Rapaport Magazine

Still Struggling for Profits

Antwerp December Market Report

By Marc Goldstein
Diamantaires are in general agreement that sales for the year-end holiday season will not be sufficient to lighten the morose mood that has engulfed the industry since September 2010. “I think that the year is over, so to speak,” said Avi Pinchasi of J. Pinchasi & Sons, explaining that “November should have been a booming month. Normally, we should be selling about 30 percent above the usual turnover from mid-October until mid-December. Apart from China and India, where there has been some growth, the rest of the world is quite flat.”

The diamond market, most agreed, hit a kind of roadblock in September. “During the first six months of the year,” noted Pinchasi, “it was still possible to do a decent business and buy rough at reasonable prices but, since September, the rough has been rocketing without any real economic reason.”

To that situation, add the fact that the year-end holiday doesn’t seem to be pumping any real optimism into the market this year.

 “Since September of this year, it’s been like a wind of greed blowing through the minds of all producers,” David Pienica of M & D Pienica said. “The prices have been driven, not by demand, but by speculation. Normally, we should be in the middle of the high season, but nothing at all is happening.”

Wanting to end on a positive note, Pienica said, “The good news is that under these current circumstances, things can only improve.”

For polished, strong demand is not enough

If the rough traders are making profit in an unreal world with unrealistic prices, the polished manufacturers, on the other hand, don’t even dare speak about profit. “The demand for polished is very strong, but the biggest problem is the prices of the rough,” explained Mihir Mehta of Jayam Group. “Indeed, the polished is extremely price sensitive. This means that we can’t just pass on increases in rough prices, as the demand for polished would then just literally collapse. You have to struggle — even getting a 1 percent or 2 percent discount on the rough is extremely difficult.”

The rough-polished price imbalance has created repercussions throughout the supply chain. “Today, it’s more interesting to trade polished than to manufacture it,” continued Mehta. “The name of the game currently is not so much to make money as to try not to lose any. It’s true that, since September, we’ve been witnessing an increase in demand of some 25 percent to 30 percent in some markets, particularly in India and China. However, the world can’t survive solely on what’s happening in two Asian countries. The only way for the polished prices to go up would be if a strong demand would manifest itself in more diamond centers.”

No Basis for Rough Prices

Axel Beck of Beck Diamonds summarized the situation for diamond manufacturers who are not buying from one of the four major diamond producers — although even the majors are reported to be reducing the margins of their customers. “If you calculate backward, that is, starting from the price you could get from a potential buyer for the polished you expect a rough stone would yield, here’s how it works. Let’s say I take the best price I could push the polished for, and then deduct a 3 percent to 4 percent profit margin, and then about $50 per carat for the cut and then an additional $50 per carat for the certificate. The value I get is approximately the price I could afford to pay to buy a piece of rough that would hopefully yield that particular polished stone. When you do this exercise, the results are implacable: Based on polished prices, rough currently is 15 percent to 20 percent too expensive. In fact, this same trend is spreading to a growing number of diamond categories, some since as early as May 2010,” he explained.

Holding Firm

This imbalance is why so many diamantaires are reluctant to sell at the moment and are holding firm on prices. They know that if they reduce their prices, not only are they going to lose money — instead of, at best, breaking even — but they also won’t be able to replenish their inventories. Generally speaking, it is as if each piece of rough is priced at a higher quality level than its actual quality level. In other words, if you judge it only by its price, the piece of rough should yield one or two degrees of color and clarity more than it really will.

Another aspect of the diamond industry about which people are skeptical — especially as the year-end approaches — is reported statistics, in particular, statistics on retail growth. For example, when diamantaires read that the U.S. retail sales of diamond jewelry have increased — even by, say, 3 percent — they know that the price of gold has risen so much recently that the underlying reality is that the diamond value content of those same jewels must be decreasing.

The Marketplace

•     The very high end of natural color diamonds — in radiant cuts, as well as all modified cuts — is increasingly difficult to sell.

•     Cape color brilliant stones are extremely difficult to find on the market today, because these often are repolished in modified radiant cuts and then become graded as yellow or fancy intense yellow.

Article from the Rapaport Magazine - December 2010. To subscribe click here.

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