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Rapaport Weekly Market Comment July 21, 2016

Markets weak during summer trading lull. Dealers frustrated by sluggish demand, rising inventory and tight profit. Rough market quiet with lower premiums during ALROSA sale. De Beers 1H production -15% to 13.3M cts., sales +29% to 17.2M cts., prices -14% to $177/ct. ALROSA 1H production -16% to 16.9M cts., sales +21% to 21.7M cts., prices -3% to $117/ct. Rio Tinto 1H production +2% to 8.96M cts. Letšeng 1H sales flat at $106M, average price -16% to $1,899/ct.Israel 1H polished exports -14% to $2.6B. Chow Sang Sang warns 1H profit -50%/-60%. Luk Fook 1Q same-store sales -22%. Morgan Stanley predicts lab-grown diamonds to capture 15% of melee market, melee prices under pressure.

RapNet Data: July 21
Diamonds 1,222,805
Value $7,963,113,027
Average Discount -30.04%

RAPI Chart
The RapNet Diamond Index (RAPI™) is the average asking price in hundred $/ct. of the 10 percent best priced diamonds, for each of the top 25 quality round diamonds (D-H, IF-VS2, GIA-graded, RapSpec-A3 and better) offered for sale on RapNet - Rapaport Diamond Trading Network.

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  Improved technology and economics, and potentially more receptive consumers have propelled lab grown diamonds into a serious potential disruptor of a jewelry category that has existed for more than a century. Diamond miners can contain the threat, but it could be costly.

Morgan Stanley analysts on publication of a research note ‘Game of Stones’ about the potential impact of lab-grown diamonds.

United States: Trading quiet after dealers returned from vacation. Tough to sell goods that are not typical, commercial-quality diamonds for engagement ring market

Belgium: Polished market slow. Dealers buying only what they need before vacation begins (August 1 to 22)

Israel: Sentiment weak with July trading slower than usual. Some suppliers discounting to improve turnover and increase liquidity

India: Some U.S. and Chinese buyers in Mumbai looking for bargains but trading slow and sentiment weak. Quiet market expected through August

Hong Kong: Dealer market quiet but stable during seasonally slow period. Jewelers only buying for specific customer demand and not for inventory as retail sales contract

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De Beers Sales Volume Soars

De Beers sales volume surged 29% from a year ago to 17.2 million carats in the first half as diamond manufacturers restocked inventory that had depleted toward the end of 2015. Average realized prices dropped 14% to $177 per carat, while De Beers price index declined 8% since January. De Beers has scaled back its mining operations in the weak market conditions, resulting in production declining 15% to 13.314 million carats in the first six months of 2016.

ALROSA’s Second-Quarter Sales Buoyant

ALROSA’s rough diamond sales climbed to at least $1.2 billion in the second quarter, up 19% from a year earlier. Sales volume jumped 7% to 9.6 million carats, while the average price advanced 12% to $127 per carat. Brokers noted demand slowed at this week’s July sale as the market has started to cool. ALROSA revised down its production plan for 2016 to 37 million carats, from 39 million carats. Output dropped 6% to 16.9 million carats in the first half.

India’s Rough Trade Slows in June

India’s rough imports plunged 20% to $1.2 billion in June after De Beers reported lower demand reflected typical seasonal patterns during the month. Rough exports surged 27% to $130 million. Polished exports from the world’s largest diamond manufacturing center were flat at $1.85 billion, while polished imports rose 5% to $252 million. India’s net diamond account more than doubled to $519 million, representing the added value of the diamond trade.

Israel’s Diamond Trade Slides amid Weak Sentiment

Israel’s polished diamond exports fell 14% to $2.61 billion in June as shipments dropped to the U.S. and Hong Kong, its two largest markets. Polished imports slid 10% to $1.62 billion. Rough imports were flat at $1.63 billion, while rough exports increased 2% to $1.39 billion. Israel’s net diamond account declined 23% to $756 million. Dealers noted a tough trading environment this year as global demand continues to decline and Israel struggles to maintain its place in the market.

Chow Sang Sang Issues Profit Warning

Chow Sang Sang warned profit is expected to plunge 50% to 60% for the first half of 2016 as consumer sentiment in China and Hong Kong weakened. The jeweler attributed the slump to a decline in sales turnover and unrealized losses from its gold hedging activities. The drop in net income would be higher had it not been for a one-off gain of $31.7 million (HKD 246 million) from a disposal of shares in Hong Kong Exchanges and Clearing Limited in 2015.

Luk Fook Extends Quarterly Revenue Declines

Luk Fook Holdings same-store sales at self-operated locations dropped 24% over the three months that ended March 31. The performance was weighed down by a 26% drop in gold sales and a 19% slide in gem-set jewelry from a year ago. The company noted sluggish retail sentiment in Hong Kong and Macau and a steeper drop in Mainland China, where gem-set jewelry products “started to decline.”

Swatch having a Tough Time

Swatch Group net income slumped 52 percent to $266.5 million (CHF 263 million) due to continued global economic volatility and the impact of an “overvalued” Swiss franc. Sales fell 11% to $3.77 billion (CHF 3.72 billion) weighed by its wholesale division. Positive sales in Southeast Asia and the Middle East could not compensate for weakness in Hong Kong and Europe. Swatch singled out the Harry Winston brand after the high-end jeweler posted a strong half-year and record month in June.

Higher Prices Drive U.S. Jewelry Sales Growth

U.S. specialty jewelry store sales grew 2% to $2.79 billion in May as jewelry prices also rose, according to government data. The increase is in line with the uptrend seen in 2016 as sales at specialty jewelers climbed 2.1% to $11.62 billion during the first five months. Jewelry prices, as measured by the consumer price index (CPI), advanced 7% in June from a year earlier. The CPI for jewelry retreated 0.4% month to month in June, after increasing 3.3% in May.

India’s Bluestone Raises $30M to Fund Expansion

Bluestone closed a $30 million (INR 2 billion) round of fundraising to strengthen its position in India’s online jewelry market. The funds will be used to expand the company’s design and manufacturing capacity, and for marketing initiatives. India’s jewelry market is expected to grow from $60 billion currently to $110 billion in the next five years, with online sales projected at $2 billion to $3 billion, according to Bluestone. The company is targeting a four-fold increase in revenue to $149 million (INR 10 billion) by 2018.

Rio Tinto Cuts Full-Year Rough Output Guidance

Rio Tinto lowered its diamond production forecast for this year following a restructuring that saw the group merge its diamonds and copper businesses. The company now expects to recover between 18 and 21 million carats, which is still above last year’s 17.4 million carats. The group’s diamond production advanced 2% to 8.959 million carats in the first half with output at its Argyle mine up 4% due to a ramp up of underground operations. Production at the Diavik mine fell 5%.

Letšeng Average Prices Slide

Average prices at the Letšeng mine in Lesotho dropped 16% to $1,899 per carat in the first half due to a shift in mining to lower-value but higher-grade areas. Mine operator Gem Diamonds said fewer large diamonds – above 100 carats – were recovered during the period. Letšeng’s revenue was flat at $106.3 million with the volume of sales increasing 19% to 55,959 carats during the six months.

Stornoway Launches Ore Processing at Renard Mine

Stornoway Diamond Corporation started processing ore at its flagship Renard mine, signaling the first diamond production in Canada’s Quebec province. Commercial production will be achieved once processing has been maintained for 30 days at 60% of the plant’s capacity. The mine is expected to reach full capacity within nine months and subsequently produce 1.8 million carats per annum in the first 10 years, at an average valuation of $155 per carat.

Firestone Diamonds Plans First Sale

Firestone Diamonds expects to host its first sale of rough in January as construction at the Liqhobong mine in Lesotho continues ahead of schedule. Development of the mine was 85% complete at the end of June and production is expected to come on stream in the fourth quarter. The mine will take at least six months to reach full capacity of 1 million carats per year and is expected to yield between 380,000 and 450,000 carats in the fiscal year ending June 30.

Lab Grown Diamonds Pose Threat to Melee Prices

Lab-grown diamonds will probably develop into a niche that could take a 15% share of the melee diamond market, according to research by Morgan Stanley. That would impact prices and may result in the mined melee market dropping 12% in value, the analysts said. The research foresees lab-grown diamonds taking a 7.5% share of the larger-gems space but without impacting prices. Morgan Stanley urged ALROSA and De Beers to each invest at least $200 million a year in marketing to combat the threat.

Tiara Gems Buys Million-Dollar Kimberley Treasure

Rio Tinto sold its ‘Kimberley Treasure’ gold and diamond coin to Dubai-based Tiara Gems and Jewellery, a specialist in rare fancy color diamonds and collectibles. The coin, which is made up of one kilogram of 99.99% fine gold and includes a radiant cut, 0.54-carat red diamond from the Argyle mine, was snapped up within 48 hours of becoming available for sale. Rio Tinto did not disclose the actual sale price, but previously put a $762,280 (AUD 1 million) price tag on the piece.

London's Jewelry District to get $3M Makeover

Hatton Garden business owners approved a $3.3 million (GBP 2.5 million) investment to carry out improvements in London’s famed jewelry district. A Business Improvement District (BID) will be set up in October to carry out the upgrade over the next four-and-a-half years. The development will focus on providing better business connections and representation for the business community, promoting the area, improving the public facilities, and enhancing the environment. 

Diamond Industry Stock Report

While most of the major indices rose, diamond and jewelry companies had a mixed week on the stock markets. Gains were led by Firestone Diamonds (+19.3%) and Stornoway Diamonds (+17.5%), as both are nearing first production at their respective mine developments. Retailers had a tougher time with Chow Sang Sang (-8.7%) and Luk Fook (-5.1) noting continued sales declines in 2016 reflecting a weak consumer environment in Hong Kong. Swatch Group (-5.8%) noted similar trends as its profit plunged in the first half.

View the detailed industry stock report

  July 21 (13:01 GMT) Jul 14 (13:01 GMT) Chng.  
$1 = Euro 0.91 0.90 0.01  
$1 = Rupee 67.18 66.87 0.31  
$1 = Israel Shekel 3.85 3.85 0.00  
$1 = Rand 14.29 14.25 0.04  
$1 = Canadian Dollar 1.31 1.29 0.01  
Precious Metals       Chng.
Gold $1,319.28 $1,321.75 -$2.47 -0.2%
Platinum $1,082.50 $1,085.55 -$3.05 -0.3%
Silver $19.35 $20.08 -$0.73 -3.6%
Stock Indexes       Chng.
BSE 27,710.52 27,942.11 -231.59 -0.8%
Dow Jones 18,595.03 18,372.12 222.91 1.2%
FTSE 6,701.39 6,699.81 1.58 0.0%
Hang Seng 22,000.49 21,561.06 439.43 2.0%
S&P 500 2,173.02 2,152.43 20.59 1.0%
Yahoo! Jewelry 998.19 969.25 28.94 3.0%

Polished Trading Activity

Some U.S. and Chinese buyers in Mumbai looking for bargains but trading slow and sentiment weak. Quiet market expected through August. Low expectations for Mumbai show (August 4 to 8) with gold jewelry demand sluggish at high gold prices in rupee. Manufacturing stable with less rough available and slower trading on secondary market ahead of next week’s De Beers sight.

Read the Polished Diamond Trading Report


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