Industry
U.S. Demand Up, India Market Slumps
While forecasts for the U.S. holiday season have improved, India’s war on black market money is expected to slow demand just as the important wedding season begins.
By Avi Krawitz
The diamond industry found itself torn between the promise of the holiday season and caution prevailing in the trading and manufacturing centers this December. As U.S. consumers rushed for bargain deals on Black Friday and the subsequent “Cyber Week,” spending plunged in India with the government’s cancellation of high-denomination rupee notes. The sudden move by Prime Minister Narendra Modi’s office to scrap INR 500 ($7.40) and INR 1,000 ($14.80) notes — the largest denominations previously available — was aimed at curbing terror financing, smuggling of arms and drugs, and especially to eliminate “black money” in the “parallel shadow economy,” the Finance Ministry explained. While the notes are being replaced by the phased introduction of a new INR 500 note and INR 2,000 ($29.60) note, the decision resulted in an estimated 85 percent of India’s money supply being taken out of circulation (see India market report on page 56). Liquidity immediately dried up, resulting in a drop in retail sales as consumers focused on necessities rather than luxury products, explained A.K. Prabhakar, head of research at IDBI Capital. The impact was felt in the jewelry sector, where sales fell about 60 percent in the week following the announcement, Prabhakar estimated. Having just closed a fairly positive Diwali festival in late October, the momentum for jewelers was broken by the announcement at the start of the busy wedding season, market observers noted. There were also consequences further along the supply chain where high-denomination cash typically changes hands between smaller jewelers and diamond dealers in the local market. Demand is expected to slow for the next two-to-three quarters, analysts at India Ratings wrote.
YOU MUST HAVE JAVASCRIPT ENABLED TO VIEW THE SLIDESHOW
That influx will likely put additional pressure on polished prices. “Polished prices continue to point to a continuation of the trend of lower prices, certainly while trading activities decline in the near term,” Hodgson wrote in a research note about the industry. “While the outcome of the upcoming retail period remains uncertain, abundant inventories and the prospect of increasing rough supplies in 2017 are likely to limit any significant price appreciation near term.” Polished prices were relatively stable in November with the RapNet Diamond Index (RAPI™) for 1-carat diamonds up .6 percent for the period November 1 to 21. RAPI for .30-carat stones increased .3 percent, while .50-carat diamonds declined .6 percent. RAPI for 3-carat diamonds rose .8 percent during the period (see chart on page 17, top). Inventory levels on RapNet dropped slightly in November, with very few new goods entering the market as Indian manufacturing shut down for Diwali. However, the number of unique diamonds listed on RapNet is still about 20 percent higher than at the beginning of 2016. The trade is keeping an eye on retail over the Christmas season and the Chinese New Year as dealers and manufacturers hope to reduce those polished inventories. They expect that strong holiday retail sales will force jewelers into the polished market for replenishments in the first quarter.
Holiday demand within the dealer market was relatively stable as U.S. polished imports were up 3 percent in the third quarter. India’s supply to the U.S. jumped while other centers declined (see chart above). Dealers continue to point at the U.S. as supporting the trade amid weakness in other consumer markets, particularly as confidence improved in November. U.S. retail sentiment was positive in November as the conclusion of the Presidential election eradicated the uncertainty surrounding the political process, regardless of which side of the fence one sits. Furthermore, retail sales increased by more than expected in October, prompting projections for a positive holiday season, and a possible interest rate hike by the Federal Reserve in December. Analysts at Standards & Poor’s predicted sales would rise 2.1 percent to 2.5 percent this holiday period compared to 2015’s muted season. Moody’s offered a more optimistic outlook of 3 percent to 4 percent supported by a gradually growing economy, low levels of unemployment and elevated levels of consumer confidence. “Retailers should benefit from healthy holiday sales growth after a disappointing season last year, but must manage promotional cadence to maintain margins,” Moody’s wrote. “Better credit availability for consumers, along with improving consumer confidence and wage growth and lower unemployment, will push sales growth this holiday season.”Article from the Rapaport Magazine - December 2016. To subscribe click here.
|
|