The diamond market hasn’t faced such challenging conditions since 2015. Polished demand is weak, and retailers are reducing their purchases, leading to a squeeze on manufacturers and dealers.
The midstream was already struggling with the large influx of goods that entered the market after the Gahcho Kué, Renard and Liqhobong mines came on stream in late 2016 and early 2017. The problem has only become worse, placing a great deal of pressure on cutting and trading companies — many of which are working to shift their goods. Liquidity is tight as banks reduce their financing for the sector, citing a lack of profitability.
A blow to sales
The total number of polished diamonds on RapNet has risen 10% since a year ago to 1.5 million — an indication of the growing stockpiles in the trade. Prices, meanwhile, have fallen: The RapNet Diamond Index (RAPI™) for 0.30-carat polished slipped 2.1% between July 1 and 23, and 0.50-carat stones slid 1.8%. The 1-carat category was supporting the market amid steady US demand, though the index for that size was still down 0.4%. Sales of larger stones remained sluggish, with RAPI for 3-carat falling 1%.
Rough demand has suffered, with Alrosa recording its lowest quarterly sales since the second half of 2015: Revenue slid 26% to $807 million for the three months ending June 30. De Beers’ sales slumped 17% to $2.65 billion in the first half as the oversupply of rough and polished weighed on sightholders’ appetite for more goods. To help ease the situation, the miner allowed buyers to defer purchases at its July sight, over and above the usual sightholder allowances. De Beers had already reduced prices at its June sale.
Customers are still buying rough that can produce the types of polished diamonds popular in the US, such as larger, lower-quality stones, noted Nimesh Patel, De Beers’ chief financial officer. That reflects the American market’s relative strength in contrast to weakness in greater China and the Gulf region.
Consumer demand not bad
Retail results have been mixed. High-end brands such as Cartier, Van Cleef & Arpels, and Bulgari have recorded solid growth, but the mid-market sector has been more muted, especially in the Far East. Luk Fook and Chow Tai Fook both saw a slump in Hong Kong same-store sales in the three months that ended June 30, reflecting the impact of the US-China tariff war and a drop in tourism from the mainland.
However, long-term consumer demand looks positive, with the current challenges coming from an internal stock imbalance, according to De Beers. “Although there are different things going on in different markets, there is reasonable demand,” CEO Bruce Cleaver said in a July 25 investor call transcribed by Seeking Alpha. “It’s not fantastic, but it’s by no means awful. And as long as there is downstream demand, the issues that are going on in the midstream, all things being equal and us being very careful with volume and price — you would expect them to play themselves out over a period of time. It really depends on consumer demand in the downstream markets, particularly in [the fourth quarter].”
Article from the Rapaport Magazine - August 2019. To subscribe click here.