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Global Economic Growth
Editorial
Jan 24, 2014 8:00 AM
By Avi Krawitz
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RAPAPORT... The diamond industry is encouraged by prospects of stronger economic growth in 2014. The year has started with positive sentiment in the polished market and steady activity in rough that has brought renewed optimism to the trade. There is a sense that the five-year recovery from the 2008 downturn has finally taken hold.
Both the World Bank and the International Monetary Fund (IMF) upped their forecasts for the year predicting that growth will be driven by a recovery in advanced economies.
That wealthy countries are turning a corner is welcome news for a diamond industry that relies so heavily on stability in the U.S. and Europe. Much of the positive sentiment this January stems from reports that Christmas was satisfactory in the West amid the caution in emerging markets. Now there are some economic forecasts to back it up and spur confidence.
The World Bank last week projected that global gross domestic product (GDP) will grow 3.2 percent in 2014, from its estimated 2.4 percent growth last year. Similarly, the IMF this week forecasted 3.7 percent growth in 2014, up from 3 percent in 2013.
Jim Yong Kim, World Bank Group president, explained, “The performance of advanced economies is gaining momentum, and this should support stronger growth in developing countries in the months ahead.” Rising demand in the U.S. and Europe will support export markets such as China and India.
Particularly in the U.S., growth is being driven by domestic demand and consumer confidence that will certainly continue to rise if unemployment is kept below its current 7 percent level. Furthermore, China continues to be the global growth engine with projected growth of 7.5 percent in 2014, according to World Bank forecasts, while representing a relative slowdown from previous years.
However, the industry should approach these numbers with caution. There remain a number of caveats that may restrain diamond market growth moving forward.
Economists at the World Bank cautioned that downside risks continue to threaten the recovery, including potential rising interest rates as the U.S. tapers its quantitative easing stimulus program, as well as persistent pressure on commodity prices.
While the Federal Reserve has pledged to keep interest rates near zero for the first half of the year, they will inevitably go up. To a large extent, low interest rates have sustained the U.S. diamond and jewelry industry as they have created excess money that was moved to the stock markets, raising the perception of wealth during the recent bull-run on Wall Street. Time will reveal the impact that higher interest rates and the reduction of quantitative easing will have on stock markets, and with it, consumer wealth.
Perhaps more importantly, diamond dealers and jewelers should be careful not to over finance their inventory unless they lock in their borrowing at current interest rates. To the industry’s credit, companies have been disciplined to manage leaner inventory levels in recent years, having learned their lesson of being stuck with dead inventory after the 2008 crash.
In part, the banks are keeping inventory levels in check as they have adopted a conservative approach in lending to the industry. The expected credit crunch, which is already being felt, should prevent companies from over-extending their financing.
Therefore, one should not expect a boom in the diamond market with the improved economic forecast. If anything, better prospects for the year influence positive sentiment and provide a sturdier base for market stability. Furthermore, Chinese growth is slowing to a more authentic and reasonable pace, as this column noted recently (see editorial: ‘Backing the Right Horse,’ published on January 10, 2014). The industry is well positioned for unspectacular but healthy growth in 2014.
Greater caution should be exerted in the rough market as stronger economic forecasts tend to influence a more aggressive approach from diamond mining companies. As a result, rough prices are expected to pull further ahead of the polished in the first half of the year. Already, rough prices rose by about an average 5 percent at the January De Beers sight with similar increases reported at the preceding ALROSA sale.
Current rough demand is being driven by low inventory levels and expected short-term polished demand in order to replenish sold retail inventory after Christmas and the upcoming Chinese New Year. However, polished prices are not jumping up with the rough and polished suppliers are maintaining stability in the market.
The widening gap between rough and polished prices is unsustainable and the rough market cannot ignore fundamentals in the polished market or the lack of profitability in the manufacturing sector.
Therefore, the rough market is anticipated to cool during the year because of those low manufacturing profit margins, due to the credit crunch and because of basic principles governing polished demand. No matter what happens with rough prices, polished prices are highly sensitive to external economic forces and are not expected to increase based on rough prices.
And while economic prospects have improved for 2014, their predictions were tempered with caution. The World Bank asserted that although the main risks that have preoccupied the global economy over the past five years have subsided, the underlying challenges remain. The same assessment is equally applied to the diamond market. While that places the industry in a far better position than last year, or at any time since 2008, diamantaires have enough experience not to be overly optimistic.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz and on LinkedIn.
This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.diamonds.net/weeklyreport/ or contact your local Rapaport office.
Copyright © 2014 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.
Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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Tags:
Alrosa, Avi Krawitz, De Beers, diamonds, IMF, Jewelry, Rapaport, World Bank
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