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2014: Growth Potential

Editorial

Jan 3, 2014 12:53 AM   By Avi Krawitz
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RAPAPORT... The mood in the diamond industry has already improved in 2014. Initial reports suggest the Christmas season was better than expected for the diamond trade and the U.S. appears inclined toward growth again. Of course, no one expects the diamond market to boom in the year ahead, but there is a sense that dealers and manufacturers will be more aggressive to ensure that they make money in 2014.

That wasn’t the case in 2013, as this column explored last week (see editorial, “The Diamond Story of 2013,” published on December 27, 2013). Polished prices declined for the second consecutive year and so one can forgive diamantaires for being cautious.

However, they’re also frustrated that their profit margins have been squeezed for so long and there is a sense that they’re ready to take additional risk for higher returns. While it is impossible to know exactly what will be in the diamond market, one can make some predictions for the market based on current events and available information. Here’s a look at some of the developments that we’ll be looking out for in 2014.

Rough Prices, Credit & Liquidity

Rough prices are not expected to rise significantly in 2014 as diamond manufacturers are determined to garner better profit margins than they did in 2013. But it’s not going to be easy. They are likely to face continued pressure from mining companies.

However, the lack of liquidity resulting from tight margins in 2013 and lower bank credit will influence more conservative rough buying. ABN Amro, one of the largest lenders to the industry, reduced its financing from 100 percent of rough purchases to 70 percent, which went into effect on January 1, 2014. Others, including some of the Indian banks, are expected to follow, if they haven’t already. The result is that manufacturers are left to finance a portion of their rough purchases themselves, leaving them with additional liquidity challenges. Manufacturers and dealers will have to exert greater restraint in their rough buying and refuse rough at unsustainable prices.

De Beers Sight Applications

Believe it or not, De Beers will soon open applications to become a sightholder in the next three-year contract period, which will begin on April 1, 2015. Therefore, manufacturers will spend much of 2014 conducting the necessary audits, business reviews and applications in their quest to become a sightholder. That’s if they want a sight. Sightholders are questioning the value of having a De Beers sight as they consistently noted in 2013 how difficult it was to profit from De Beers boxes. There were also persistent rumors about sightholders who were willing to give up their sight, and one or two did. De Beers may well receive fewer applicants than normal as the process unwinds.

In addition, some expect the company to phase down the sight system and instead put a greater emphasis on its auction business, which currently sells 10 percent of De Beers production. Already, the company has implemented its dynamic sales policy to encourage greater interaction between the sight sales and auction businesses. De Beers also introduced avenues to ensure long-term production on the auction platform via its futures contracts. Few would be surprised if De Beers raised the percentage of production sold at auction in the coming year.

Trading Botswana

Simultaneously, De Beers is contracted to sell the majority of its rough in Botswana and transferred its international sales from London to Gaborone this past November. The move complemented the launch of rough auctions by the state-owned Okavango Diamond Company, which now has access to 13 percent of Botswana’s Debswana production. These developments have combined to place Gaborone firmly on the rough trading map and traffic to Botswana is expected to grow in 2014, if not exponentially. Developing a more dynamic inter-dealer market and polished trading are the natural next steps for the country.

Economic Trends

Part of the improved market optimism stems from rising confidence in the U.S. economy. Unemployment fell to 7 percent in November, which was its lowest level in five years, and consumer confidence was bolstered by the holiday season. Sentiment in the diamond and jewelry market improved accordingly.

Wealth grew as stock markets rose to record levels in 2013. Investors have sought returns that were not available in the money market given the near-zero interest rates. The Federal Reserve has stimulated the economy through its quantitative easing program and has kept interest rates low. That too is set to change after the Fed announced its first step in tapering down its bond buying, signaling its belief that the economy can fend for itself. However, while the Fed pledged to keep interest rates low for the next few months, rates will inevitably increase.

Higher interest rates may influence investors to look at less risky assets than the stock market, which should result in rising interest for large investment-quality diamonds. Demand for round, 2-carat to 5-carat, D-H, IF-VS certified diamonds is therefore expected to improve in the year ahead.

Big Stone & Colored Diamond Boom

Already, the popularity of very large diamonds has boomed in the past year. In fact, while commercial polished diamonds have been volatile through the past five years, colored diamonds and rare big stones have enjoyed unprecedented growth. Diamond buyers and consumers are looking for something different and unique, while investors have been enticed by the long-term returns these goods offer. As a result, more dealers have entered niche areas such as the colored diamond market.

Estimates suggest that prices of the more scarce items such as pink, fancy intense vivid yellow, and fancy blue diamonds rose by more than 30 percent in 2013, while lower quality yellows increased by about 10 percent. Fueling perceptions about the market, large special, colored diamonds broke numerous records on the auction circuit.

No market is completely bubble resistant. However, veterans in the colored diamond space note that growing dealer demand and a growing pool of wealthy consumers for these goods, coupled with their rarity of supply, will ensure that prices continue to rise in the near and long term.

Polished Prices

The market for commercial diamonds remains volatile. The RapNet Diamond Index (RAPI) for certified 1-carat diamonds has declined in the past two consecutive years, and polished markets have become selective. Round, 0.30-carat to 0.40-carat, SI diamonds were the standout item in 2013, largely driven by a shift toward more commercial goods at lower price points by Chinese consumers.

Indeed, emerging markets present less optimistic prospects than the U.S. China continues to implement reforms to transition from a public investment-driven economy to a consumption-driven one. The process, while ultimately positive for the diamond industry, will take some time to implement, and consumers will likely remain relatively restrained in the interim. Far East diamond buyers will remain selective and price sensitive in the year ahead.

Similarly, India’s economic growth has slowed influencing caution among Indian consumers, not to mention the diamond trade. The government continues to curb gold consumption in an attempt to slim its current account deficit, and may increase diamond import duties as well in the process.

However, overall, there is a more positive mood in the industry and a sense of optimism that represents a change from previous years.

No-one is expecting the market to boom. But many feel conditions are right to stimulate at least a slight uptrend for the mid-stream market. The diamond market may not have grown during the past year, but it did mature in its adversity. With the experience of the past few years, the trade enters 2014 in a braver mood, determined to restore growth. Diamond manufacturers and dealers appear ready to take more risk to ensure their share of industry profit in the year ahead.

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.diamonds.net/weeklyreport/ 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, China, De Beers, diamonds, Jewelry, Rapaport, u.s.
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