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Rapaport TradeWire August 17, 2012

Aug 16, 2012 6:00 PM   By Rapaport
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Rapaport Weekly Market Comment Aug. 17, 2012

Low expectations for next week’s India show as polished suppliers remain under pressure in weak buyer’s market. Rough trading quiet as ALROSA lowers 2Q supply to the market and approves sale of $130M to Gokhran (Russian Treasury) for first time since 2009. Global gold jewelry demand -9% to $21.7B in 2Q, volume -15% to 418.3 tons as Indian & Chinese demand slumps. Gitanjali 1Q sales +31% to $612M, profit +21% to $27M. Shrenuj 1Q sales +6% to $129M, profit -34% to $2M. Hong Kong’s 1H polished imports -1% to $8.5B, exports -7% to $6.1B. De Beers shifts diamond sorting operations from London to Gaborone. Botswana appoints Toby Frears as managing director of Okavango Diamond Company.

RapNet Data: Aug. 16
Diamonds   982,235
Value $6,187,991,983
Carats   1,036,639
Average Discount -27.34%

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      As De Beers shifts more and more of its sales operations to Botswana over the next ‎year, we will solidify the long-term future of the partnership and work to transform ‎Botswana into one of the world’s leading diamond trading and manufacturing hubs.

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    De Beers Moves Aggregation to Gaborone

    De Beers moved its aggregation department from London to Gaborone as part of the ‎gradual transfer of its Diamond Trading Company (DTC) operations to Botswana. ‎Aggregation is the process of mixing same category diamonds from De Beers global ‎operations before they are prepared for distribution to sightholders.‎ With aggregation now taking place in Gaborone, De Beers ‎estimated that approximately $6 billion worth of diamonds will now flow through the ‎country. Until this week, aggregation had taken place in London for nearly 80 years.‎ The transfer of aggregation is part of DTC’s overall migration of its London sights and ‎sales operations to Gaborone, which is expected to be complete by the end of 2013. ‎De Beers reported that more than $22 million will have been invested to have its DTCB building ready for the first sight in Gaborone next year.

    Frears to Head Okavango Diamond Co.

    Botswana’s state-owned Okavango Diamond Company (ODC) appointed Toby Frears, a former De Beers executive, as its first managing director as the company plans to launch trading ‎in Gaborone by the second quarter of 2013.‎ Frears served as head of diamond-sorting and valuing operations at the Diamond ‎Trading Company Botswana (DTCB), where he was previously head of sales.‎ ODC was created in March 2012 following an agreement between De Beers and ‎Botswana to make available a portion of Debswana’s production for sale, ‎independent of the DTC. The government’s share of Debswana’s ‎production, 10% of which was available retroactively from the beginning of 2011, will ‎increase by 1% each year until it reaches 15% in 2016.

    ALROSA Sells Rough to Gokhran

    ALROSA sold an undisclosed amount of rough diamonds to Russia's state-owned Gokhran in the second quarter of 2012, marking ‎the first time since the downturn of 2009. ‎A company spokesperson declined to disclose an amount but did note that ‎ALROSA’s board previously approved selling up to $130 million worth of rough diamonds ‎to Gokhran. ALROSA explained that it reduced its supply to the market and sold to Gokhran after ‎witnessing acute financing problems by its customers during the second half of 2011, ‎which led to the decline in demand for rough diamonds in the first half of 2012. By reducing its supply to the ‎market, ALROSA maintains what it calls an acceptable level of price stability during a period of lower demand.

    Global Gold Demand Unchanged

    Gold demand remained relatively flat at $51.2 billion in the ‎second quarter of 2012, according to the World Gold Council (WGC).‎ Demand by volume declined 7% year on year to 990 tons as the ‎challenging global economic climate took its toll on commodities. The average price of gold was ‎‎$1,609.48 per ounce during the quarter, which was 7% higher than the average in ‎the second quarter of 2011.‎ ‎

    WGC’s quarterly ''Gold Demand Trends'' report indicated that gold jewelry demand ‎declined 9% to $21.65 billion as the volume fell 15% percent to 418.3 tons. ‎Gold investment demand, including gold bars, coins and ETFs, decreased 17% to $15.63 billion, while volume fell 23% to 302 tons. India’s gold jewelry demand fell 26% to $6.46 billion but the ‎country still ranked as the largest gold jewelry market during the quarter. India’s investment ‎demand dropped 47% to $2.94 billion. ‎Gold jewelry demand from China, including Hong Kong and Taiwan, fell 2% to $5.33 billion, while its investment demand ‎rose 3% to $2.75 billion.

    U.S. Jewelry Store Sales +4%

    WATCH NOW: U.S. jewelry store sales rose 4% year on year in June to $2.2 billion and consumer price inflation remained flat. Meanwhile, U.S. department store sales fell 3.3% to $14.8 billion in June and dropped 3.5% in July to $13.5 billion. Unity Marketing has warned retailers, especially those in the luxury goods business, to prepare for a tough second half as affluent consumers have reduced their spending 27% this year and there are no signs of them opening up wallets in the coming months.

    Jewelry Price Inflation -3%

    The U.S. consumer price index (CPI) for jewelry fell 2.9% year on year in July to 172.28 points. This was the largest year-on-year decline since December 2005. However, the CPI remains historically high and July's reading marked the nineteenth consecutive month with a reading of more than 170 points. Since April, prices for polished diamonds have softened and both gold and platinum prices have dropped to below the level recorded one year ago.

    U.S. 2Q Online Sales +15%

    Digital matrix firm comScore Inc. reported that online U.S. retail sales climbed 15% year on year to $43.2 billion during the second quarter that ended on June 30. The top-performing online product categories, which did not include jewelry this time, included digital content and subscriptions, electronics, flowers, greetings and gifts, computer hardware, and apparel and accessories. Each of those categories grew sales at least 16 percent year on year. Jewelry was a top performing category in the first quarter.

    Rajesh Exports Profit +3%

    Rajesh Exports Ltd. reported that sales rose 5% year on year to $897.6 million during its first fiscal quarter that ended on June 30. Profit increased 3% to $17.8 million and total expenditures increased 5% percent to $870.8 million. Rajesh Exports stated that it had outstanding orders worth $817.1 million as of August 14.

    Gitanjali Profit +21%

    Gitanjali Gems Ltd. reported that sales rose 31% year on year to $612.1 million during its first fiscal quarter that ended on June 30. Profit increased 21% to $26.9 million. Sales at the company’s diamond business grew 29% to $301.6 million, while jewelry segment sales increased 36% to $330.2 million. Group expenditures rose 33% to $573.6 million. Gitanjali’s sales in India almost doubled to $321.1 million, while sales from the rest of the world declined 4% to $290.9 million.

    Shree Ganesh Profit +14%

    Shree Ganesh Jewellery House Limited (SGJHL) reported that group sales rose 17% year on year to $541.3 million during its first fiscal quarter that ended on June 30. Profit increased 14% to $16.8 million. Group expenditures rose 18% to $523.6 million. SGJHL makes gold jewelry, diamond jewelry, gemstone-studded jewelry and light-weight Italian jewelry and operates the GAJA retail outlets. The company derives the majority of its sales from overseas markets such as the United Arab Emirates (UAE,) Singapore and Hong Kong.

    Shrenuj Profit -34%

    Shrenuj & Co. Ltd. reported that sales rose 6% year on year to $129.1 million during the first fiscal quarter that ended on June 30. Profit, however, declined 34% to $2.3 million as expenses and finance costs rose. The Mumbai-based company stated that it expects to return to its previous levels of profitability in the coming ‎quarters as it has witnessed some stability in input prices.

    JCPenney Loss Surges to $147M

    J.C. Penney Company reported that sales fell 23% year on year to $3 billion for the second quarter that ended on July 28 and cost of goods sold increased 16% to $2 billion. Comparable-store sales plunged 21.7% and the retailer reported a loss of $147 million, or 67 cents per share, compared with a profit of $14 million or 7 cents per share one year ago. The net loss includes restructuring costs, severance, inventory transition and markdowns and a gain on the redemption of the Simon (property management company) REIT units.

    JCPenney exited the outlet business during this transition period, which negatively impacted sales, however, its Internet business sales through were also lower, down 33% year on year to $220 million. Gross margin fell to 33.2% compared with 38.3% one year ago, and it was negatively impacted $102 million worth of markdowns on discontinued inventory in preparation for new product arriving in the fall of 2012. The retailer still expects aggressive management of expenses, layoffs and other operational efficiencies will result in a savings of approximately $900 million at the end of 2012. JCPenney closed the second quarter with approximately $888 million in cash and cash equivalents on its balance sheet, compared with $1.55 billion one year ago.

    Sears Narrows Loss to $132M

    Sears reported that sales fell 6.6% year on year to $9.47 billion in the second quarter as domestic comparable-store sales declined 3.7%. The decline in revenue was affected by the fewer Kmart and Sears Full-line stores in operation. The company also reported a net loss of $132 million for the quarter, which was an improvement from a loss of $152 million one year ago. Sears attributed the improvement to reduced expenses and expanded gross margin through a more effective promotional concept.

    India’s Retail to Top $1T

    India's retail sector is poised to become a $1.3 trillion opportunity by 2020 as integrated, multi-channel retailing will drive the upcoming wave of consumption, according to a report from the Federation of Indian Chambers of Commerce and Industry (FICCI) and Tata Consultancy Services (TCS). Modern retailers of the past have tried to capitalize on this opportunity by increasing their store presence across major cities in India, while fast moving consumer goods (FMCG) companies have tried to enhance their distribution reach, the report stated. However, these strategies must also include brick-and-mortar together with digital and mobile channels to reach one billion eager consumers. FICCI stated that the modern retailers have the potential to reach $10 billion worth of sales through digital, mobile and other non-conventional channels in just the next eight years.

    Damas Adds Two Forevermark Collections

    Damas launched its new collections featuring Forevermark diamonds in the United Arab Emirates (UAE), with the Forevermark Setting and the Forevermark Millemoi. Both collections are available at six Damas stores across the UAE. Forevermark Setting is inspired by the shape of the Forevermark icon, a four-prong mounting that delicately cradles each diamond and allows the maximum amount of light, according to Damas. The Forevermark Setting collection includes rings, earrings and pendants in 18-karat gold. The Forevermark Millemoi collection is comprised of jewelry that Damas described as joyful hoops, jostling bands, and sensuous fringes and tassels. At the core of each design, a Forevermark diamond holds the bands together.

    Hearts On Fire Names Two Ambassadors

    Hearts On Fire named Janie Bryant, the costume designer for the television show "Mad Men," and Tara Subkoff, the owner and designer of the Imitation of Christ Fashion Line, as brand ambassadors to drive awareness in both print and digital marketing efforts beginning in September. Hearts On Fire prepared a multi-channel media campaign to accompany the announcement and launch of fashion collections Illa and Copley. Bryant has been recognized with an Emmy award, Costume Designers Guild awards and many nominations for Mad Men. Subkoff launched the Imitation of Christ brand in 2001 as a fashion and art collective, re-imagining vintage pieces by sewing each by hand.

    LJ Intl. Weighs ‘Going Private’ Proposal

    The board of LJ International Inc. announced that it had received a preliminary, non-binding proposal from its chairman and company president, Yu Chuan Yih, along with Urban Prosperity Holding Limited to acquire all of outstanding ordinary shares of the company. Yih proposed price of $2 per ordinary share, in cash, subject to certain conditions to take the company private. Yih owns approximately 11% of the company's outstanding shares. The board of directors now intends to form a special committee of disinterested directors to consider the proposal.

    Lucara Loss Jumps to $8M

    Lucara Diamond Corporation widened its loss in the second quarter of 2012 and lowered its ‎sales outlook for the rest of the year. The junior mining company reported a loss of $7.6 ‎million for the period, compared with a loss of $5.9 million a year earlier. Lucara generated revenue of $12.1 million from two sales of rough production from its ‎Karowe mine in Botswana. Approximately 66,181 carats of diamonds were sold at ‎two auctions with an average price of $182 per carat. However, management explained ‎that it did withhold goods from the auctions, mainly in the high-color, high-quality categories, ‎due to the recent softening of the diamond market. ‎

    Petra Lowers Outlook

    Petra Diamonds lowered its production forecast for fiscal 2013 and said it expects the ‎rough diamond market to remain under pressure in the short term. ‎Petra set a production target of 2.85 million carats for the year ending on ‎June 30, 2013, down from its previous guidance of 3.1 million carats. The lower outlook ‎was influenced by a revision of the mining plan at its Finsch mine in South Africa and due ‎to lower production levels at the Williamson mine in Tanzania. ‎Petra’s production reached 2.2 million carats in fiscal 2012. The company noted that it remains on schedule to achieve annual production of 5 million carats by fiscal 2019.‎

    Shore Gold Narrows Loss

    Shore Gold Inc. posted a loss of $2.2 million for the second quarter that ended on June 30, which was down from a loss of $4 million one year ago. Revenue rose to $75,000 from $62,000 from interest-bearing deposits. The explorer is preparing a revised environmental impact statement for its Star–Orion South Diamond Project and continues to seek capital. The Star–Orion South Diamond Project includes Shore Gold's own Star Diamond Project  as well as Star West and the Orion South Kimberlite, which fall within the adjacent Fort à la Corne joint venture it holds with Newmont Canada FN Holdings.

    Diamond Industry Stock Report

    Retail stocks were mostly higher in relatively light trading this week. JCP gained 10%, LJI and Blue Nile jumped 9%, but Damiani, LVMH and Richemont were down 1%. Mining stocks were mostly lower with Lucara -11%, Peregrine -19%, Rockwell -12%, Rio Tinto -5% leading the way, but Shore Gold jumped 68%.  Read the extended industry stock report for this past week.
      Aug. 16 Aug. 9 Chng.  
    $1 = Euro 0.801 0.810 -0.009  
    $1 = Rupee 55.78 55.17 0.6  
    $1 = Israel Shekel 4.03 3.99 0.04  
    $1 = Rand 8.20 8.09 0.11  
    $1 = Canadian Dollar 0.99 0.99 0.00  
    Precious Metals        
    Gold $1,615.30 $1,616.90 -$1.60  
    Platinum $1,439.00 $1,409.00 $30.00  
    Stock Indexes       Chng.
    BSE 17,657.21 17,560.87 96.34 0.5%
    Dow Jones 13,250.11 13,165.19 84.92 0.6%
    FTSE 5,834.51 5,851.51 -17.00 -0.3%
    Hang Seng 19,962.95 20,269.47 -306.52 -1.5%
    S&P 500 1,415.52 1,402.80 12.72 0.9%
    Yahoo! Jewelry 963.33 970.01 -6.68 -0.7%

    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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