Rapaport Magazine

Buoyant, Competitive and Cautious

Trade Report

By Avi Krawitz
Diamond markets were buoyant through March after trading at the Hong Kong International Jewellery Show exceeded expectations. The show signaled a shift to a seller’s market as rising Indian and Far East demand supported the higher prices being quoted at the show, which continued to rise in the weeks following the event.

As a result, the average RapNet Asking Price Index (RAPI) for certified diamonds rose 7.5 percent during the month from February 22 through March 22 (see graph on opposite page, top). Buyers showed some initial resistance to the new price levels, but ultimately placed orders in response to shortages in the market, which added to the competition for goods.

Vendors in Hong Kong noted that the show was the best they’ve experienced in the past three years, which spurred confidence that the recession was indeed over. Some concerns remain, however, that the market had grown too strong too quickly and that the confidence in the polished market may not reflect end consumer demand. Rather, the worry is that the market is being propped up by dealer trading and expectations of future price increases.

The price of polished finally gained some ground against the high rough prices that prevailed during the past six months, so that prices were aligned in some items. In particular, dealers reported that prices for small diamonds in -2, stars and melee goods have increased since the beginning of 2011 so that the market for these goods may be overheated. Among the certified goods, average prices on RapNet for .5-carat stones rose 7.1 percent, while prices for 1-carat stones increased 10.3 percent and prices for 3-carat goods grew 8.9 percent from February 22 to March 22.

Unprecedented Rough Demand

The positive trends in the polished market encouraged further activity in rough and premiums on Diamond Trading Company (DTC) boxes continued to trade near double digits on average, even after DTC raised prices by an average of 7 percent at its February sight. De Beers also reported that it experienced “unprecedented demand” at its Diamdel February auctions, with sales to Belgium- and Israel-based customers rising to record levels.

“Tight supply conditions and an unprecedented level of customer demand combined to deliver exceptionally competitive auctions, and most indicators point to near-term demand conditions remaining very robust,” said Neil Ventura, Diamdel’s chief executive officer (CEO).     

Other mining companies also reported strong prices at their most recent round of tenders, with Gem Diamonds noting that in many categories, rough diamond prices are now above their highs of 2008. “2011 has begun on an extremely positive note,” said Clifford Elphick, CEO of Gem Diamonds. “Not only have rough diamond prices continued to increase as a result of perceived supply shortages, but polished prices have too, and volumes of trading are pleasing.”

Dealers, however, pointed to a shortage of polished, rather than rough, and said that there may be a backlog of rough inventories due to manufacturing in India remaining below capacity since the economic collapse (see Credit story on page 58).

Possible Coolers 

Even if there are rough supply shortages currently, the expectation of shipments from Russia and Zimbabwe might cause the rough market, considered overheated at the moment, to cool as the year progresses.

Interfax reported that Russia’s state repository, Gokhran, is planning to sell about $105 million worth of its stockpiled rough diamonds in 2011, of which approximately $17 million will be to international companies. More significantly, Kimberley Process (KP) Chairman Mathieu Yamba unilaterally authorized Zimbabwe to export diamonds from two mining concessions at the Marange Fields held by Mbada Diamonds and Marange Resources, respectively. The controversial approval, which caused confusion initially because it was granted without the required consensus among KP members, covers both current production and the stockpile of goods held by the two companies.

With Yamaba’s decision, a low-end estimate of approximately 3 million carats of Marange goods worth about $250 million could enter the market. These goods were sold and paid for in January and February 2011, largely to companies in India and the United Arab Emirates (UAE), but their shipment was embargoed, pending KP consideration of human rights abuse charges against Zimbabwe. With the March 19 certification, further Zimbabwe sales and shipments are expected.

The U.S. State Department objected to the KP chair’s decision and sent a letter to KP authorities in India and the UAE, stating that it would view any Zimbabwe shipments as noncompliant with certification requirements. The State Department also warned that it would publish the names of companies taking delivery of these goods and ask the Office of Foreign Assets Control (OFAC), which administers U.S. sanctions, to look more closely at the transactions. 

Should the Marange goods flood the market, regardless of their perceived legality, it remains to be seen whether the volumes will be enough to cool the current heightened demand for rough.

Global Caution

Despite the optimism in the polished market, dealers kept a close watch on global events, as political unrest in the Middle East and the tragic earthquake, tsunami and nuclear radiation crisis in Japan brought uncertainty to financial markets. The Dow Jones Industrial Average (DJIA) shed 3 percent between March 1 and March 18, erasing most of the gains made so far in 2011. Spot oil prices have increased by 12 percent since the start of 2011 and were trading at $102 per barrel on March 21 (see graph on page 19, bottom).

Des Kilalea, an analyst for RBC Capital Markets, noted that while the tragedy in Japan will limit demand for polished diamonds in the country, growth in China and India should more than compensate for the decline. Japan is the third-largest market for polished diamonds and diamond imports to Japan rose 12 percent to $693.6 million in 2010, its first annual increase in six years (see graph on opposite page). The positive trend continued in January, when Japan’s imports rose 44 percent year on year to $72.4 million for the month.

Retail Still Upbeat

As Japan rebuilds its devastated areas, luxury spending is expected to take a back seat, which will impact some high-end multinational jewelry companies that have a strong presence there. Tiffany & Co, whose Japanese sales accounted for 18 percent of its total sales in 2010, said it expects sales in the country to decline 15 percent in the fiscal quarter that ends on April 30. In response, the company reduced its first-quarter projection by 5 cents a share, but said it still expects total global sales to increase by 11 percent during the period.

Tiffany reported that fourth-quarter 2010 sales rose 12 percent to a record $1.1 billion (see chart at right), while full-year 2010 sales grew 14 percent to $3.1 billion. Retailers Harry Winston and Signet Jewelers were expected to post similar solid gains for the year in their financial reports, scheduled for release after press time.

The annual numbers reinforced the belief that there is sufficient growth along the pipeline to justify the confidence currently seen in the market, particularly as retailers restock after the Christmas season. Tiffany added that its net inventories at the end of January were 14 percent larger than a year earlier, which it is using to support sales growth, new store openings, product introductions and internal manufacturing.

That might quell skeptics who have cautioned that the market is amiss and traded too strong in March. And, given the increases in polished prices, manufacturers appear satisfied that their margins improved during the month. Even as global political and economic trends still pose a threat to the recovery — as does overtrading within the industry — the diamond market closed the first quarter in a refreshingly jovial mood, hopeful that the good times will continue.

Article from the Rapaport Magazine - April 2011. To subscribe click here.

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