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Rapaport Weekly Market Comment July 4, 2015

Polished prices continue to decline with June RAPI 0.30ct. -2.6%, 0.50ct. -2.4%, 1ct. -0.8% and 3ct. -1.9%. Diamond markets weak as U.S. goes on vacation. Hong Kong show very slow reflecting poor Far East luxury demand. Chinese buyers are delaying payments to polished suppliers. Liquidity is tight and manufacturers continue to lose money and reduce activity. More Indian companies file for bankruptcy with estimated $200M outstanding debt. Birks  FY sales +7% to $302M, loss of $8.6M vs. loss of $5.8M. RJC appoints Andrew Bone as executive director. Notable diamantaires Jacob Zupnick and Shlomo Moussaieff passed away this week.

RapNet Data: July 2
Diamonds   1,371,958
Value $8,200,434,878
Carats   1,321,260
Average Discount -26.53%

RAPI Chart
The RapNet Diamond Index (RAPI) has been revised to reflect the average price of the 10 best priced diamonds in each category.

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  [Central African Republic's rough diamonds] recovered during the sanction period will not be allowed for export. Even if the country is compliant, those contaminated goods cannot be sold.

Edward Asscher | World Diamond Council

KPCS Prepares CAR for Exports

The Kimberley Process Certification Scheme (KPCS) developed a framework to resume some rough diamond exports from the Central African Republic (CAR), which has been under a diamond embargo since May 2013. At the recent KPCS intersessional meeting in Angola, it was decided that government-controlled compliant zones in CAR would qualify to export rough only after implementing the framework and pending a clean review mission. 

A monitoring team is being created to identify compliant zones, audit stockpiles and assess a diamond footprint. CAR is reported to be holding inventory of 66,000 carats valued at between $6 million and $12 million. Edward Asscher, the president of the World Diamond Council (WDC), said that diamonds recovered while sanctions were in place are not eligible for export.

In other news, Venezuela is preparing to rejoin the KPCS and negotiations continue on appointing the United Arab Emirates (UAE) as the next chair, a term that begins January 1, 2016. The UAE must submit to a review mission and agree to projects with civil society members that explore supply-chain management and study transfer pricing, among other topics of concern.

SNZ Facility to Open in August

The Special Notified Zone (SNZ) at the Bharat Diamond Bourse (BDB) was originally scheduled to open for trading on July 1, however, the time frame was delayed about 45 days to ensure that all issues related to taxation have been addressed, according to Vipul Shah, the chairman of the Gem & Jewellery Export Promotion Council (GJEPC).

Shah explained that a private meeting will take place on July 6 between India's Ministry of Commerce, Rio Tinto, ALROSA and De Beers to bring greater clarity on matters related to the SNZ, primarily taxation. "For example, it is not clear what would be considered sales proceeds after the taxation proceeds -- what tax should be levied, etc. There are some gray areas. So, the Ministry shall meet with the mining companies, take their feedback and work on it."

Rajesh Exports Approves Acquisition Funds

The board of directors at Rajesh Exports Ltd. approved spending between $250 million and $500 million to acquire assets in Europe that would strengthen the "backward integration" of its gold business both in India and abroad. While India's press largely speculated on specifics of the plan prior to the board's vote, including citing insiders claiming the jewelry maker would acquire gold refiner Valcambi, Rajesh Exports filed a notice with the Bombay Stock Exchange (BSE) stating that no comments had been, nor would be, provided to the media on this matter. Still the news sent shares in the company soaring more than 20% for the week. The company's board authorized Rajesh Mehta, the company's chairman, to take all the necessary steps to complete a deal.

Hong Kong's Jewelry, Watch Sales Fall

Hong Kong's retail sales were flat in May, with a provisional estimate at $5 billion (HKD 39 billion), according to Xinhua news. However, sales of jewelry, watches and other valuable items plummeted 14.9% due in large part to a continuing decline in tourism. For the first five months of 2015, Hong Kong's retail sales have fallen 1.8% year on year.

Birks Group's Loss Rises to $9M

Birks Group reported that sales improved 7.3% year on year to $301.6 million in the fiscal year that ended on March 28. Comparable-store sales rose 16% in large part due to much higher average sale transactions. In the U.S., the average unit sales value rose 34%, while it increased 32% at stores across Canada. Cost of sales jumped 10.4% to $183.8 million and, in addition, the company recorded a $2.6 million restructuring charge. The retailer reported a loss of $8.6 million compared with a loss of $5.8 million one year earlier. At the close of Birks' fiscal year, inventory was valued at $135.7 million, down from $144.6 million one year earlier, while bank indebtedness declined 13% to $64.3 million.

Video: Sell the 'Diamond Story'

Watch Now: Stephen Lussier, the CEO of Forevermark, advised retailers to focus on "the story" of diamonds and improve the "quality" of diamond jewelry campaigns and digital outreach to attract customers. "What makes consumers buy diamonds is not the product and the price, it is the diamond dream, those emotional messages that make people want to engage in the category in the first place," he said. "I want to see more emotive communication...let's tell stories about diamonds."

Millennials' shopping patterns come from a different place as "the rational work" has been done before that age group enters the store, he said. Jewelers must engage millennials emotionally to make them feel connected with the story. Lussier acknowledged that producing quality content can be expensive, but he suggested ways for independent jewelers, with minimal budgets, to create high-quality campaigns that drive up diamond sales.

DDRC Tests for Undisclosed Synthetics

The Diamond Detection and Resource Centre (DDRC), which the Gem & Jewellery Export Promotion Council (GJEPC) opened at the Indian Diamond Institute (IDI), completed a month-long screening test of stars and melee, concluding that no synthetic stones had been mixed with natural diamonds, according to the Times of India. The report stated that 100 traders submitted 10,000 stones in all for the test. The results alleviated fears of widespread mixing of natural and undisclosed synthetic stones of a similar size.

Omnichannel Done Right

The top 10 U.S. retailers in terms of annual revenue, and as ranked by STORES magazine, held their positions for a second year due to having implemented a customer-centric, omnichannel focused business model. “The biggest retailers continue to get bigger because they embrace change,” said Susan Reda, the editor of STORES. The top 10 maintained "razor-sharp focus" on changes in consumer behavior and technology this past year, she said.

Walmart topped the list, followed by The Kroger Co., which operates Fred Meyer and Littman jewelers. Of the top 30 retailers that sell jewelry, Costco was No.3, Target was No.5, was No.9., Macy's No.15, Sears No.18 and Kohl's No.23. Hudson's Bay debuted on the list at No.80 due to its acquisition of Saks and Signet moved up to No.77 from No.99 due to its acquisition of Zale.

Common omnichannel strategies that operate across the largest retailers include: buy online, pick up in store; direct-to-customer fulfillment; same-day shipping and mobile shopping. Bryan Gildenberg, Kantar Retail’s chief knowledge officer, said, “For most of these retailers, save Amazon, well over 90% of their business is still store-based, so omnichannel innovation needs to be integrated into the store and the online experiences seamlessly."

Strive for Sophistication, Exclusivity

Luxury consumers in all regions of the world have become smarter and "more opportunistic" when shopping, according to consulting group The Bridge to Luxury (TBTL) and jewelry brands must adapt to these changes in order to survive. Information across the Internet has driven consumers to be better informed about products and pricing just as that data empowers skepticism of marketing that is simplistic or "too commercialized," TBTL stated.

TBTL advised luxury brands to meet the needs of consumers directly: be transparent, show how the brand implemented ethical practices across the enterprise and offer sophisticated, "exclusive" product. Citing the proposed collaboration between rivals Richemont, LVMH and Kering to join the platform Yoox/Net-a-Porter, TBTL said the strategy makes sense. Still, if the industry, all together, fails to arrest digital challenges and meet consumer expectations, the risk of losing market share to the cacophony of other products on the Internet is very high.

Fairtrade Gold Jewelry Sales Jump

Cred Jewellery in the U.K. said that Fairtrade gold bridal jewelry sales surged during the first half of 2015 at stores in London and Chichester and on online. Engagement ring sales jumped 60%, eternity ring sales increased 50% and wedding ring sales rose 46%. Cred's director, Alan Frampton, said that young consumers are seeking sustainable sources for their food, clothing and, more and more, couples want the same clean standards for their gold. "Fairtrade gold is the best ethical, transparent and independently certified source of gold and demand is growing fast,” he said.

U.S., India Issue Trademarks

The U.S. Patent & Trademark Office (USPTO) issued the trademark "Signet Direct Diamond Sourcing Ltd." to the Signet Group, the trademark "Captured Moments" to Michael Hill International and "Love. Brilliantly." to the Electronic Commodities Exchange LP, Abraham Klein and Martin Klein. Damiani International received USPTO approval for the trademark "D.Lace." In India, the Office of The Trade Marks Registry approved the trademark "Faberge" for Faberge Ltd.

Child Labor Issues Persist

According to the latest U.S. government report on global human rights violations, forced child labor in some diamond-producing regions remained an issue in 2014. The annual "Country Reports on Human Rights Practices," which tracked human rights violations for the purpose of guiding foreign policy decisions, confirmed child labor at diamond mining regions of the Central African Republic (CAR), the Democratic Republic of the Congo (DRC), Cote d'Ivoire, Liberia and Sierra Leone.

The report found no child labor in Angola's diamond industry; however, forced labor was prevalent in the artisanal diamond sector (as well as others) and many migrant workers were subjected to rights violations at the hands of private security companies that were guarding foreign diamond mining concessions. The U.S. observed that Angola did not investigate human rights violations and found diamond trading transparency remained problematic.

The U.S. determined that treatment of the Bushmen (also Saan or Basarwa) in Botswana remained an issue as there were no programs addressing discrimination against them or agreements on defining cultural lands, generally considered to be the Central Kalahari Game Reserve (CKGR). NGOs have, for several years, criticized Botswana for opening the CKGR for diamond mining and forcing the Bushmen out.

In CAR, in addition to child labor, the U.S. said diamond monitoring efforts were insufficient, mine workers were subjected to unsafe working conditions and that illegal diamond sales were taking place. CAR's rough exports have been under embargo since 2013 and the KPCS is reviewing this status.

While Europe has resumed diamond trading with Zimbabwe, the U.S. continues its sanctions on the Minerals Marketing Corporation of Zimbabwe, the Zimbabwe Mining Development Corporation, Marange Resources and Mbada Diamonds. The report noted widespread corruption at all levels of the government. In addition, nearly 3,000 households were resettled to make way for diamond mining and were promised compensation of $1,000, among other perks; however, only a handful of residents received payment and nearly all the families are struggling to survive without housing and means to support themselves. Zimbabwe also interfered with trade union activity, including the Zimbabwe Diamond Workers' Union.

RJC Appoints Bone as Exec. Director

The Responsible Jewellery Council (RJC) appointed Andrew Bone as the executive director. Bone has worked 38 years in the diamond industry, at De Beers Group, and has been actively involved in industry initiatives such as the KPCS, the Diamond Development Initiative and the World Diamond Council. In his executive role at RJC, Bone will work with the board of directors and the management team to further drive the group's value proposition across the jewelry supply chain.

RJC has more than 640 members, 400 of which have been certified against the organization's code of practices, with some also having achieved third-party certification for RJC's chain of custody standards. James Courage's role as board chair concluded June 30 and the vice chair, Charles Chaussepied, will assume the role of interim board chair July 1, pending the appointment of a new chairman of the board later this year.

Namdeb's CEO Departs in July

Namdeb announced that its CEO, Inge Zaamwani-Kamwi, will leave her position at the end of July to serve as a public sector adviser to Namibia's president. A replacement is expected to be announced at a later date. Elijah Ngurar, the chairman of Namdeb, praised Zaamwani-Kamwi's leadership for cementing Namdeb's position as the largest financial contributor to the nation's treasury.

Rio Tinto Exits Zimbabwe

Rio Tinto sold its 78% stake in Murowa Diamonds and its 50% share of Sengwa Colliery Ltd. for an undisclosed sum to RZ Murowa Holdings Ltd. of Zimbabwe. RioZim Ltd., which is an independent mining company in Zimbabwe, holds a 22% interest in Murowa Diamonds and a 50% stake in Sengwa and will assume the overall management of both. Rio Tinto stated that the future of these assets can be best managed by companies with existing interest in Zimbabwe, while not specifically addressing the proposed diamond-mining consolidation efforts underway by the government. Rio Tinto's diamonds and minerals CEO, Alan Davies, said that Rio Tinto remains committed to the Argyle and Diavik mines, while obtaining the approvals for its advanced Bunder diamond project in India.

Paragon's Loss Widens

Paragon Diamonds Ltd. generated a $16 million (GBP 10.3 million) loss in the fiscal year that ended on December 31, up from a loss of just $2 million in 2013. The company recorded a $14.5 million non-cash impairment charge as a result of divesting from the Motete dyke, a non-core asset. During the year, Paragon secured a 10-year mining lease at the Lemphane kimberlite project in Lesotho, which is renewable for three consecutive 10 year periods. One test sale of stones that were recovered from a bulk sampling project achieved values as high as $2,500 per carat, the company stated. Overall, however, the average value forecast for the project is between $930 to $1,025 per carat, eventually generating annual revenue of approximately $9 million to $10 million.

Paragon has signed an agreement to acquire the Mothae kimberlite mine in Lesotho from Lucara Diamond Corporation for $8.5 million. Mothae is expected to generate a number of high-value diamonds and Paragon anticipates generating $60 million a year over a minimum of 12 years of full production.

Kimberley Diamonds Preps Lerala

Kimberley Diamonds Ltd. received $5 million under the terms of a loan agreement for $10 million with Zhejiang Huitong Auction Co. Ltd. of China to finance the Lerala diamond mine in Botswana. The junior miner expects to receive the remaining $5 million on or before July 31. The funds will be applied to recommissioning Lerala, which Kimberley Diamonds expects to be a key source of revenue.

Separately, Kimberley Diamonds placed its subsidiary, Kimberley Diamond Company (KDC) Pty., which operates the Ellendale diamond mine, into voluntary administration and suspended the mine's operations. Ellendale's revenue has been negatively impacted by a lower recovery grade and size distribution, driving down prices for rough diamonds at auction. The company specifically noted a much lower than expected auction result in Antwerp last week due to a "sharp, unexpected decline" in the rough diamond market. The Ellendale mine earned the reputation as a leading source for rare, fancy yellow diamonds.

Diamond Industry Stock Report

Poor performance in the U.S. and Europe for diamond industry stocks this week, with Birks (-9%), Blue Nile (-2%), Signet (-3%), LVMH (-7%) and Swatch (-3%) all lower. In the Far East, Luk Fook (+3%) was ahead, while Indian shares were mainly higher except for C.Mahendra (-11%), Lypsa (-2%) and Vaibhav (-4%). Little change in mining shares, but Peregrine (-13%) and Anglo American (-8%) were the exception. View the detailed industry stock report.

  July 2 June 25 Chng.  
$1 = Euro 0.903 0.893 0.010  
$1 = Rupee 63.39 63.57 -0.2  
$1 = Israel Shekel 3.77 3.78 -0.01  
$1 = Rand 12.23 12.10 0.13  
$1 = Canadian Dollar 1.26 1.23 0.03  
Precious Metals        
Gold $1,166.00 $1,172.80 -$6.80  
Platinum $1,084.00 $1,084.00 $0.00  
Stock Indexes       Chng.
BSE 27,945.80 27,895.97 49.83 0.2%
Dow Jones 17,730.11 17,890.36 -160.25 -0.9%
FTSE 6,630.47 6,807.82 -177.35 -2.6%
Hang Seng 26,282.32 27,145.75 -863.43 -3.2%
S&P 500 2,076.78 2,102.31 -25.53 -1.2%
Yahoo! Jewelry 1,242.72 1,279.97 -37.25 -2.9%

Polished Trading Activity

Trading activity is very slow in the local polished market, with some defaults, along with rumors of more to come, worrying the trade. The market is facing severe liquidity issues.   Read the polished diamond trading report.


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