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A Look Ahead
Editorial
Jan 4, 2013 5:00 AM
By Avi Krawitz
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RAPAPORT... Mike Roman, the late former chairman of Jewelers of America (JA), once told Martin Rapaport, “Don’t worry about diamonds. The industry will be okay, as long as there are three things: Christmas, sex, and guilt.”
The good news is that each year he has proven correct, and his premise holds true for 2013, if not more so. The bad news is that the year ahead is not expected to be one of significant growth for the diamond industry.
After all, many of the issues responsible for the challenging market in 2012 will continue to have an impact, most notably as economic uncertainty shifts from west to east and back again. At the same time, many of the deals that were penned last year, and the strategies that have been evolving even before that, will influence trading in 2013.
Prospects for the year are therefore interesting, regardless of how diamond prices will trend in 2013. While many are encouraged by the stability seen in December that was driven by the U.S. holiday season, (see Rapaport Research Report published on January 3, 2013), Christmas is over. Diamond buying remains conservative as retailers maintain low inventory and consumer confidence diminishing the closer they edge over the “fiscal cliff.”
The industry now turns to the Chinese New Year on February 10 to keep up the momentum, which Roman may have added as a fourth factor, had it been as relevant in his time as it is today.
The prospects for the season are encouraging. If 2012 was a year in which steady U.S. demand compensated for slower growth in China and India, early economic forecasts suggest the pendulum may swing back again slightly this year. With a new government taking power, the outlook for China has improved, after a slowdown in growth and confidence in 2012. The industry is banking on a relatively strong Chinese New Year to set a more positive tone for 2013.
But there’s no escaping the weak global economic environment and consumer sentiment, in the U.S. and elsewhere, which is likely to continue to exert influence during the year.
Polished suppliers and manufacturers are therefore in a catch-22 as they are currently enjoying reasonable profit margins in a relatively weak market. Their current polished supply was cut from cheaper rough bought after prices dropped around August. There will likely be an influx of lower-cost polished goods into the market in the coming months. But they also sense their margins may be short lived. With limited production and supply from De Beers and ALROSA respectively, rough prices are anticipated to rise in the first quarter.
The question for diamond cutters is two-fold as they ramp up their manufacturing operations: given the state of the economy and weak consumer demand, will the new polished coming to market, cut from cheaper rough, enable lower diamond prices, or will they manage to maintain their margins in anticipation of higher rough prices?
From the rough supply side, it seems that De Beers expects sightholders to take the rough in the coming months that was rejected before the company cut prices in the third quarter of 2012, in addition to their regular supply — as the company stipulated at the time. The same has been expressed by ALROSA, which also faced rejections from its clients in the latter half of 2012.
Such policy could set off an unhealthy bubble phase in the rough market, especially as sightholders submit their intentions to offer (ITO) for the next supply cycle beginning on April 1. It will be left to sightholders and ALROSA clients to reject over-priced rough and to banks to avoid giving credit that enables purchases at unsustainably high rough price levels.
The market will be eyeing how much rough is supplied and how it is sold, especially as new players emerge on the supply side in 2013. Botswana’s state-owned Okavango Diamond Company is scheduled to launch sales in the first half, but it is still unknown how it will sell the more than 2.5 million carats per year of Debswana production. Similarly, Harry Winston will significantly increase its production when the company completes its purchase of the Ekati mine from BHP Billiton, making it Canada’s largest diamond producer. It is likewise unclear whether Harry Winston will continue with BHP’s spot tender model for selling the Ekati goods or mix them with its Diavik production and sales. Rio Tinto will likely reveal its intentions after initiating a review of the diamond business last year.
Among the majors, ALROSA should complete its long-term contracts and will likely sell more to its contracted clients than ever before, while teasing the market with a possible share sale.
De Beers meanwhile will complete the move of its Diamond Trading Company (DTC) rough sales division from London to Gaborone, while phasing out the DTC and Diamdel brands. Sightholders, and/or their brokers, are bracing to see more of Gaborone as De Beers launches its “London” sights there around November.
De Beers is also expected to appoint a new chairman and reveal more of its corporate restructuring. The company said in October that it has begun a long-term effort to realign its corporate identity and culture in order to view the market as consumer, rather than supply, driven. Hopefully it will better explain what that means and the impact it will have on its supply, its prices, and its market assessments.
Businesses throughout the diamond pipeline are similarly weighing the consumer mood at the start of 2013. Diamantaires and jewelers will recognize that the value of their diamonds means more than the volume of their sales as they strategize to ensure sustainable profits regardless of how the year progresses. They take solace in the fact that there’s still a Christmas, (and a Chinese New Year and Diwali). There’s still sex and possibly most importantly, there’s still guilt. The outlook for growth may not be strong, but more people than ever continue to buy diamonds. Ultimately, the industry will be okay in 2013.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz
This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.
Copyright © 2013 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.
Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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Tags:
Avi Krawitz, Rapaport
De Beers
ALROSA
Diamonds
RapNet
RAPI
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