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Rapaport Weekly Market Comment Aug. 15, 2014

Diamond market demand shifting away from expensive better-quality goods toward lower-priced, commercial and promotional qualities. Dossiers doing well, although Chinese market is relatively slow. Rough trading cautious with stable prices expected at next week’s De Beers sight. Lucara Diamond Corp. 2Q revenue +50% to $71M, net income -31% to $16M. Sarine Technologies 2Q revenue +12% to $25M, profit +4% to $9M. Shrenuj & Co. 1Q revenue +35% to $220M, profit +21% to $3M, Asian Star 1Q revenue +32% to $139M, profit +56% to $3M. U.S. June jewelry store sales +3% to $2.4B. Japan June polished imports +7% to $80M. Global 2Q gold jewelry demand -36% to $21B.

RapNet Data: Aug. 14
Diamonds   1,178,924
Value $7,454,093,711
Carats   1,298,972
Average Discount -27.17%

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Gold Jewelry Demand Declines

Gold jewelry demand fell 36% year on year to $21.11 billion during the second quarter that ended on June 30, according to the World Gold Council. By weight, gold jewelry demand dropped 30% to 509.6 tonnes. Gold demand in general during the period fell 24% to $39.92 billion and declined 16% by weight to 1,063 tonnes, according to the World Gold Council.

The group explained that the decline in jewelry demand was predictably dramatic, given such high levels of demand one year earlier. In China, consumers adopted a cautious approach to gold jewelry purchases following a surge of buying activity in 2013. The value of gold jewelry demand fell 50% to $6.4 billion during the quarter, however, one year ago the demand had jumped 48%. The World Gold Council contended that demand in China simply turned back to more normal levels.

In India, gold jewelry demand fell 25% to $6.4 billion. The World Gold Council stated that an "unofficial flow of gold" into India continued during the second quarter, particularly during the first half as premiums were pushed higher. Such flow of gold will likely build momentum over the coming months as the market moves into the seasonally stronger period of Diwali and the wedding season. Gold jewelry demand across the Middle East plunged 31% to $1.9 billion. U.S. gold jewelry demand increased 5% to $1.1 billion. A 20% year-on-year decline in Turkish jewelry demand, was the result of domestic issues, according to the group, citing a clampdown on payment by credit card installments. U.K. consumers drove gold jewelry demand up 10% during the quarter and even better, up 25 percent for the first half.

NY Hosts India Diamond Week

The New York Diamond Dealers Club hosted its first India Diamond Week and, for the most part, all participants agreed that the initiative boosted sales and fostered new business relationships. There was some buyer price resistance given tight margins and high rough prices on the manufacturing side. Trading activity for rounds was centered on 1.50 carat to 2 carat, SI-VS, while trading was healthy for fancy shapes in 3-carat-plus sizes. Fancy colors were in demand, especially in pink and blue. Top-quality stones and sizes under 0.90-carats were weak.

U.S. Jewelry Store Sales +3%

U.S. jewelry store sales increased 3% year on year to $2.391 billion in June, according to government calculations. As reported earlier this month on Rapaport News, U.S. jewelry and watch sales from all retail channels rose 3.4% during the month, with jewelry sales up 3.3% to $4.886 billion and watch sales increasing 3.6% to $666.3 million. Jewelry store sales have improved 4.3% year on year to $15.34 billion in the first six months of 2014, whereas jewelry sales from all channels have risen 2.3% to $30.323 billion and watch rose 1.4% to $4.134 billion, according to Rapaport News calculations.

Meanwhile, advanced sales estimates from U.S. department stores declined 2.8% on year to $12.341 billion in July. However, retail sales estimates for all products and services in July jumped 4.2% to $446.3 billion. Retail trade sales rose 3.4% and nonstore retail sales increased 6.7% during the month.

Gitanjali's Profit +34%

Gitanjali Gems Ltd. reported that revenue fell 41.6% year on year to $250.8 million (INR 15.26 billion) in the first quarter that ended on June 30. Expenses were reduced 43% to $232.8 million and profit rose 34% to $13.1 million. Diamond segment revenue plunged 63.1% to $86.5 million, while jewelry revenue fell 12.7% to $172.1 million. Intersegment revenue, which is deducted from the total, more than tripled to $7.8 million. The company noted that restriction on gold imports and an unfavorable rupee exchange-rate against the dollar severely impacted results. Gitanjali's overdrawn amount on June 30 amounted to $16.5 million (INR 1 billion), mainly from not servicing interest debt during the period.

Ralph Lauren Preps for China

Ralph Lauren Corp. reiterated its commitment to expanding the luxury accessories business, including handbags and fine-jewelry and watches. The company stated that accessories business is the future growth opportunity, especially across Asia. Ralph Lauren reported that profit fell 10.5% year on year to $162 million in the first quarter that ended on June 28; however, revenue increased 3% to $1.7 billion.

The company plans to open a Ralph Lauren luxury flagship store in China in the third quarter. It anticipates global sales growth of between 6% and 8% this fiscal year, while the operating margin is reduced by 75 to 125 basis points due to continued investment in global retail development and infrastructure, in addition to increased advertising and marketing expense.

Jewelry Sales Decline at QVC

Liberty Interactive Corporation, the parent company of QVC, reported that revenue increased 4% year on year to $2.5 billion in the second quarter that ended on June 30. Group profit fell 5% to $255 million. QVC's revenue improved 3% to $2 billion; however, the division's operating income decreased by 2%.'s revenue, as a percent of total U.S. sales, jumped 157 basis points to 43%. The company added that QVC U.S. mobile penetration was 37% of orders. QVC U.S.'s sales rose for all product categories except for electronics and jewelry. Sales of jewelry items also declined in Japan and Germany but they rose in the U.K.

HSN Reports Lower Jewelry Sales

HSN Inc. reported that sales rose 5% year on year to $855.2 million for the second quarter that ended on June 30. HSN's net sales increased 6% to $556.5 million, including an 11% increase for its digital channel, while Cornerstone's net sales increased 4% to $298.7 million. HSNi observed that sales from mobile devices represented 15% of the total. The company's profit fell 5% to $40.9 million. During the quarter, HSN recorded increased sales for beauty, home design, and health and culinary, which were offset by lower sales for electronics and jewelry.

Sotheby's Profit +3%

Sotheby's auction sales rose 24% year on year to $2.7 billion during the first half of the year that ended on June 30. The company's revenue increased 21.2% to $492.6 million, while expenses rose 21.6% to $358.1 million. Profit for the first half increased 3% to $71.5 million, resulting in diluted earnings per share of $1.01. The company stated that continued strength in the global art market and by excellent spring sales worldwide for all categories drove Sotheby's adjusted operating income up 42%.

Shrenuj's Profit +21%

Shrenuj & Company Ltd. reported that group revenue jumped 34.9% year on year to $220 million (INR 13.443 billion) for the first quarter that ended on June 30. Expenses increased 36.4% to $209 million. The company's profit rose 20.9% to $3.3 million. Diamond revenue during the quarter surged 44.7% to $193 million, while studded jewelry sales slid 17.4% to nearly $31 million. Intersegment sales, however, plummeted 50.2% to $3.9 million.

Pandora's Profit +54%

Pandora Jewelry reported that its revenue increased 31.7% year on year to $456 million (DKK 2.544 billion) in the second quarter that ended on June 30. Gross margin as a percentage of sales improved to 70.7% compared with 66% one year earlier. The brand's profit surged 53.6% to $119 million. By region and local currencies, revenue rose 8.3% in the U.S., while it surged 22.7% across other countries in the Americas. Sales in the U.K. jumped 53.2% and they increased 12.6% in Germany, while all other areas of Europe reported an 82.1% improvement. Sales rose 38.4% in Australia and 157.4% for the rest of the Asia-Pacific division.

Pandora signed an agreement to acquire 27 concept stores from U.S. jeweler and franchisee Hannoush for $29 million. This transaction includes physical store locations, inventory and other assets. This is part of the process to refresh the network in Northeastern U.S.

Asian Star's Profit +56%

Asian Star Company Limited reported that its revenue grew 32% year on year to $139.4 million (INR 8.54 billion) for the quarter that ended on June 30. Diamond sales grew 45% to $126.8 million but jewelry division revenue fell 27% to $19 million. Expenses rose 32% to $134.4 million and profit rose 56% to $3.2 million.

New York Widens Ivory Ban

New York amended the state’s environmental law to ban elephant ivory, mammoth ivory and rhino horn sales. The new legislation enhances federal efforts to tighten the ivory trade ban across the board. The only exceptions for the sale of these products follow, according to the Jewelers Vigilance Committee:

• 100 year-old antiques comprised of less than 20% elephant ivory with documented proof of provenance;
• Musical instruments manufactured prior to 1975;
• Elephant ivory where transfer of ownership is for education and scientific purposes including to a museum authorized by special charter from the legislature;
• Elephant ivory where transfer is to a legal beneficiary of a trust or estate.

Existing license and permit holders may sell ivory and rhino horn as defined on their licenses and permits only until the current licenses or permits expire.

Sarine's Profit +4%

Sarine Technologies Ltd. reported that revenue grew 12% year on year to $24.7 million during the second quarter that ended June 30. The company's profit rose 4% to $8.6 million, as sales growth was partially offset by an increase in the company's corporate tax rate. Sarine’s strongest growth market for the quarter was across North America, where revenue jumped more than tenfold to $287,000. In absolute terms, most of the company’s growth occurred in India, the world’s main diamond manufacturing hub, where Sarine’s sales increased 19% to $20.2 million during the period.

Lucara's Profit -31%

Lucara Diamond Corp. reported that revenue grew 50% year on year to $71 million during the second quarter that ended on June 30. The average price of diamonds sold from the Karowe mine in Botswana, the company’s sole producing asset, rose 59% to $836 per carat during the quarter. Lucara’s profit fell 31% to $15.6 million and earnings per share declined by one-third to 4 cents. The drop in profitability resulted from higher operating costs as the Karowe mine processed lower-grade ore and increased capital expenditures as the company pursued its plant optimization plan.

Gemfields Auction Achieves $16M

Gemfields plc auctioned 11.6 million carats of emerald and beryl from its Kagem mine in Zambia for $15.5 million, or $1.34 per carat. The integrated gemstone mining company sold 17 lots from 21 offered and described the stones as mostly lower-quality. Excluding the sale of 1.5 tonnes of low-grade beryl, the average realized price was $3.61 per carat, according to the company. Gemfields has now held 16 auctions of emerald and beryl from the Kagem mine, totaling $276 million since July 2009.

Shore Gold Narrows Loss

Shore Gold Inc. reported a net loss of about $900,000 for the second quarter that ended on June 30. The explorer narrowed its loss from $1.6 million one year earlier. Shore Gold also reduced its loss for the first half of the year to $1.8 million compared with $3.1 million in 2013, as a result of lower exploration and evaluation expenditures related to the Start - Orion South diamond project.

The company has completed its technical review of the Star - Orion project through the Canadian Environmental Assessment Agency, submitted the final version of its Environmental Impact Statement, and has signed a memorandum of understanding with the James Smith First Nation, Peter Chapman Cree Nation and Chakastaypasin Cree Nation. Shore Gold stated that it continues to seek project development capital. As of June 30, the company recorded working capital of $2.7 million.

PL/117 Drill Targets Set for Sept.

ALROSA's geological report on exploration work for the PL/117 project in the Orapa area of Botswana identified four previously unknown mineralogical anomalies and two with geophysical anomalies. ALROSA and Botswana Diamonds are partnering on the project. The report identified strong mineralogical and geophysical anomalies for the northern part of the license AN117/2, which will be drilled in September. Target AN117/1, in the northwest area of the license, has a very strong mineralogical signature and it will be drilled in September after further geophysical work to pinpoint drill-hole sites.

Permit Issued for Gahcho Kue

The Gahcho Kué diamond project in the Northwest Territories of Canada received its much anticipated land use permit. Project operators, De Beers Canada Inc. and Mountain Province Diamonds, explained that the Mackenzie Valley Land and Water Board (MVLWB) issued Gahcho Kué a type A land use permit and sent a water license for final approval to the Minister of Environment and Natural Resources (ENR).

Gahcho Kué expects to employ close to 700 people during its two-year construction phase and approximately 400 people during its operational phase. De Beers owns a 51% share in the project, while Mountain Province Diamonds is a 49% stakeholder.

Diamond Industry Stock Report

U.S. shares were mostly higher except for Birks (-4%), while Far East shares were all higher, led by ValueMax (+7%). European shares were little changed, Indian shares were mixed but C.Mahendra (-27%) led declines. Mining shares mainly higher, led by Kennady Diamonds (+7%). View the extended stock report.

  Aug. 14 Aug. 7 Chng.  
$1 = Euro 0.748 0.748 0.000  
$1 = Rupee 60.92 61.52 -0.6  
$1 = Israel Shekel 3.47 3.48 -0.01  
$1 = Rand 10.55 10.77 -0.22  
$1 = Canadian Dollar 1.09 1.09 0.00  
Precious Metals        
Gold $1,314.00 $1,311.40 $2.60  
Platinum $1,461.00 $1,473.00 -$12.00  
Stock Indexes       Chng.
BSE 26,103.23 25,589.01 514.22 2.0%
Dow Jones 16,713.58 16,368.27 345.31 2.1%
FTSE 6,685.26 6,597.37 87.89 1.3%
Hang Seng 24,801.36 24,387.56 413.80 1.7%
S&P 500 1,955.18 1,909.57 45.61 2.4%
Yahoo! Jewelry 971.24 950.58 20.66 2.2%

Polished and Rough Trading Activity

Polished trading is relatively slow and the general mood is cautious and price sensitive, especially as the liquidity crunch continues. Read the full report.


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