News

Advanced Search

Market Outlook 2002

Feb 28, 2002 3:29 PM   By Martin Rapaport
Email Email Print Print Facebook Facebook Twitter Twitter Share Share
The diamond industry began 2002 with a great sense of relief. While 2001 was a tough year for sales and profits, it ended on a positive note with holiday sales better than last year and much stronger than expected. The fear generated by the 9-11 tragedy, concern that the U.S. recession would diminish diamond demand, and a large oversupply of goods throughout the diamond pipeline created very low expectations in the trade. The rebound with strong last minute holiday sales supported by discounting had a very beneficial impact on trade sentiment and outlook for 2002. There is consensus that the market is returning to normal after a difficult period of uncertainty.

The new year provided the trade an opportunity to rebuild confidence and adapt to the new realities created by a slower, but steady market. The restructuring of the diamond industry with larger firms taking on increased market share, cutting out of middlemen, and a strong emphasis on downstream marketing initiatives continues unabated. While the overall outlook for the new year is highly dependent on macro-economic events directly related to the U.S. economy, significant changes taking place in the diamond distribution system will also have a strong impact on the trade over the new year. Small and medium-size firms are severely challenged to find their niches in the evolving marketplace. Firms must clearly define how and where they can add value to the diamonds they sell.

De Beers’ Results

De Beers’ financial figures were discussed at an interesting press conference on February 15. Privatization enabled De Beers to withhold information about inventory and sales targets. Management, however, provided a reasonable level of transparency by openly discussing the company’s activities and future outlook.

While De Beers’ 2001 sales were down 21.5 percent to $4.5 billion and diamond profits declined 33 percent to $886 million, the company plans to maintain its policy of restricting rough sales. De Beers will move away from its traditional “custodian of the market” role in the year ahead, but it will not sell more diamonds than the market can absorb. During the latter part of the year, De Beers reintroduced a quota system requiring producers to begin stockpiling “less than 10 percent” of their production. In spite of difficult market conditions in 2001, De Beers retained a profit margin of 20 percent on its diamond sales. De Beers is committed to maintaining market stability this year.

A resurgence of demand for rough diamonds at higher prices, coupled with a successful re-assortment of Diamond Trading Company (DTC) boxes in January, improved the competitive market position of De Beers’ boxes and sightholders. While there is no clear answer about what De Beers would do should other producers lower prices, we expect it to maintain improved assortments through the year. De Beers will provide profitable rough to sightholders that will increase the efficiency of distribution and/or provide added value marketing that drives increased levels of diamond demand. De Beers’ primary goal in 2002 is to increase its rough sales. De Beers has clearly stated that it does not plan a rough price increase until this is accomplished. (See sidebar Q/A with Gary Ralfe). The name of the game in 2002 will be to find better ways to sell more goods.

De Beers estimates U.S. diamond jewelry sales increased by 1 percent to 2 percent during Q2, resulting in an overall U.S. and global 5 percent decline for the year. Japan was weak with a decline of 13 percent. Net polished into all the consumption centers declined 17 percent and rough sales were down 18 percent. Bank debt was estimated at just under $6 billion following the January sight compared to $6.4 billion a year earlier. January 2002 rough stocks were $1.5 billion compared to $1.3 billion in 2001. Polished stocks were $3.7 billion in January 2001, then rose to $4.4 billion by October 2001 and finally declined to $3.75 billion by January 2002.

U.S. Statistics

U.S. import/export statistics for 2001 are presented in a special Rapaport Statistical Report on pages 41 to 43 in this issue. Polished imports declined 11 percent to $10 billion and rough imports fell 26 percent to $550 million. The decline in net imports (imports minus re-exports) was even sharper. Net polished imports fell 17 percent to $6.1 billion and net rough imports plunged 28 percent to $381 million. The net diamond account (all imports minus all exports) fell 18 percent to $6.5 billion.

Polished imports were down double digits from January through October with the large declines in February (-17 percent), July, September (-29 percent) and October (-21 percent). These large drops captured the essence of the problem. The early declines were due to overinventory and the latter declines were due to uncertainty.

A primary factor behind sharply reduced diamond imports and local diamond manufacturing was excess inventory. In 2001, everyone from manufacturers to dealers to retailers had too many diamonds and not enough money. The diamond distribution system clogged up and was almost paralyzed. Less new goods came into the market and there was less to choose from. Too many people had the wrong kind of diamonds, and the mood of the market was poor. As Lawrence Ma, chairman of Hong Kong’s diamond trade association, said in a recent interview, “For the diamond business to succeed you need the two Ms — Mood and Money.” In 2001, the diamond trade had neither.

The Silver Lining

Perhaps the best thing going for us in 2002 is that the mood of the trade in 2001 was terrible. The good news is that since everyone was expecting a poor holiday season in 2001, they didn’t stock up with new goods. The 2001 season exceeded all expectations, so retailers sold what they had. The result was a significant de-stocking of inventory and unclogging of the diamond distribution pipeline. With excess inventory out of the way, there is opportunity for retailers and dealers to restock in 2002.

The answer to questions about when to restock and how much to restock are highly dependent on trade confidence in the future performance of the U.S. economy. While Europe is doing relatively well, Far East demand is asleep and will probably not wake up until the U.S. turns back on. Fortunately, the U.S. economy is bigger and stronger than most of us realize. It is not as volatile as Far East economies and tends to self-stabilize. Everyone looks to the U.S., including the U.S.

Uncertainty

Since no one can predict the future, it is reasonable to assume that decision making in the months ahead will be conservative and restrained by uncertainty. Retailers will hold off inventory purchases until they see consistent demand “on the ground and in their stores.”

Consider the mindset of trade buyers. If they buy too soon, they run the risk of getting into an overinventory position and returning to the unacceptable position of 2000. On the other hand, if they delay purchases and avoid risk, the worst thing that can happen to them is that they will buy later and pay a bit more for goods.

While it looks like we have reached the bottom of the market, we should not expect buyers to be market experts. The first half of 2002 looks like a waiting and testing period during which most buyers are going to take a conservative course. Once burned, they will be twice as careful.

A note of caution. There is concern that memo marketers will try to increase market share by continuing to overload retailers with nonpurchased returnable inventory. Such memo deals increase overall market risk as they significantly decrease liquidity. Retailers should be aware that greater profits are to be made buying diamonds instead of borrowing them. The only way for the market to rid itself of this problem is through serious price competition in the retail sector. Retailers who “pay” too much for borrowed diamonds will be forced out of business because their diamond jewelry will be easily identifiable as being too expensive.

Our preliminary outlook for 2002 is for a year of slow, but steady growth as the diamond trade moves with the economy. Consumer and trade sentiment will be one and the same as the U.S. embarks on a process of re-establishing confidence. Provided there are no more terrorist shocks and the economy gains steadily, we expect an interaction between improving diamond demand and trade sentiment that will encourage greater inventory rebuilding by the second half of the year. If the U.S. economy maintains steady improvement, the 2002 holiday season may be a real winner.
Comment Comment Email Email Print Print Facebook Facebook Twitter Twitter Share Share
Tags: De Beers, DTC, Economy, Hong Kong, Japan, Jewelry, Manufacturing, Production, Sightholders
Similar Articles
Lucapa Finds Large Yellow Diamond 150Yellow Diamond Weighs In as Lulo’s Largest
Jan 18, 2018
Lucapa Diamond Company recovered a 43-carat yellow diamond, the largest colored gem-quality stone it has unearthed
© Copyright 1978-2018 by Martin Rapaport. All rights reserved. Index®, RapNet®, Rapaport®, PriceGrid™, Diamonds.Net™, and JNS®; are TradeMarks of Martin Rapaport.
While the information presented is from sources we believe reliable, we do not guarantee the accuracy or validity of any information presented by Rapaport or the views expressed by users of our internet service.