 

    Stellar's Tongo Renewed

    Sierra Leone renewed Stellar Diamonds' exploration license at the Tongo diamond project. The project's four diamondiferous kimberlite dykes represent an inferred resource of 660,000 carats with a modeled diamond value of $248 per carat. Drilling and evaluation is ongoing with the objective of increasing the resource estimate. Stellar Diamonds stated that discussions are continuing with the Ministry of Mines concerning the renewal of its Kono license.

    Namakwa Lowers Production Outlook

    Namakwa Diamonds commenced a technical review of its operations in July, with the primary focus on the Kao mine in Lesotho. While the review continues, Namakwa identified operational inefficiencies in the current mining operation and in the metallurgical plant. In order to address these issues, short term production will be negatively impacted and management downgraded market guidance on production for 2012 from 150,000 carats to 120,000 carats.

    Anjin Penalizes Striking Workers

    Anjin, which mines diamonds in Zimbabwe's Marange, reportedly suspended more than 1,500 diamond workers who had engaged in a wage strike. Members of a workers’ committee told VOA Studio 7 that they were penalized with layoff for demanding at least $650 a month for the lowest paid worker instead of the $235 offered now. Some of the male workers also claimed they had been sodomized by three male managers after protesting against Anjin. Those managers reportedly apologized for their assaults. 

    Gemfields Opens in India

    Gemfields opened sales offices in Mumbai and Jaipur to supply cut and polished Zambian emeralds to India and the greater Asian market. Gemfields stated that every emerald will be sourced directly from its distribution partners, which have successfully bid and acquired lots from the company’s rough auctions. The Mumbai office will be managed by Pinank Vora and the Jaipur office will be led by Rohit Kumar.

    Kimberley Process Stats for 2011

    Top 10 Countries in 2011 $Mil. %Chng.
    Angola $1,163 19%
    Australia $221 -12%
    Botswana $3,902 51%
    Canada $2,551 11%
    DRC $180 3%
    Lesotho $359 81%
    Namibia $873 17%
    Russia $2,675 12%
    South Africa $1,730 45%
    Zimbabwe $476 40%
    Global production total: $14,407 26%

    Diamond Industry Stock Report

    U.S. shares were mainly lower with Movado (-7%), JCP (-8%), Signet (-3%), Tiffany (-5%) and Zale (-4%) the largest declines. European and Indians shares were mixed: Asian Star (-7%), Goenka (+13%), Vaibhav (+9%), Damiani (-6%). Mining shares were lower, Peregrine (-25%), Firestone (-9%), Petra (-8%). Read the extended industry stock report for this past week.

      Aug. 3 July 26 Chng.  
    $1 = Euro 0.820 0.814 0.006  
    $1 = Rupee 55.80 55.49 0.3  
    $1 = Israel Shekel 4.02 4.09 -0.07  
    $1 = Rand 8.35 8.24 0.11  
    $1 = Canadian Dollar 1.00 1.01 -0.01  
    Precious Metals        
    Gold $1,588.90 $1,616.00 -$27.10  
    Platinum $1,385.00 $1,402.00 -$17.00  
    Stock Indexes       Chng.
    BSE 17,224.36 16,639.82 584.54 3.5%
    Dow Jones 12,878.88 12,887.93 -9.05 -0.1%
    FTSE 5,662.30 5,573.16 89.14 1.6%
    Hang Seng 19,690.20 18,892.79 797.41 4.2%
    S&P 500 1,365.00 1,360.02 4.98 0.4%
    Yahoo! Jewelry 928.33 926.34 1.99 0.2%

    Polished and Rough Trading Activity

    Low demand and price uncertainty hammers the market. Fancy shapes though are doing better than rounds. Rough dealers worry about recovering costs due to high prices.  Read the full report.


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