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RAPAPORT... The diamond trade tends to place a reasonable amount of weight on the September Hong Kong Jewellery & Gem Fair. Perfectly timed, the show offers Far East retailers an opportunity to buy some inventory for China’s October 1 National Day holiday and prepare for the Chinese New Year in February, while Indian buyers get ready for Diwali and the wedding season.
After the summer quiet often associated with July and August – and its accompanying uncertainty – anticipation typically builds in the weeks preceding the September show. Anxious to raise the trading bar, polished dealers and manufacturers seek an indicator of polished price and demand trends ahead of the fourth-quarter season. Often, how they buy there resonates in other markets, including the U.S.
This year is no different. If anything, the trade is eyeing the show more closely than ever for those signals as sentiment in 2012 has been relatively low. Significantly, the depressed mood has been influenced by a lower level of activity among Far East and Indian buyers, who were previously the drivers of industry growth. The trade desperately wants the show to signal their return.
In theory, this could happen. Given their lack of recent buying, retail inventories are presumably low and there have been reports from India and Israel of an increase in inquiries for goods from Far East buyers.
But the reality could well be different as price uncertainties persist. Suppliers should expect to be pressured at the show and recognize that they are vulnerable in a price-sensitive market that is only as strong as its weakest link.
Consider the market from a buyer’s perspective. They’d be forgiven for thinking that reports of tight liquidity among manufacturers and an excess of inventory among polished dealers has put them in the driving seat. They’ll be scouting the Hong Kong halls for cash-strapped diamond suppliers.
Furthermore, many buyers view the recent rough price cuts by De Beers as an indication that additional polished price adjustments will follow. While Diamond Trading Company (DTC) sightholders noted that there is still room for more of a rough price correction after the August sight, De Beers dismissed the notion. The company urged sightholders to hold their polished prices firm if they wish to retain their newfound remnants of profitability.
Polished suppliers meanwhile note that shortages of in-demand goods such as SI clarity, Triple Ex goods and fancy shapes, will help buoy their prices. Recent relative polished price stability has encouraged them, even if prices are still trending downward. The RapNet Diamond Index (RAPI™) for certified 1-carat diamonds is down 1 percent from the beginning of August to September 13.
Historical data suggests that polished prices may still have a ways to decline even more. Consider that while RAPI for 1-carat stones fell 23 percent from the peak in September 2008 to around February 2009, and climbed back up 56 percent to a new high in August 2011, the market has since corrected by 19 percent in the past year – a longer and arguably more painful downturn. Is there still room for an extra 4 percent?
The hope is that Hong Kong will indicate that the market has bottomed out as many believe it has. Strong buying at better prices from Hong Kong dealers would indeed signal a turn in the market.
But it’s not clear they’re quite ready for that yet. A frustrating economic environment suggests that Chinese consumers continue to hold back on certain luxury purchases. This week, British fashion house Burberry warned that a slowdown in China could hit its earnings while noting that it is echoing a similar sentiment among other retailers.
Researchers at Ipsos and Ruder Finn suggested in their China Luxury Forecast survey, published in July, that Chinese consumers are cautiously planning for the next year because of the challenging economic news that could lead to a relative slowdown. The good news, the report noted, is that they will not stop shopping. But they will be buying different luxury items with a shift away from luxury-brand watches, handbags, and jewelry, to a preference for luxury cosmetics and high-end shoes.
That offers different branding and marketing challenges for the diamond industry in Asia. But for now, diamonds are on the caution list of Chinese consumers. One should therefore not expect a sudden spurt in demand at the Hong Kong show. Retailers are expected to buy, but they’re also expected to continue to carefully guard their inventories.
And in doing so, the show may result in a standoff between buyers and sellers that will simply boil down to which of them needs the deal more. How urgently do buyers need the goods, and how pressed are sellers to generate turnover and cash. Buying is expected to be selective and price sensitive and no-one expects a seller’s market to emerge - leaving buyers with some bargaining power. But the extent to which they’re seriously back in the market, and willing to pay for their diamonds, is the most pressing Hong Kong question of all.
The writer can be contacted at avi@diamonds.net
This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.
Copyright © 2012 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.
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