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Rapaport Weekly Market Comment March 6, 2015

Hong Kong show just meets low dealer expectations with few Chinese buyers. Chinese middle class growing with continued demand for under-the-carat lab-graded stones, but excess inventory is limiting sales. Govt. anti-corruption campaign against conspicuous consumption sharply reducing demand for large expensive stones. Large 3ct+ diamonds not liquid at current price levels. Chow Tai Fook’s gem-set jewelry China same-store sales +62% over Chinese New Year, HK/Macau -17%. Indian cutters stressed about profitability as market liquidity evaporates. De Beers Feb. sight estimated at $550M, average price -2%. U.S. Jan. jewelry sales -2% to $4B. India’s State budget disappoints gem trade.

RapNet Data: Mar. 5
Diamonds   1,588,428
Value $8,630,444,967
Carats   1,475,221
Average Discount -22.88%

RAPI Chart
The March 1, 2015 increase in RapNet Price Indices (RAPI) reflects a decision by a number of large Indian based suppliers to price diamonds at full Rapaport List prices and not a sharp increase in diamond prices.

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  The Indian finance minister has completely overlooked one of the most significant areas to curb black money and a long pending demand from the gem and jewelry industry to reduce the gold import duty. Smuggling of gold plagues the industry and leads to illegal trading and the duty reduction would have helped us control the issue to a very large extent.

Vipul Shah | GJEPC

RAPI for 1ct. +1% in February

Polished diamond prices remained under pressure in February. There was some improved market sentiment ahead of the Hong Kong show, but trading volume remained constrained and liquidity tight across the manufacturing centers. Buyers lacked confidence to make large inventory purchases and limited their buying to fill existing orders.

The RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds rose 1% in February. RAPI for 0.30-carat diamonds declined 1.3%, while RAPI for 0.50-carat diamonds fell 1.4%. RAPI for 3-carat diamonds dropped 0.5% during the month. Polished prices softened as traders believe the market hasn't yet bottomed out. Geopolitical issues added to the uncertainty, with Russia and Middle East demand slumped along with the ruble and oil prices. Chinese demand for large diamonds also weakened due to the government’s campaign against corruption and conspicuous consumption. Diamantaires looked to the U.S. for support where there was good demand for SI-I2 clarity diamonds.

HK Show: Business as Usual

The diamond portion of the Hong Kong show lacked the hustle and bustle of exhibitors trading among themselves and visitor traffic was on the light side. Still, there was business being conducted, with demand centered on specific categories.

In general, there was good demand for under 1-carat, H-M, SI diamonds, suitable for the middle-income classes. Prices held relatively stable, at their current low levels, and buyers were hesitant as they suspect prices might soften further, but sellers generally held their ground even if they compromised a bit to close a deal. Global show circuit results are fairly clear at this stage, so dealers must ask themselves how successful they can be if "exceeding low expectations" is the best outcome. Diamantaires must break with simply conducting “business as usual” at these shows by adding real value to their diamonds, to their clients and the industry. Once that occurs, a show in Hong Kong, Basel or Las Vegas could be a game changer for the industry.

De Beers Sight Estimate at $550M

De Beers February sight closed with an estimated value of $550 million and rough diamond prices declined an estimated 2% to 3%. Minor improvements in assortment qualities were also reported. Sightholders said deferrals were lower than they had been in January, but still remained relatively high. Notably, De Beers continued to allow sightholders to defer up to 25% of their requested goods without penalty through March, the last sight of the current contract period.

Sightholders noted that there was a small amount of ex-plan goods made available during the sight. Market sentiment among sightholders and rough brokers improved compared with the sight in January and trading in the secondary market for De Beers boxes picked up this month -- with most boxes trading at around cost. Average credit terms reached 90 days for most boxes, with many diamantaires noting that liquidity in the market is still tight. De Beers contended that the rough market is coming back into better balance as retail polished demand works its way through to the rough market and polished prices have started to stabilize.

U.S. Jewelry, Watch Sales -2%

U.S. jewelry and watch sales across all channels fell 1.9% year on year to $4.55 billion in January, according to preliminary figures. Data revealed that jewelry sales fell 1.6% to $4 billion, while sales of watches contracted 4.8% to $532 million during the month. In addition, January became the fourth consecutive month with sales declines in the sector. As expected, sales totals were revised slightly lower for December. In all, combined jewelry and watch sales growth in 2014 was narrowed to just a 1% year on year gain at $78.595 billion with jewelry sales totaling $69.164 billion and watch revenue reaching $9.436 billion.

Berkshire's Retail Sales Improve

Berkshire Hathaway reported that revenue from its retail division rose 3% percent year on year, representing $134 million in additional sales, in 2014. The holding company did not provide totals for each of its retail brands that include Borsheims Fine Jewelry, Ben Bridge Jeweler and Helzberg Diamonds, as well as four home furnishings businesses, See’s Candies and Pampered Chef. The retail sector's pre-tax earnings declined 9%, or by $32 million, compared with 2013. Berkshire Hathaway’s overall group revenue rose 7% year on year to $194.67 billion in 2014, while profit grew 2% to $19.87 billion. 

Luk Fook's Sales Drop

Luk Fook Holdings Ltd. reported same-store sales across all operations for the Chinese New Year Festival fell 21% year on year. Comparable-store sales for gold dropped 29%, while gem-set jewelry sales declined 10%. The company did not provide hard totals. However, in Mainland China same-store sales rose 15% with comparable-store sales of gold up 3% and sales of gem-set jewelry up 65%. The figures for Hong Kong and Macau were bleak as overall comparable-store sales fell 25%, with gold down 34% and gem-set jewelry lower by 14%.

Chow Tai Fook's Sales Rise

Chow Tai Fook reported that revenue grew 9% year on year during the Chinese New Year holiday shopping period and was spurred by strong sales of gem-set jewelry in Mainland China. However, the company did not provide sales figures. Revenue from Mainland China rose 22% for the festival, while sales in Hong Kong and Macau dropped 24%.

The company's same-store sales over Chinese New Year decreased 4%. In Mainland China, same-store sales grew 11%, while comparable-store sales in Hong Kong and Macau fell 29%. Total same-store sales for gem-set jewelry increased 26% during the holiday period, led by a 62% jump for Mainland China. Gem-set jewelry sales fell 17% in Hong Kong and Macau. Gold product sales in Mainland China fell 2% but in Hong Kong and Macau they plunged 38%.

U.S. Jewelry CPI -4%

The U.S. consumer price index (CPI) for jewelry dropped 4.1% year on year to 166.07 points in January, which was about 4 points higher than December's reading. Comparatively, the CPI for watches rose 2.3% to 122.79 points in January, which resulted in a new index high for the month.

Meanwhile, diamond prices during January contracted, according to the RapNet Diamond Index (RAPI), the global benchmark for polished prices. RAPI for 1.00-carat diamonds plunged 10.2% year on year, while RAPI for 0.30-carat stones fell 8.8%, RAPI for 0.50-carat dropped 3.1% and RAPI for 3.00-carat diamonds declined 6.7%. Gold prices in January rallied to their highest level since July; however, the run failed to boost the average price, leaving the metal about 6% lower than one year earlier. Platinum, on the other hand, remained under pressure, falling about 15% in January compared with 12 months ago. Silver plunged 19%.

The CPI for all consumable product categories in January was basically unchanged from one year ago, down 0.1%, at 233.7 points.

Sotheby's Promotes David Bennett

Sotheby’s appointed David Bennett to the newly created position of worldwide chairman of jewelry. In his new global role, Bennett — who is based in Geneva, Switzerland, will help design and implement a strategy of continued expansion and business development for the jewelry branch of the auction house. Jewelry sales at Sotheby’s in 2014 garnered $603 million, the highest annual total for the category ever. It also marked the third year in a row of record jewelry sales for Sotheby’s.

Bennett has been with Sotheby’s for 40 plus years, joining the firm in 1974. During that time he has sold seven diamonds over 100 carats earning him the title “100- Carat Man.” In December of 2013, Bennett was named among the top 10 most powerful people in the art world by Art + Auction magazine and in June 2014 he made the list of the top 50 “most influential persons in Switzerland” published by Bilan, a Swiss financial and business magazine.

Over the years, Bennett has overseen several high profile sales. In addition he co-authored two books with Daniela Mascetti, "Understanding Jewellery," which has been in print since 1989 and is widely acclaimed as the consummate reference book, and "Celebrating Jewellery," published in 2012.

Swiss Watch Group Launch Smartwatches

Manufacture Modules Technologies (MMT) of Geneva, a Swiss joint venture between Fullpower Technologies of California and Union Horlogere Holdings, launched the MotionX Horological Smartwatch Open Platform. Fullpower will create and manage the schematic design, firmware, smartphone applications, as well as the cloud infrastructure for the watches, while MMT will manage the Swiss watch movement development, production and licensing and support for the watch industry.

Powered by MotionX®, the Swiss Horological Smartwatches offer bi-directional communication with iPhone and Android apps, while maintaining traditional Swiss watch craftsmanship. There is no digital screen on a Swiss Horological Smartwatch, so the timepiece retains a classic look. The first smartwatches will support a two-year battery life, activity tracking such as sleep monitoring, sleep cycle alarms, get active alerts, adaptive coaching and the MotionX cloud to backup and restore data. The initial partners include watchmakers Frederique Constant, Alpina and Mondaine.

Forevermark Confirms Strategy Works

The Forevermark diamond brand confirmed that it experienced strong growth in 2014 with the retail value of sales topping out around $750 million, according to Stephen Lussier, Forevermark's CEO. In addition, Forevermark's store presence increased 20% year on year to 1,542 locations. Demand for the branded diamonds was strong in the U.S. and increasingly higher in India and China due to an emerging middle class.

Lussier stated that consumer preference for branded diamonds and diamond jewelry should increase in 2015, and given Forevermark’s ethical background, assurance, quality and integrity, it is positioned to succeed above all others. Forevermark’s licensee program expanded in Turkey during the year and just since the launch in May, the brand is now available in 42 stores through an exclusive partnership with Zen Diamond. In addition, Middle East partner Damas opened a new store in Saudi Arabia that sells Forevermark diamonds. The brand also launched in Botswana.

The Forevermark Diamond Institute inscribed its one millionth diamond in 2014, while grading of stones increased 67% year on year and inscriptions rose 47%, according to the group.

Minister's Budget Disappoints

India's Finance Minister, Arun Jaitley, presented the fiscal budget for 2015 and with a couple of exceptions, industry leaders felt it missed key growth initiatives that are tied to the "Make in India" scheme. Mehul Choksi, the chairman of the Gem and Jewelry, Luxury and Lifestyle Forum (GJLL) of FICCI (Federation of Indian Chambers of Commerce and Industry), said that none of the relief measures that were recommended to boost the jewelry manufacturing sector under the "Make in India" initiative were even considered.

Choksi said, “The finance minister has announced a slew of measures to curb black money in India, while ignoring one of the biggest issues due to gold smuggling to the tune of 180 tons that has come into India through unofficial channels in 2013.” Choksi contended the impact of this unofficial supply of gold is valued at about $10 billion, "leading to a loss in foreign exchange inflow of a similar amount and a loss in revenue of over $1 billion on account of customs duty.”

The chairman of the Gems & Jewellery Export Promotion Council (GJEPC), Vipul Shah, said, “As far as the gems and jewelry industry is concerned, our only reaction is disappointment. The finance minister has completely overlooked one of the most significant areas to curb black money and a long pending demand from the gem and jewelry industry to reduce the gold import duty. Smuggling of gold plagues the industry and leads to illegal trading and the duty reduction would have helped us control the issue to a very large extent.”

Choksi found one initiative in the budget that he agreed with. “The gold monetization announcement is a positive initiative by the government and we hope that it is implemented well and is investor friendly.”

Shah, too, appreciated this move by the finance minister stating, “We commend the finance minister’s effort to identify innovative ways to reduce demand for overseas gold demand and control the current account deficit by introducing the gold monetization scheme to and Indian gold coins.”

Court Annuls Tiffany's Payout to Swatch

The ordinary court of first instance (District Court) of Amsterdam annulled a $450 million arbitration charge that Tiffany & Co. paid to the Swatch Group. Swatch originally sued Tiffany in 2011 over a failed partnership that began in December 2007. Swatch initially sought damages of between $75 million and $4 billion, promting Tiffany to counter sue for damages of between $125 million $550 million. Ultimately, Tiffany paid CHF 402.7 million plus court fees, interest and other costs.

One year ago, Tiffany petitioned the court to set aside that arbitration award on statutory grounds, which is permitted under Dutch law. Tiffany stated that should Swatch appeal this decision, the annulment action will not be resolved for at least 18 months. In its own statement, Swatch vowed to contest the court's ruling, defining the decision as "purely formal" and "is not enforceable and has no material consequences" for the group.

Trans Hex Observes Lower Prices

Trans Hex sold 27,553 carats from its South Africa operations for $30.5 million between October and February, but the group observed that average prices fell 25% from earlier in the year as it offered far fewer special-sized stones. Eleven stones achieved better than $10,000 per carat, including one exceptional pink diamond of 2.70 carats from the Baken mine, which garnered $60,722 per carat. A 42.60-carat diamond from Baken sold for $988,888. In Angola, Trans Hex holds a 33% stake in the Somiluana mine where sales totaled $15.1 million for 37,302 carats between October and January. Here too, the average rough prices achieved fell 21% compared with earlier in the year due to variations in the size and quality of the stones offered, as well as a slight decrease in global prices.

Gemfields Auction Exceeds $14M

Gemfields plc. sold 10.1 million carats of lower-quality emeralds and beryl from its Kagem mine in Zambia for $14.5 million, or an average of $3.72 per carat. The auction set a new record average value per carat for lower-quality emerald. The auction took place in in Lusaka and was 73% sold by lot and 88% sold by value with 21 companies in attendance. Ian Harebottle, the CEO of Gemfields, explained that the company has held seven auctions in Lusaka over the past 22 months.

ALROSA Divests of Bank

ALROSA sold its 84.66% stake in MAK-Bank to Expobank, on February 26, following approval from the Central Bank of Russia. The sale was part of the company's non-core asset disposal plans to focus its operations exclusively on diamond mining, ALROSA said. MAK-Bank has 10 offices in Russia and provides services to companies and individual clients, including ALROSA employees and Yakutia residents. Expobank operates 17 offices in Moscow, Saint Petersburg, Novosibirsk, Kemerovo, Yekaterinburg, Perm, Krasnoyarsk and Surgut.

Diamcor Records a Loss

Diamcor Mining's revenue plunged 37% year on year to $708,918 (CAD 886,343) during its third fiscal quarter that ended December 31. Diamcor, which operates the Krone-Endora at Venetia project, said that the amount of rough diamonds sold dropped 10% to 3,579 carats at an average price of $222 per carat. The company noted that it recovered an additional 1,678.18 carats that were held in inventory at the end of the quarter. Diamcor estimated the value of its rough diamond inventory at $281,712, as of December 31. The company reported a loss of $515,070 for the quarter, compared with net income of $97,546 a year ago.

Simpson Joins True North's Board

True North Gems Inc. appointed Raymond Simpson to its board of directors. Simpson has more than 20 years of experience in the diamond industry and is currently the managing director of Diamond Asset Advisors, a Swiss based alternative investment advisor that specializes in diamond related investment and financial products. Until recently, Simpson was an executive vice president of Dominion Diamond Corp., which he joined in 2003, when the mining company was known as Aber Resources, to oversee a strategic expansion into retail.

Diamond Industry Stock Report

Industry shares sank into negative territory this week, with all U.S. shares lower except Kohl's (+3%). Far East shares fell on weak Chinese New Year sales, led by Luk Fook (-14%). European shares were mixed with Damiani (+6%) ahead and Swatch (-2%) behind. Indian shares  lower, except Classic Diamond (+7%) and Lypsa (+3%). Mining shares took a hit, except for ALROSA (+6%), Mountain Province (+2%), Gemfields (+3%) and Stellar (+3%). View the detailed industry stock report.

  Mar. 5 Feb. 26 Chng.  
$1 = Euro 0.910 0.890 0.020  
$1 = Rupee 62.46 61.73 0.7  
$1 = Israel Shekel 4.00 3.96 0.04  
$1 = Rand 11.84 11.54 0.30  
$1 = Canadian Dollar 1.25 1.25 0.00  
Precious Metals        
Gold $1,197.00 $1,209.10 -$12.10  
Platinum $1,177.00 $1,171.00 $6.00  
Stock Indexes       Chng.
BSE 29,448.95 28,746.65 702.30 2.4%
Dow Jones 18,135.72 18,214.42 -78.70 -0.4%
FTSE 6,961.14 6,949.73 11.41 0.2%
Hang Seng 24,193.04 24,902.06 -709.02 -2.8%
S&P 500 2,101.04 2,110.74 -9.70 -0.5%
Yahoo! Jewelry 1,326.42 1,332.03 -5.61 -0.4%

Polished Trading Activity

The market activity is slow but its main focus remains on Hong Kong, where reports of trading have been discouraging. There is some demand locally but companies are unable to fulfill orders due to the unavailability of certain goods that went to Hong Kong. Few financial issues in the market are also worrying traders. Read the polished diamond trading report.


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