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Backing the Right Horse
Editorial
Jan 10, 2014 5:26 AM
By Avi Krawitz
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RAPAPORT... Expectations are rising for the Chinese New Year even as China’s economy is projected to gallop at a slower pace in 2014. Despite the lower economic forecasts, the diamond industry should view developments in China with optimism rather than the cautious outlook many economists hold for the coming “Year of the Horse.”
The reason for industry optimism and economic restraint are one and the same. China’s new leadership has embarked on a reform agenda to transform the economy from one that relies on government investment into one that is driven by market forces by the year 2020. The transition requires ambitious structural reforms that make the current slowdown inevitable. However, the fact that the world’s second largest economy is encouraging a culture of consumerism will spur industry growth even amid the caution.
In fact, there are a number of factors that ought to reassure the diamond and jewelry industry through the transition period.
The slowdown is relative to the booming double-digit growth experienced between 2003 and 2007, and current growth is still enviable by most standards. In 2013, China’s economy is projected to have grown by 7.6 percent, according to the official Xinhua News Agency. While better than the government’s previously stated target of 7.5 percent, it still represents the third consecutive year of declining growth. The government has maintained its target for 7.5 percent growth for 2014.
The data suggests that China is in a process of maturing, which is a good thing for a diamond trade that tends to act irrationally in booming markets. In 2011, speculative Chinese buyers drove diamond prices higher in the first half of the year, only to decline as the bubble burst and inventories were overstocked. Prices have been in a downtrend ever since as markets have become more conservative and buyers more selective.
Chinese buyers are unlikely to repeat such speculation in the current economic environment as wholesale and retail jewelers are managing with leaner inventories. The diamond market in China is maturing along with its economy and buying is expected to be more rational and authentic to meet real demand.
By sheer demographics, diamond demand is growing. As its population approaches 1.4 billion people, China’s young middle class continues to rise, creating greater gift-giving opportunities. Bridal continues to dominate the market, accounting for an estimated one-third of diamond jewelry sales as the culture of diamond ring proposals is developing. Whereas previous generations were primarily interested in gold as a sign of commitment, today more brides are demanding diamond jewelry. The estimated 13 million brides that get married each year in China represent a tremendous opportunity for the industry.
However, tastes are changing and there is a shift toward lower, commercial-quality diamonds that is expected as a market matures. There is increasing acceptance of SI-clarity diamonds in a market that traditionally focused on VS goods. In addition, consumers are looking more at fancy shapes than before. The strong price growth of 0.30-carat to 0.40-carat and SI-clarity diamonds in 2013, while other categories declined, was largely driven by Chinese demand.
The major jewelers in the region are also targeting growth by using diamonds in their fashion jewelry. They recognize that diamonds currently offer stronger margins than the gold products that influenced such strong revenue growth in 2013. Consumers rushed toward gold products as they saw investment opportunities when gold prices fell last year. Since the trend is expected to continue, the likes of Chow Tai Fook, Chow Sang Sang and Luk Fook Holdings are planning to push more diamond content during the coming Chinese New Year season.
Already in the fiscal third quarter that ended on December 31, 2013, Chow Tai Fook, the largest jeweler in the region – and in the world – sold more gem-set jewelry than in previous periods. The company reported that gem-set jewelry sales accounted for 26 percent of total revenue, compared to 22 percent and 16 percent in the preceding quarters. Chow Tai Fook explained that the average selling price of gem-set jewelry increased from a year earlier and that growth in the segment was driven by improved consumer sentiment and promotions during the October National Day “mega sale.”
An even larger mega sale is expected during the Chinese New Year Spring Festival that begins on January 31. Chow Tai Fook and other jewelers in the region have increased their inventory levels in preparation for the season.
The festival therefore represents a second Christmas for the diamond trade as the focus of supply shifts from the U.S. to the Far East between December and January. For the trade, the holiday season no longer only refers to Christmas, as it did just a few years ago, but also now includes the Chinese New Year.
Such has been the impact of China’s growth on the diamond industry to the extent that the trade continues to rely on the country as its primary growth vehicle – even in a cautious economic environment.
This trend is expected to continue in 2014. In the coming year, the U.S. jewelry market is projected to be stable – barring a massive stock market selloff in the absence of quantitative easing – and growth in India will likely be restrained by currency fluctuations and prohibitive government policies toward the industry.
China will remain the growth engine for the diamond industry especially now that the trade has reasonable expectations for the market in the coming year. This column stated last week that conditions seem right to stimulate improved profits for dealers and manufacturers (see editorial “2014: Growth Potential,” published on January 3, 2014), even though no one is expecting a boom.
Rather, the industry is set up for unspectacular but healthy growth. Similarly, the fact that China is becoming more consumer-centric, signals that the economy will grow at a more authentic and responsible pace. That sense of normalcy is a good thing for the diamond industry, even as the country endures some growing pains in the “Year of the Horse.”
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz and on LinkedIn.
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 © 2014 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, Chow Tai Fook, diamonds, jewellery, Jewelry, Rapaport
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