Business in January 2011 was active, especially in large stones. There is a strong demand for these as consumers convert some of their earnings from the better-than-expected 2010 into diamonds. Although the past year was turbulent, by and large, people made money and now they are concerned about rampant inflation eroding those earnings.
But the biggest question today is whether the inflationary policies of governments will aggravate the situation. The problem is that on one hand, governments pledge to get a grip on inflation, when they are, in fact, continuing to print money to prevent a collapse of their economies. While the U.S. is in the forefront of this practice, other countries are doing the same thing. A recent article in the South China Morning Post noted that the country’s mint was having trouble recruiting sufficient workers to handle the workload of producing so many new bank notes.
Salary Increases
In China, in order to appease a population that is feeling the pinch of inflation, salaries are being increased and, in the Guangdong province, the local government is trying to implement a 30 percent increase in salaries. This will undoubtedly cause many factories to either close or relocate to cheaper areas or neighboring countries. Unemployment will increase and local dissent will follow, coupled with raging inflation, creating a potentially explosive situation for the Chinese government.
The government is trying to hold inflation at 5 percent to 6 percent but, in reality, the prices of everything from garlic to oil have gone up by 20 percent to 30 percent. Oil is now hovering around $100 a barrel, and it was not too long ago that everyone felt $70 a barrel was over the top. Gold has been pushing $1,400 per ounce. If everything is going up in value, it is quite reasonable to assume that diamonds should follow.
The recent price increases in lower clarities and colors on the Rapaport list gave an impetus to the business, with clients buying to replace inventory and also to hedge against further increases. But there is a nervousness in the diamond trade. Everyone knows that the prices are both speculative and highly inflated, and there is no guarantee that the current recovery of the world economies is sustainable — there are, in fact, plenty of reasons to believe that it is not.
Supply Shortages
This insecurity in the face of speculation has resulted in a definite shortage of polished in the supply line, with many diamond dealers and manufacturers curtailing their buying of rough for production and wholesalers not buying new stones at these high price levels. Another factor contributing to the shortages is the fact that demand from many markets tends to concentrate on a narrow band of qualities, and there just aren’t enough goods in those specific categories to meet the demand. Everyone seems to want the same type of diamonds at the same time.
Despite the recent increase in the Rapaport list, demand is still very high for DIF in sizes from 1 carat and up. There is always a limited supply of this grade. While Triple EX stones are fast movers, other well-made stones also are moving strongly. The same cannot be said for VVS goods in D to F colors. Consumers who can afford a high-quality diamond will go for the best, or else settle for a stone with a high color but with a clarity grade of VS to SI. They feel that the VVS goods are too expensive. Demand for VS to SI is extremely strong and discounts in these categories are in the teens, depending on the cutting grade. Even if the stones are not of the best make, the higher discounts on them make them sell quickly.
The shortage of desirable goods has led many diamond buyers, both in Mainland China and some neighboring countries, to do their buying on the internet. It is not unusual for large diamonds to be traded this way whereas, a few years ago, only smaller stones were sold on the web. This signifies a maturing and widespread acceptance of internet sales, which should continue to see tremendous growth in the years to come.
Demand for larger stones appears to be strong in the Indian market and Indian buyers are paying more frequent visits to Hong Kong to fill their orders.
January has been a short month for the Mainland diamond dealers. Apart from trying to find specific big stones to fill inquiries, most of the demand for smaller stones below a carat has virtually stopped. Most jewelry factories will close down around January 19 for the Chinese New Year on February 3 and will start to come back on line a month later. Many of the factory workers travel to their hometowns to celebrate the holiday and it is estimated that approximately 2.5 billion people will be traveling then. Hong Kong will have its fair share of Mainland tourists visiting for the holiday, and jewelry retailers are expected to benefit from the influx.
As the country enters the Year of the Rabbit, it is reminded that a characteristic of this zodiac sign is that, while the rabbit is thought to be timid, it is also both wise and cautious. Those are traits that could serve the industry well, as 2011 could prove to be a year of wild fluctuations.
The Marketplace
• Large stones from 3 carats and up — in top grades or in the more commercial qualities — are moving well.
• Dossiers in 30-pointers and 50-pointers are selling, but demand has diminished.
• Demand is good for carat sizes in H color and down in VVS-SI and they are moving well.
• Fluorescent or lower cut grades that have big discounts are also moving well.vv
Article from the Rapaport Magazine - February 2011. To subscribe click here.