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Rapaport Weekly Market Comment Oct. 15, 2014

Polished centers quiet over Jewish holidays with sluggish Indian demand ahead of important Diwali holiday season. Buyer's market prevails as suppliers face tight liquidity. De Beers Oct. sight estimated at $460M; few extra goods (ex-plan) sold with more refusals and deferrals. Rough secondary market weak amid concerns of post-Diwali oversupply. Bankers are tightening up the diamond trade. Belgium Sept. polished exports +15% to $1.6B; rough imports +28% to $1.3B. Mixed outlook for U.S.  Christmas with National Retail Federation expecting total sales +4% to $620B; but PwC foresees average  spending -7% to $684 as households have less to spend. Signet appoints Mark Light as CEO following Michael Barnes resignation. Best wishes for a happy and enlightened Diwali to all our Indian friends. THE RAPAPORT PRICE LIST WILL NOT BE PUBLISHED OCT. 17 DUE TO JEWISH HOLIDAY OF SUCCOT.

RapNet Data: Oct. 14
Diamonds   1,410,635
Value $7,958,693,951
Carats   1,439,810
Average Discount -27.34%

RAPI Chart

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Our offices will be closed for the following Jewish holiday:

Succot: Oct. 16-17

With best wishes for the new year,
The Rapaport Group

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Rap Melee Index Edges Lower During 3Q

The Rapaport Melee Index (RMI™) for small diamonds fell 6.8% to 129.32 during the third quarter of 2014, while year-over-year the index is up 2.6%. As expected, polished trading slowed during the third quarter and prices softened as manufacturers faced tight liquidity due to slow sales and diminished bank credit. Polished suppliers were prepared to reduce prices in order to improve cash flow and shrink their large inventory levels.

Suppliers are hoping the fourth-quarter holiday season will improve diamond trading and help ease liquidity concerns; however, there is no indication of a turnaround in trading conditions for now. Buyers sense that suppliers are under pressure to improve their cash flow and, are accordingly, pushing for higher discounts. Following the weak third quarter, the trading centers begin the all important holiday shopping season with an environment that clearly favors buyers.

De Beers Sight Estimate at $460M

De Beers October sight closed with an estimated value of $460 million as prices for several categories running between 2% and 4% lower; however, sightholders noted a shift in assortment to higher qualities, thereby pushing average prices higher by 2% to 3%. Overall, sightholder mood was subdued since buyers are more cautious because polished prices have been on the slide. Very little in the way of ex-plan goods sold, and there were a noticeable amount of sightholder refusals and box deferrals.

De Beers anticipated a small sight due to intentions to offer (ITO), especially given this time of year when manufacturers are facing tight liquidity. De Beers contended that many major retailers have switched to just-in-time supply chain management, leading manufacturers to jump with little notice and tie up working capital to polish a large amount of goods just before the Christmas retailing season. Nonetheless, De Beers remains very optimistic for strong diamond jewelry sales over the Christmas season.

U.S. Jewelry Store Sales +4%

U.S. jewelry store sales rose 3.7% year on year to $2.45 billion in August. As reported earlier on Rapaport News, jewelry and watch sector sales from all retail channels, including jewelry stores and department stores, increased 4.9% in August to $5.61 billion. Meanwhile, the consumer price index (CPI) for jewelry in August fell 4.7%, while the CPI for watches rose 4.5%. Jewelry store sales have recorded revenue of $20.13 billion for the first eight months of the year, representing a year-on-year increase of 4.5%, according to government estimates.

By comparison, advanced estimates for U.S. department store sales slipped 2.3% year on year to $12.28 billion in September. Department store sales for the first nine months of the year have dropped 2.5% to $114.2 billion.

Jewelry Sales +2% at LVMH

LVMH reported that revenue rose 4% year on year to $27 billion (EUR 21.4 billion) for the nine months that ended on September 30. The watches and jewelry segment recorded growth of 2% at $2.5 billion, while on a comparable-basis and at constant-exchange-rates, the increase was 5%. During the third quarter, LVMH observed an acceleration of sales for its jewelry segment, driven by Bulgari. Watch sales, however, continued to be impacted by a more cautious purchasing trend observed by multi-brand retailers in an uncertain economic environment, according to LVMH.

The group launched a new watch -- Lvcea by Bvlgari -- for women during the third quarter and it observed good sales across Hublot’s iconic lines. Overall, LVMH defined the global economic and financial market as "uncertain" and vowed to continue an operational strategy that is focused on innovative products and targeted geographic expansion for the most promising growth markets.

GJEPC: Heavy Discounts Haven't Materialized

The Gem & Jewelry Export Promotion Council (GJEPC) took issue with press reports citing that diamantaires had offered discounts of as much as 20% on inventory to free-up cash flow. The industry body explained that even with the planned closure of Antwerp Diamond Bank (ADB), there is no immediate impact on the trade given the adequate time to settle accounts. The GJEPC opined that sentiment is strong across the industry with the Diwali, wedding and Christmas seasons on the doorstep. 

“The long term fundamentals of the diamond industry remain strong and robust as there are no new major (rough) finds, and sales of diamonds are growing in emerging markets of China and India. The rough diamond prices by De Beers have gone up by 3% to 5%, while the Russian goods have increased 2% to 5%. This only adds to the diamond and diamond jewelry prices, for which they are on an upward trend in the coming festive season and in the future,” said GJEPC's chairman, Vipul Shah.

Signet Appoints Light as CEO

Michael Barnes resigned from his position as CEO of Signet Jewelers Ltd. and from the board of directors, effective October 31. Mark Light, currently Signet's president and chief operating officer, will succeed Barnes and will also join the board. Todd Stitzer, the board's chairman, described Light as an experienced, strategic leader who has been deeply involved in the company's Vision 2020 Strategy, the Zale acquisition and its ongoing integration. Light stated that the company is on target to achieve a three-year synergy savings of between $150 million and $175 million from the Zale integration.

Analyst Ike Boruchow of Sterne Agee noted that Light is a "very strong choice" to lead Signet and with business fundamentals holding intact, such as fiscal guidance and merger synergies, he reiterated a rating of "Buy" and the group's long term outlook. "We continue to believe that the combined Zale/Signet business can generate earnings power in excess of $11 per share by 2017," Boruchow wrote in a note to clients.

Dubai's Banks Increase Trade Credit

Emirates NBD, Mashreq Bank and National Bank of Fujairah have begun extending credit to industry players that operate in the Dubai Diamond Exchange (DDE), its chairman, Peter Meeus, told Bloomberg News. Reportedly, the Dubai lenders extended their services as KBC Group begins closing its Antwerp Diamond Bank division. Dubai is aggressively pursuing commodity trading and with local banking support, the UAE hopes to boost its stature as a diamond trading center. Rosy Blue's CEO Dilip Mehta told Bloomberg that Dubai's banks could lend as much as $500 million for rough diamond trading by the end of the year.

GJPEC Presses Minister on Key Issues

Executives from the Gem & Jewellery Export Promotion Council (GJEPC) met with Saurabhbhai Patel, India's Minister of Finance for Gujarat, to discuss pressing trade issues, including taxation and assessment and infrastructure requirements for rough trading. The industry group argued that it was imperative for India to incorporate a turnover tax and a consignment scheme for rough diamonds, which is the case in Belgium and Israel, to become a world class rough trading hub.

Additionally, the group supported a presumptive tax system to simplify the existing tax and avoid litigation against industry players. Furthermore, a turnover-based tax system would attract foreign diamond mining companies to trade in Surat. GJEPC proposed introducing a turnover tax with net profit calculated for computing prevalent income tax at the rate of 2% of turnover for trading activity and 3% for manufacturing activity. The GJEPC also recommended broadening the Foreign Trade Policy to allow rough consignment imports, which aren’t permitted due to the absence of custom notification; designate diamond bourses as special zones where imports and trading will be allowed and address the availability of financing, in general. 

The GJEPC stated that Export Credit Guarantee Corporation (ECGC) is unable to guarantee credit by the Public Sector Undertaking (PSU) banks and that those banks have been seeking extra collateral for additional lines of credit to the industry without ECGC guarantee. The minister assured the trade that he will take up these issues with the central government, directly with Nirmala Sitaraman, the Minister of State for Commerce and Industry.

Diavik Production Flat

Dominion Diamond Corporation reported that Diavik's rough production was flat year on year in the third quarter at 1.67 million carats. However, production for the first nine months of the year was up 10% to 5.69 million carats. The mining company revised its Diavik production outlook for the year higher to 6.5 million carats from an original estimate of 6.1 million carats. Processing of ore includes material from both mining and stockpiles. Mining activity will be exclusively underground with approximately 700,000 tonnes of ore to be sourced from A-154 North, 500,000 tonnes from A-154 South and 800,000 tonnes from A-418 kimberlite pipes.

Rockwell Records 2Q Loss

Rockwell Diamonds reported a loss of $1.5 million in the second quarter that ended on August 31 compared with a profit of $300,000 one year ago as higher revenue and lower unit costs were offset by lower beneficiation income, resulting in a $3.4 million downward inventory adjustment. Earlier, the company reported that revenue jumped 71% year on year to $16.9 million, with $14.2 million from direct diamond sales and an additional $2.7 million from its beneficiation agreement with Diacore, formerly Steinmetz. Production rose 36% to 9,581 carats, with 5,817 carats derived from the company's royalty mining contractors. Inventory at the close of the second quarter totaled 5,954 carats carried forward, including 3,034 carats on royalty mining contracts.

Miners Adjust During Ebola Outbreak

Octéa Ltd contended that diamond production and sales were proceeding in Sierra Leone, following the lifting of a region wide lock-down to contain Ebola. The company does not anticipate any negative impact to production this year as a result of the virus; however, at its Tongo diamond project, work on a definitive feasibility study faced logistical issues caused by Ebola containment efforts. Octéa's anticipates at least another six months before the report is ready.

Stellar Diamonds pushed back its expected Tongo area feasibility study results to mid-2015 and still doesn't know when it can resume ground work. In Guinea, Stellar Diamonds commenced trial mining at its Baoulé project, which is located in an area that has not been affected by Ebola.

Both companies are monitoring the health of staff and participating in community Ebola containment efforts.


  Sept. $Mil. %Chng. YTD $Mil. %Chng.
Polished exports $1,572 15% $11,000 6%
Polished imports $1,523 10% $10,783 6%
Net exports $50   $223 38%
Rough imports $1,340 28% $11,519 16%
Rough exports $1,416 18% $12,030 11%
Net imports ($76) -51% ($511) -42%
Net diamond account $125 -8% $734 -30%

Diamond Industry Stock Report

One day of panic doesn't make a week, although consumer spending fundamentals -- which don't look great -- are worrying retail investors who were planning on a strong fourth quarter. U.S. shares all down except for Movado (+1%), with Birks (-20%) and JCP (-13%) leading the drop. European shares were lower, led by Damiani (-7%) and all of India's firms were down except for Classic Diamond (+3%) and Goenka (+15%). Mining shares were mixed, however, several firms were down by double-digits: Kennady (-13%), Rockwell (-19%), Shore (-13%), True North (-17%), Stellar (-11%). View the extended stock report.

  Oct. 15 Oct. 8 Chng.  
$1 = Euro 0.780 0.786 -0.006  
$1 = Rupee 61.56 61.06 0.5  
$1 = Israel Shekel 3.70 3.70 0.00  
$1 = Rand 11.09 11.06 0.03  
$1 = Canadian Dollar 1.13 1.11 0.02  
Precious Metals        
Gold $1,239.60 $1,219.00 $20.60  
Platinum $1,257.00 $1,269.00 -$12.00  
Stock Indexes       Chng.
BSE 26,349.33 26,246.79 102.54 0.4%
Dow Jones 16,141.67 16,965.42 -823.75 -4.9%
FTSE 6,211.64 6,482.24 -270.60 -4.2%
Hang Seng 23,140.05 23,263.33 -123.28 -0.5%
S&P 500 1,862.49 1,964.69 -102.20 -5.2%
Yahoo! Jewelry 1,095.09 1,135.10 -40.01 -3.5%

Polished and Rough Trading Activity

Current market very tough with rough prices on the increase and polished prices sliding on a weekly basis due to weak demand. Buyers remain very price sensitive and only fill immediate orders. Some improvement for the jewelry market, but overall and considering the start of Diwali, it is below seasonal norms. Read the full report.


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