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Rapaport Weekly Market Comment Oct. 24, 2014

Rough prices discounted on secondary market as sightholders pay for the privilege of steady supply. Polished markets under pressure with liquidity concerns as Antwerp Diamond Bank begins shut down process and other banks tighten credit. Global diamond demand weak. Hong Kong trading declines as Chinese government restricts currency transfers and cracks down on corruption. Indian market closes for Diwali with soft holiday sales. U.S. market steady with good expectations for holiday season. Christies NY sells $34M (75% by lot). Chow Tai Fook 2Q retail sales -10%. ALROSA 3Q production -2% to 9.7M cts., De Beers +6% to 8.2M cts. We wish all our friends a happy, enlightening Diwali.

RapNet Data: Oct. 23
Diamonds   1,395,949
Value $7,878,008,755
Carats   1,412,685
Average Discount -27.45%

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  [W]e note a greater number of deep promotions during the month of October in the U.S., while it should typically be sequentially deeper, as it is a clearance month, we are more concerned with that increase, especially since inventory levels are in quite good shape. We believe retailers must rely on inventory conservatism to preserve merchandise margins and begin to control promotions better on a year-over-year basis.

Adrienne Yih-Tennant | Janney Capital Markets


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ALROSA's Production -2% in 3Q

ALROSA sold approximately $1 billion worth of diamonds during the third quarter that ended on September 30, according to the company's preliminary estimate. ALROSA sold 5.3 million carats of gem-quality goods with an average price of $182 per carat and 2.3 million carats of industrial stones for $16 per carat during the quarter. The company noted that group revenue for the first nine months of the year rose 8% year on year to approximately $3.7 billion for 28.8 million carats. ALROSA told investors that diamond market performance remained positive and that rough diamond prices have risen about 7% since January.

Production during the third quarter fell 2.1% year on year to 9.737 million carats; however, seasonal production growth at ALROSA's alluvial deposits helped to boost production compared with the second-quarter totals. ALROSA stated that production decreased, in part, due to the reduction in ore processing at its Udachnaya pipe, where output plummeted 39% to 293,000 carats and the company's Mirny division output contracted 67% to 621,000 carats. ALROSA's Aikhal division output jumped 21% to 2.981 million carats, while production jumped nearly 12% for the Nyurba division to 2.264 million carats. Severalmaz's production rose to 524,000 carats from 155,000 carats one year earlier and Almazy Anabara's output increased 17% to 1.82 million carats, however, Nizhne-Lenskoye's production slipped 12% to 1.234 million carats.

Production for the first nine months of 2014 has fallen 5% year on year to 25.655 million carats, however, ALROSA expects to achieve full year production of 36 million carats in 2014.

De Beers Production +6% in 3Q

De Beers production rose 6% year on year to 8.193 million carats in the third quarter of 2014, Anglo American reported. The increase was largely due to strong output at the company's Jwaneng mine in Botswana where production grew 27% to 3.3 million carats. Still, higher output from Jwaneng was partially offset by lower production from Canada and South Africa, where the Voorspoed mine's production dropped 40% to 143,000 carats and Venetia's output declined 13% to 776,000 carats.

In total, production from De Beers Consolidated Mines in South Africa decreased 17% to 1.126 million carats. Production at Debswana, a joint venture with Botswana, which included the Orapa, Letlhakane, Damtshaa and Jwaneng mines, rose 14% to 6.224 million carats. Production at Namdeb, which includes both terrestrial and marine mining in Namibia, increased by 1% to 449,000 carats. De Beers Canada production from the Snap Lake and Victor mines declined 19% to 394,000 carats. The company also reported progress at its developing Gahcho Kué project, after attaining the necessary permits and licensing.

During the first nine months of 2014, De Beers production grew 10% to 24.2 million carats. De Beers expects to produce 32 million carats in 2014, which is at the top end of the company's earlier guidance of between 31 million to 32 million carats.

U.S. CPI Eases for Jewelry, Rises on Watches

The U.S. consumer price index (CPI) for jewelry declined 3.8% year on year to 172.35 points in September, although it was the highest reading since January. The CPI for watches, meanwhile, rose 1.9% to 125.29 points, marking the highest reading since November 1997. Market prices for precious metals during the month remained under pressure with the average price of gold down approximately 7.5% compared with one year ago, while platinum experienced a difficult month as the average price fell about 10%.

Diamond price movement was mixed in September, according to the RapNet Diamond Index (RAPI), the global benchmark for polished goods. Polished prices for 0.30-carat rose 7.8% year on year, while they increased 7.6% for 0.50-carat stones, according to RAPI. However, polished prices for 1-carat diamonds fell 5.4% and prices were down by 3.2% for 3-carat diamonds. By comparison, the CPI for all product categories in September increased 1.7% year on year to 237.63 points.

Diwali Sales Point Higher

Gold prices were running about 7% lower this Diwali season compared with 2013, which appears to be giving a welcomed sales boost to retail jewelers across India. The All India Gems & Jewellery Trade Federation (GJF) anticipates that gold imports this quarter could increase by as much as 75% year on year, given easy comparisons with 2013 due to restricted imports, coupled with pent up consumer demand this quarter.

Rajesh Exports Ltd. anticipated jewelry sales rising between 30% and 40% during Dhanteras, and, as noted by several news reports, gold purchases were running 15% to 20% higher on average for Dhanteras. The Popley Group predicts gold and jewelry sales could improve between 20% and 30% for Diwali season. Haresh Soni of GJF observed positive consumer sentiment and strong rural demand for gold due to lower prices would boost overall trading. Consumers are favoring heavy jewelry and gold and silver coins so far this Diwali.

Sales Weaken at Chow Tai Fook

Chow Tai Fook's retail sales fell 10% year on year in its second quarter that ended on September 30, though the retail giant did not provide hard totals. Chow Tai Fook faced a high base effect caused by the gold rush one year ago. Group retail sales in Mainland China fell by 2% and declined by 20% in Hong Kong, Macau and other Asian markets. Chow Tai Fook attributed the slightly better performance in China to the relatively lower base effect compared with the other Asian markets, coupled with better consumer sentiment in China for gem-set jewelry during the period.

Chow Tai Fook's same-store sales growth of gem-set jewelry was flat, while gold product same-store sales decreased by 33%. Chow Tai Fook opened 58 new points of sale in the second quarter, including three in Hong Kong, Macau and other Asian markets. The company had 2,181 points of sale as of September 30.

Revenue Falls at Luk Fook

Luk Fook Holdings reported that same-store sales dropped 21% year on year in the second quarter that ended on September 30, with comparable-store sales falling 30% in Mainland China and plunging 20% in Hong Kong and Macau. Luk Fook did not provide hard totals. Gold product same-store sales fell 28%, while gem-set jewelry same-store sales declined 6%. The group had 1,333 points of sale as of September 30, which included 1,190 licensed stores in Mainland China and 143 self-operated stores consisting of 46 self-operated stores in Hong Kong, 10 stores in Macau, 82 shops in Mainland China and five overseas.

Additionally, Luk Fook reported that same-store sales for National Day Golden Week, which took place October 1 to 7, rose 28% in Mainland China. Gold jewelry same-store sales rose 29%, while gem-set jewelry grew by 28%.

Christie's NY Sale Achieves $34M

Christie's New York sale of important jewels achieved a total of $33.7 million and was 75% sold by lot. The top lot was a cushion-cut, 101.36-carat, L, VS2 diamond that sold for $4.98 million or an average $49,100 per carat. A rectangular-cut and circular-cut, 81.83-carat, K, VVS1, potentially internally flawless, faint brown diamond pendant necklace achieved $3.2 million, while a rectangular-cut, 23.89-carat, H, potentially internally flawless diamond sold for $1.6 million or $65,000 per carat. A rectangular-cut, 16.07-carat, F, potentially internally flawless diamond achieved $1.5 million or an average $93,700 per carat, while a rectangular-cut, 16.99-carat, G, VVS2 diamond sold for $1.3 million or $66,700 per carat.

Cash America's Profit -79%

Cash America International Inc. reported that its revenue rose 7.9% year on year to $472.2 million during the third quarter that ended on September 30. Net revenue, meanwhile, increased 11.9% to $276.4 million and expenses rose 5.9% to $231.4 million as loss rates from the consumer loan portfolio were lower overall and pawn-related revenue was higher. Total pawn loan balances in the U.S. were up 6.5% and same-store pawn loan balances were up 2.1%.

Profit fell 78.5% to $9.9 million, as management implemented plans that generated $14.1 million in after tax expenses related to the sale of non-strategic operations, the early repayment of long-term debt and a corporate reorganization for the retail services segment. One year earlier, Cash America gained an after tax net benefit of $21.9 million from a tax credit that was partially offset by a significant litigation settlement during the period.

Kalyan Jewellers Secures Funding

Kalyan Jewellers received a $196 million (Rs 1,200 crore) round of investment funding from an affiliate of Warburg Pincus for expansion. With 55 outlets across South India, Mahatashtra, Gujarat, Punjab and New Delhi, the brand aims to enter newer regions in India with a special focus on strengthening its existing presence in North and West of the nation. The brand also has a strong presence in the United Arab Emirates with six exclusive outlets. The investment will also enable Kalyan Jewellers to scale up its presence in the Middle East -- opening in Kuwait and Qatar -- and also enter Southeast Asia.

NRF: 25% Have Jewelry on Wish List

U.S. consumers who purchase gifts during the 2014 Christmas season anticipate spending an average of $596.53, according to the National Retail Federation's (NRF) annual holiday intentions survey. The anticipated figure represented an increase of 6.9% from actual gift spending in 2014, although the average is dramatically different by income segment. The NRF noted that U.S. consumers who earn less than $50,000 per year expect to spend $368.97 holiday gifts this year, while those earning more than $50,000 plan to spend $797.68, on average. Nearly 57% of U.S. consumers also plan to take advantage of retail sales or discounts during the Christmas season to make a self- or non-gift purchase with the average anticipated amount down 6% year on year to $126.66, according to the NRF.

The most popular gift item that consumers hope to receive is a gift card this year, as noted by 62% of those surveyed. Nonetheless, 24.8% said that jewelry or a precious metal accessory gift was on their wish list for 2014, a percentage that is on the higher side of the 10-year trend and the best since 2006 when 26% selected the jewelry category. Other popular wish list gifts were clothing (52.5%), consumer electronics (34.6%), books, CDs, DVDs, videos or games (43.1%) and items for the home (22.9%).

Sotheby's Plans Geneva Sale on Nov. 12

Sotheby's Geneva will hold its magnificent jewels and noble jewels sale on November 12, offering important jewels from the collection of Dimitri Mavrommatis, as well as a selection of historic jewels with noble provenance. The top lot from the noble jewels collection is a natural pearl necklace, formerly from the collection of Joséphine de Beauharnais, Queen of Sweden and Norway. The necklace, accompanied by an oil portrait of the queen wearing the piece is expected to fetch a price between $800,000 and $1.4 million.

Other top lots include a 55.19-carat, fancy yellow diamond pendant by Gübelin expected to fetch up to $2 million and a pair of perfectly matched D, flawless excellent polish, excellent symmetry, type IIa diamonds weighing 20.05-carat and 20.06-carat, cut from a 162.02-carat rough diamond. The pair of diamonds has a presale estimate of between $6.3 million to $8.3 million.

Sterling, Eurostar Receive Trademarks

The U.S. Patent & Trademark Office assigned the trademark "Diamonds In Rhythm" to Sterling Jewelers Inc., the U.S. subsidiary of Signet Jewelers Ltd., on October 14 with the registration number 4622350. The trademark was first used in October 2013 in marketing jewelry that is made in whole or with a significant part of diamonds. The USPTO also issued the trademark "EUROSTAR" to Eurostar Diamond Traders of Belgium on October 14 with registration number 4619155.

Russia Considers Law on Synthetics

Russia's Finance Ministry and ALROSA outlined an amendment to federal law that would oblige jewelers to mark synthetic diamonds and sell them separately, according to RBC News. The amendment was discussed in the State Duma's working group on natural resources, which considered man made stones not to be defined as precious stones. While lab-grown diamonds were not viewed as a threat to diamonds, ALROSA was concerned that synthetics are being sold as natural in stores and at some diamond exchanges, according to the report.

Core Jewels Adds NFC to Its 'One' Collection

Core Jewels unveiled a new collection of diamond jewelry in Japan that is branded "One" -- Time of Love. The collection features rings and matching pendants, all of which incorporate near field communication (NFC) technology that can unlock private digital content on computers and Android phones. With advanced NFC technology, an entrusted piece of jewelry now evokes the richness and emotional connection that will become the future of high-end jewelry, according to the company. The emotional connection behind "One" jewelry evokes an album of life where the wearer interacts and connects precious memories with loved ones.

Shane Co. Installs Retalon Omnichannel Solution

Shane Co. implemented Retalon inventory and assortment management solutions to maintain product assortment and inventory levels across all of its channels. Retalon provides retail predictive analytics solutions and, in Shane Co.'s case, which is very complex with thousands of jewelry products and loose gemstones, the service provider helped the jeweler to manage inventory more accurately, according to Tom Shane, the chairman of Shane Co. The jeweler stated that it reduced one of its main product lines by 40%, while also increasing sales in that same product line by 20%, using Retalon's solution. Shane Co.'s previous process required cumbersome data analysis, taking more than a month to complete, according to the firm, but predictive analytics rebalanced the jeweler's entire inventory in just 15 minutes.

Fairtrade Gold Enters Swiss Market

Max Havelaar Switzerland began to offer Fairtrade gold jewelry through Coop City and Christ Uhren & Schmuck, both parts of the Coop Group. The gold has been mined by Fairtrade gold mine Sotrami, which is located in southern Peru. Switzerland joins a number of Fairtrade gold markets where labeled and traceable gold jewelry is already available. After launching in the U.K. in February 2011, Fairtrade gold has expanded to Australia/New Zealand, Belgium, Canada, Denmark, Ireland, Luxembourg, Netherlands, South Korea, Sweden, Czech Republic, Hong Kong, Indonesia, India, Norway and Trinidad.

Hari Krishna Rewards Employees

Hari Krishna Exports Pvt. Ltd. celebrated Diwali in a big way by rewarding employees with cars, flats, foreign trips and SIva Collection-Kisna Diamond Jewelry. Overall, the company's gifts included 424 Fiat Punto cars, 207 apartments and 570 SIva Collection-Kisna Diamond Jewelry that were awarded to 1,201 employees from the manufacturing unit. In Mumbai, 86 employees were rewarded as well, which included foreign trips with their families and SIva Collection-Kisna Diamond Jewelry.

HRD Awards Four Retailers in China

HRD Antwerp recognized diamond jewelry retailers Chow Tai Seng, Kela, Splendia and Tesiro, with an HRD Antwerp Recognition Award in Shanghai. The recognition followed the retailers' relentless efforts to bring Antwerp's diamond heritage to the Chinese consumer through special programs. Serge Couvreur, the CEO HRD Antwerp, stated that the diamond craftsmanship and pioneering design that Antwerp is known for has begun to resonate across China's diamond jewelry market, in large part due to its retail partners.

Lucara Tender Achieves $46M

Lucara Diamond Corp. achieved $46.4 million from its third exceptional stone tender, which closed on October 21. The company sold 14 diamonds for an average price of $30,129 per carat, with 12 of the 14 lots offered achieving over $1 million and six diamonds fetching over $4 million. The highest value diamonds sold during the tender included a 203-carat diamond that sold for $8.2 million, a 239-carat stone achieved $7.2 million and a 141-carat diamond fetched $6.1 million. Lucara will report its third quarter results in November.

Stornoway Optimizes for Large Diamond Recovery

Stornoway Diamond Corporation optimized its plant design for the Renard diamond project in order to add large diamond recovery capacity early in the project. In January 2013, the plant's optimized feasibility study contemplated a diamond plant flow-sheet geared to recover diamonds up to 30mm in diameter (equivalent to a 200-carat round octahedral stone), leaving room to retrofit a large recovery capacity later, and a cost estimate of about $148 million (CAD 163 million), excluding capitalized operating costs.

But with new modifications made recently, the plant design will recover diamonds up to 45mm in diameter (equivalent to a 600-carat round octahedral stone), with a corresponding capital cost estimate of $130 million. Stornoway expects to pour concrete for the plant’s foundation in April, but continues to review design efficiencies in order to achieve cost savings. 

Stellar's Sample Beats Estimate

Stellar Diamonds recovered 196 carats, including several large diamonds, during trial mining at its Baoulé kimberlite pipe in Guinea. The sample yielded two octahedral diamonds weighing 5.50 carats and 5.10 carats. Additional diamonds recovered included a 3.10-carat, 1.90-carat, 1.30-carat and a 1.20-carat stone. Half of the diamonds recovered were classified as gem-quality and the average grade of 17 carats per hundred tonnes in the trial exceeded the expected minimum grade of 13 carats. The company expects to hold its first diamond sale toward the end of 2014.

Separately, Stellar said it increased health screening at its project sites and at the homes of the company’s employees due to the Ebola virus outbreak. The company also implemented restrictions on staff travel and a total ban on visits to the epicenters of the Ebola virus outbreak in Guinea.

Rio Extends CEO's Tenure

Rio Tinto's board extended the tenure of its CEO, Sam Walsh, and the chief financial officer, Chris Lynch, providing a strong endorsement of their leadership, the group’s strategy and its focus on driving shareholder value. Rio Tinto's chairman, Jan du Plessis, praised Walsh for his enthusiasm and request to extend tenure, adding both men had led a successful corporate transformation and established a track record of delivering on their promises. Over the past year, Rio Tinto has increased cash flow from operations, achieved significant operating cash cost improvements, reduced net debt and refocused capital expenditure on profitable projects.

Anjin Workers Strike

More than 250 workers at Anjin's mining operations in Zimbabwe went on strike, demanding back pay and better working conditions, according to The Zimbabwean. Workers claimed that even when management offered some payment weeks after the scheduled payday that the amount was only half of the normal salary. Anjin told employees that they have to fund ZANU-PF (political) events and pay royalties for diamonds mined. The Zimbabwe Diamond and Allied Workers Union (ZIDAWU) expressed deep concern that diamond miners pay slave wages, force 12 hour work days instead of mandatory 8 hours and that operations are shrouded in secrecy.

Diamond Industry Stock Report

As expected, nearly all industry stocks bounced back nicely this week. Birks (+9%) led gains in the U.S., while only Movado (-2%) was down and all European shares were higher, led by Damiani (+9%). Far East shares were higher except for Luk Fook (-2%). Indian shares were mixed with C.Mahendra (-17%) and Rajesh Exports (+6%) defining the spread. Miners were slightly lower except for Kennady (+22%) and Stellar (+19%). View the extended stock report.

  Oct. 23 Oct. 15 Chng.  
$1 = Euro 0.790 0.780 0.010  
$1 = Rupee 61.18 61.56 -0.4  
$1 = Israel Shekel 3.77 3.70 0.07  
$1 = Rand 10.97 11.09 -0.12  
$1 = Canadian Dollar 1.12 1.13 -0.01  
Precious Metals        
Gold $1,232.30 $1,239.60 -$7.30  
Platinum $1,253.00 $1,257.00 -$4.00  
Stock Indexes       Chng.
BSE 26,851.05 26,349.33 501.72 1.9%
Dow Jones 16,677.90 16,141.67 536.23 3.3%
FTSE 6,419.15 6,211.64 207.51 3.3%
Hang Seng 23,333.18 23,140.05 193.13 0.8%
S&P 500 1,950.82 1,862.49 88.33 4.7%
Yahoo! Jewelry 1,144.01 1,095.09 48.92 4.5%

Polished and Rough Trading Activity

The market is weak except for last minute orders before Diwali holidays. Dealers hope for momentum to build from a round of Christmas season demand. Buyers remain very price sensitive and liquidity is very tight. Read the full report.


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