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Rapaport Weekly Market Comment July 25, 2014

Polished trading sluggish as weak Mumbai IIJS show loses appeal for diamond traders. Indian market hopeful new Modi government will boost economic growth and Diwali jewelry sales. Manufacturer margins and liquidity under pressure as rough prices increase in spite of declining polished prices. July De Beers sight estimated at $775M with 1%-2% price rise. ALROSA 1H production -7% to 15.9M cts., sales +13% to $2.7B, prices +6%. Global 2013 rough production +11% to $14.1B, volume +2% to 130.5M cts., average price +9% to $108/ct. India’s June polished exports -1% to $1.5B, rough imports +16% to $1.6B. Frederic Cumenal to replace Michael Kowalski as Tiffany CEO in April 2015.

RapNet Data: July 24
Diamonds   1,149,517
Value $7,406,137,696
Carats   1,286,225
Average Discount -27.09%

RAPI Chart

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  The digital transformation is a significant movement where daring business leaders venture into tomorrow's markets today. It isn't an initiative owned by a particular role or department in the organization; instead, it is a cross-enterprise realignment of resources to unify and enhance the digital customer experience at every touch point in order to be competitive in today's era of connected markets.

Brian Solis | Altimeter Group


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Global Diamond Production By Value +11%

Global diamond production by value rose 11% year on year to $14.09 billion in 2013 as the average price of rough diamonds rose, according to annual data published by the Kimberley Process Certification Scheme. By volume, global production increased 2% to 130.48 million carats, while the average price grew 9% to $107.95 per carat.

The value of Botswana’s production rose 22% to $3.63 billion with volume up 13% to 23.19 million carats. Russia ranked  second place with production up 8% to $3.11 billion and output up 8% to 37.884 million carats. Canada’s diamond production fell 5% to $1.91 billion but output rose 1% to 10.56 million carats. Namibia’s production rose 15% to $1.36 billion from 1.689 million carats and Angola's value of production jumped 15% to $1.28 billion from 9.36 million carats. Other trends noted that Zimbabwe's production fell 14% to $538.5 million for 10.41 million carats and that total rough exports by all member states increased 11% to $55.59 billion, while rough imports rose 6% to $53.76 billion.

IIJS Reports Minimal Diamond Trading

The India International Jewellery Show (IIJS) ended with diamond suppliers reporting relatively low volume of trading and some softening of prices for select goods. There was relatively small inventory of diamonds so the show often just focuses on building clientele.

Diamond suppliers noted that there were fewer international buyers at the show than in previous years and success really depends upon market research for local trends in the various regions of the country. Buyers from the north primarily sought lower-color goods, while those from the south focused on better color and clarity diamonds. Jewelry wholesalers reported steady sales at the show, but observed that retailers are still cautious, many are overstocked and so they are purchasing less than usual. The trade anticipates a stronger second half as the Diwali festive season approaches.

U.S. Jewelry CPI -5%

The U.S. consumer price index (CPI) for jewelry declined 4.5% year on year to 170.83 points in June. However, the reading was a touch higher than the index for both May and April. The CPI for watches, meanwhile, was down 0.8% year on year to 122.71 points. Somewhat stable to slightly lower prices for jewelry industry commodities have contributed to a declining CPI in the past several months.

The average price of gold in June was about 3% lower, while platinum was about 3% higher compared with June 2013. The RapNet Diamond Index (RAPI), the global benchmark for polished diamond prices, fell 3.2% year on year for 1-carat diamonds, while RAPI for 3-carat diamonds dropped 2.8% in June. However, RAPI for 0.30-carat diamonds jumped 10.2% and the index increased 6.2% for 0.50-carat stones.

Swiss Watch Exports +1%

Swiss watch exports rose 1.4% year on year to $2.065 billion (CHF 1.863 billion) in June, according to the Federation of the Swiss ‎Watch Industry.‎ Growth was spurred by stronger demand for watches with precious metals. Wristwatch exports rose 1.2% to $1.952 billion, while the number of units shipped grew by 4.8%. The value of other products increased by 9.2% to $50.6 million. Exports to Hong Kong fell 2.2% to $359.8 million, while exports to the U.S. dropped 0.5% to $206.3 million. Exports to Italy were up 14.5% to $132.8 million, while exports to Japan increased 20.4% to $130.6 million. Exports to China fell 6.8% to $128.5 million. Meanwhile, exports to Germany recorded a slight downturn and fell 1% to $114.3 million.

LVMH's Profit -4%

LVMH reported that revenue improved 3% year on year to $18.9 billion (EUR 14 billion) in the first half of the year, while the luxury group's share of profit slipped 4% to $2 billion. LVMH's same-store sales increased 5%. The retailer observed good sales resilience in Europe and continued growth in Asia and the U.S.

Sales across the company's jewelry and watches division fell 1% to $1.7 billion, while same-store sales rose 3% and operating profit dropped 31% to $144 million. Economic uncertainties continued to make multi-brand retailers prudent in their inventory replenishment. The performance in the brands’ own boutiques exhibited significant growth. Bulgari benefited from positive momentum in jewelry. TAG Heuer focused on the development of its iconic lines. The decrease in profit from recurring operations was principally explained by a negative exchange rate effect.

Swatch's Profit -12%

Swatch Group's sales increased 8.5% year on year to $5 billion (CHF 4.535 billion) at constant exchange rates in the first half year that ended on June 30. An overvalued Swiss franc strengthened further against currencies in all of the group’s important sales regions, negatively impacting revenue by $200 million or 4.5 percentage points. Swatch Group's profit fell 11.5% year on year to $754 million.

In the watches and jewelry segment, Swatch Group recorded sales growth of 8.8% at constant rates and 4.3% at current rates. Harry Winston made further significant investments in a wider product range and an increased availability of high-end jewelry, as well as in the new watch collection which was presented at Baselworld 2014 and which will be available in its retail stores in the second half of 2014. The brand also invested in renovation of its retail stores.

Retail Survival Requires Culture Change

High performance digital retailers are not only investing cash to improve the customer experience but the entire enterprise has bought into the digital revolution with every breath and passing thought. Retail executives who hold back their digital transformation -- for whatever reason -- severely risk their company's survival, according to Accenture.

The business consulting firm found that successful brands today have reversed their marketing culture to no longer focus on sales transactions, but instead they delight and invite consumers. Successful brands "empathize" with consumers rather than target them with constant product messages; so, engage, share and help customers without expecting an immediate return. Create dialog, stay on consumers’ radar and treat them as a continuous relationship that covers the spectrum of sales, service, retention and loyalty.

Accenture's research found that a winning strategy for digital performance empowers human cooperation across the enterprise, implements a full omnichannel customer experience, monitors real-time analytics for the purpose of immediate reaction on those insights, uses agile technologies and cloud-based services, re-orients marketing plans to harness digital trends on the fly and, finally, tests, learns and “fail fast” but recovers even faster.

Speed, Agility Drive Digital Transformation

Transforming a brand's digital landscape is not just an investment, but it requires the retailer to "put digital first" in the forefront of its entire staff, according to the Altimeter Group. Successful digital transformation initiatives lifted customer engagement 75%, improved customer satisfaction 63%, drove digital traffic 53% higher and increased lead generation and sales by 49%, according to Altimeter.

The group observed that the most successful digital transformation initiatives today embrace speed, human collaboration and company-wide participation. Digital transformation resistance, or lack of culture change, (especially at the top) was cited by 63% of enterprises as the reason their digital transformation failed. Other issues included, "sitting back to think things through" rather than taking the risk and moving fast (59%), lack of cross-functional collaboration (56%), lack of digital talent and resources (56%), lack of understanding for digital customer behavior (53%) and the need to secure executive support (42%) before taking action.

Nearly eight in 10 companies are budgeting to improve their omnichannel processes and to expedite changes to digital properties, such as website updates, new mobile or social platforms, while 71% are specifically updating their website and ecommerce programs for a mobile world. Transformation also includes integrated social, mobile, web, ecommerce, people services and investment updates to deliver a frictionless customer experience across the enterprise. Ongoing research into customer digital touch points, using thorough analytic services will result in the brand's ability to react, in essence, meeting the customer service immediacy of the digital landscape.

Physical Stores Are a Cornerstone to Digital Success

A.T. Kearney concluded that a physical store completes the ominchannel experience -- especially for fine jewelry. While online shopping will continue to grow, so too will the consumer desire for retail solutions that deliver anything, anytime, anywhere and anyhow.

Jewelers that develop effective value addition and track shopper engagement beyond “sales” will succeed. Without omnichannel in place, it is too easy for retailers to downplay their physical store.

A.T. Kearney measured five steps in the purchasing process and found that the "product discovery" phase often took place online; however, for the trial and test stage the majority of consumers preferred a physical store. In addition, for the actual purchasing stage, shoppers again preferred a store due to immediacy and added value. While delivery options varied by product, fine jewelry was one item that shoppers preferred to pick up in a store as opposed to having it delivered at home. As for "product returns," shoppers preferred physical stores. A.T. Kearney confirmed that 90% of all retail sales are transacted in stores and 95% of all retail sales are captured by retailers with a brick-and-mortar presence.

U.S. shoppers of all ages find physical stores more appealing than online only experiences, especially for the fine jewelry and home furnishing categories, as the sensory experience allows them to touch and feel products. What jewelers must do, however, is ensure that shoppers enjoy a remarkable brand experience online and in the store, hire engaging and expert sales associates and create an atmosphere of confidence in the store that reflects the quality of the product.

KGK Licenses Judith Ripka

Xcel Brands Inc., the parent company of the Judith Ripka label, signed an exclusive licensing agreement with KGK Jewellery Manufacturing Ltd. to take over the wholesale jewelry business under the Judith Ripka brand. This agreement will give KGK the license to manufacture, source, sell and distribute jewelry, including fine jewelry, diamond jewelry, and bridal jewelry, under the Judith Ripka label.

Sofisti to Head Gucci Jewels

Luxury retail giant Kering restructured its jewelry and watch division and appointed Sowind Group's CEO, Michele Sofisti, to the role of CEO of Gucci watches and jewelry beginning October 1. Kering will appoint a new CEO for Sowind Group in the coming months. In three years as the CEO of Sowind Group, Sofisti modernized the production capacities of Sowind Group and reorganized the product offer of both Girard-Perregaux and JeanRichard brands. Sofisti joined Gucci watches as strategic advisor in 2009 and he was promoted to CEO in 2010. In 2011, he was appointed the CEO of Sowind Group.

Cumenal to Replace Kowalski

Michael J. Kowalski, the CEO of Tiffany & Co., intends to retire on March 31, 2015. Kowalski, who has been a member of the company's board since 1995, will continue to serve as a non-executive chairman. The board has named Frederic Cumenal, pictured, currently the company's president, to succeed Kowalski as CEO on April 1. Kowalski, 62, joined Tiffany in 1983 and became CEO in 1999. Cumenal, 54, joined Tiffany in 2011 as executive vice president with responsibilities for worldwide sales and distribution. In 2013, his responsibilities were expanded to include the design, merchandising and marketing functions, and he was promoted to president and appointed to Tiffany's board.

De Beers Revises Sightholder Model

De Beers updated the model for allocating rough diamonds with respect to the March 2015 to March 2018 sightholder contractual period. Roughly 90% of goods (by value) are sold through sightholder sales and the new model will introduce stricter screening methods for determining rough buying eligibility. De Beers requires sightholders to practice transparent and ethical business practices for all financial and supply chain compliance issues.

But De Beers has also loosened up the way in which nonsightholders may purchase rough in the future with a simplified demand-based process. De Beers anticipates strong demand from across the manufacturing sector. The sightholder application period opens August 25 to 29.

ALROSA's Production -16%

ALROSA’s diamond production fell 16% year on year to 8.043 million carats in the second quarter that ended on June 30. It sold 8.4 million carats during the quarter, including 6.1 million carats of gem-quality diamonds at an average price of $200 per carat. Revenue from rough diamond sales for the first half of the year rose 13% year on year to $2.7 billion.

Quarterly production at the Aikhal division, which consists of the Jubilee pipe, Aikhal underground mine and Komsomolskaya pipe, declined 35% to 2.38 million carats. The Mirny division, which includes the International and Mir underground mines and various alluvial deposits, recorded a production decline of 13% to 1.553 million carats. The Udachny division reported a production decrease of 25% to 1.039 million carats, the Nyurba division's production fell 21% to 848,000 carats and production at Almazy Anabara increased 28% to 1.239 million carats.

First Nation Deal Signed

De Beers Canada Inc., Mountain Province Diamonds and the Lutsel K’e Dene First Nation entered into an impact benefit agreement for the proposed Gahcho Kué diamond mine. De Beers is the operator of the project and holds a 51% stake, while Mountain Province Diamonds owns a 49% share.

The agreement creates a framework for De Beers and the Lutsel K’e Dene First Nation to work together over the life of the mine, with a particular focus on local participation in the opportunities that construction and operations will provide. In addition, it recognizes local culture and customs and establishes that training, employment and business opportunities are made available to Lutsel K’e Dene members, including financial provisions necessary for ensuring fair participation in opportunities the project will provide.

Walsh Sets Pace for Bunder

Sam Walsh, the CEO of Rio Tinto, said that India has great potential for diamond mining as global demand continues to grow. Rio Tinto hopes to ramp up its pending Bunder diamond project in Madhya Pradesh sooner rather than later. Walsh expressed great hope that with a new government in place, the red tape involved with conducting business in India will diminish so that commodity suppliers can partner with the country's economic development.

Trans Hex Sells Subsidiary

The Trans Hex Group agreed to sell its 100% interest in subsidiary Pioneer Minerals Ltd. for about $3.3 million (ZAR 35 million) to Bondeo 140 CC. The deal marks a final step in Trans Hex's decision to dispose of mining and prospecting projects that were located between Douglas and Prieska in the Middle Orange River region of the Northern Cape Province in South Africa. Pioneer holds a diamond mining right on the farm Remhoogte and Bondeo owns other diamond mining and prospecting operations in the Middle Orange River region, where it holds a regional presence and extensive local knowledge.


  June $Mil. %Chng. YTD $Mil. %Chng.
Polished exports $1,469 -1% $10,125 -6%
Polished imports $662 -8% $3,366 -12%
Net exports $807 3% $6,759 -5%
Rough imports $1,596 16% $9,293 7%
Rough exports $111 -1% $781 -24%
Net imports $1,485 18% $8,512 12%
Net diamond account ($678)   ($1,753)  
Rough synthetic imports $3 -54%    
Total synthetic imports $5 -41%    
Total synthetic exports $6 100%    

Diamond Industry Stock Report

U.S. retail shares mainly higher except for Charles & Colvard (-6%) and Signet (-2%). Hong Kong shares little changed, Europe mainly lower led by Swatch (-2%). Indian shares all lower except for Goldiam, Rajesh Exports and Titan, all of which were flat. Mining shares mixed with Gemfields (-7%) and Stellar (+11%) defining a wide trading margin. Anglo (De Beers) reports results July 25 and shares closed the week +3%. View the extended stock report.

  July 17 July 17 Chng.  
$1 = Euro 0.743 0.739 0.004  
$1 = Rupee 60.07 60.61 -0.5  
$1 = Israel Shekel 3.42 3.43 -0.01  
$1 = Rand 10.53 10.76 -0.23  
$1 = Canadian Dollar 1.07 1.08 -0.01  
Precious Metals        
Gold $1,292.60 $1,318.50 -$25.90  
Platinum $1,462.00 $1,497.00 -$35.00  
Stock Indexes       Chng.
BSE 26,271.85 25,561.16 710.69 2.8%
Dow Jones 17,083.80 16,976.88 106.92 0.6%
FTSE 6,821.46 6,738.32 83.14 1.2%
Hang Seng 24,141.50 23,520.87 620.63 2.6%
S&P 500 1,987.98 1,958.13 29.85 1.5%
Yahoo! Jewelry 981.33 984.27 -2.94 -0.3%

Polished and Rough Trading Activity

Sentiment fell following a disappointing IIJS show for the diamond market. Trading remains slow and cautious as the liquidity crunch continues. Read the full report.


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