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Calm Before the Rush
Polished markets took a brief breather in April, while hoping that the Las Vegas show will spur buoyant trade the same way the Hong Kong show did in March.
By Avi Krawitz
If diamond markets were uncharacteristically strong in March, they calmed slightly in April as the Passover and Easter holidays provided the industry with some downtime. Dealers displayed a more cautious attitude toward the trading environment, hoping for some stability in polished prices, while global events continued to fuel uncertainty.As a result, the pace of polished price increases softened toward the end of April but still continued on its uptrend. The average RapNet Asking Price Index (RAPI) for certified diamonds rose 3.1 percent during the month through April 20 (see graph on opposite page, top). Average prices on RapNet for certified .5-carat stones rose 4.8 percent, while prices for 1-carat stones increased 2.8 percent and prices for 3-carat goods were flat for the month.Wholesale demand in the U.S. improved, while continued retail strength in China and India spurred trading, particularly as China prepared for the Golden Week celebrations starting May 1. However, the polished market was still driven by dealer demand in the trading centers of India, Belgium and Israel, following the frenzy of the March Hong Kong show, and building on the strong first quarter recorded in each center.Slower Second QuarterIndia’s gross polished exports rose 88 percent year on year to $9.18 billion, while imports grew 171 percent to $7.98 billion, although many think the numbers may be inflated by the fact that goods are being re-exported to gain additional bank financing. Belgium’s gross polished exports increased 30 percent to $3.43 billion, and its polished imports rose 26 percent to $3.2 billion, while Israel’s gross polished exports rose 39 percent to $4.4 billion and imports grew 50 percent to $1.28 billion (see graph at right, bottom).While low inventories, supply shortages and rising investment and consumer demand were the catalysts for trade in the first quarter, there was concern that the current levels will not be sustained in the second quarter. Rough Prices Still HighVarda Shine, chief executive officer (CEO) of the Diamond Trading Company (DTC), said the De Beers company expects a slightly slower second quarter, particularly as the Indian industry goes on summer holiday in May until the JCK Las Vegas show. “Assuming that Vegas kicks off at least on the levels of Basel and Hong Kong, I think the third quarter is going to be strong again,” she said.However, while polished markets may have eased slightly in April, demand for rough appeared as strong as ever, with mining company tenders continuing to achieve record prices during the month. Gem Diamonds reported the average price of stones mined at the Letseng mine in Lesotho soared to $4,272 per carat at its April tender, compared with $2,383 per carat achieved during the first quarter. Gem Diamonds’ CEO Clifford Elphick attributed the hike to increasing demand for diamond jewelry from the U.S., continued “very strong demand” from India and China and low inventories of rough and polished diamonds in the cutting centers. Similarly, Tim Wilkes, CEO of Firestone Diamonds, noted that prices achieved at his company’s April tender reflected continued strength in the rough market. Firestone’s production from the recently launched BK11 mine in Botswana achieved an average price of $230 per carat, which was 30 percent above prices fetched at the company’s first tender in December. The average price of goods from Firestone’s Liqhobong mine in Lesotho rose 85 percent compared to December, to $181 per carat in April. Production StableThere were reports of slightly softer rough trading activity because dealers in the secondary market have grown cautious of the current high prices, and because there appears to be an accumulation of rough inventories. Mining companies are maintaining a slow ramp-up of production, with De Beers output up 5 percent year on year to approximately 7.4 million carats in the first quarter, and ALROSA increasing its production by 16 percent to 10 million carats. Rio Tinto reported production fell 29 percent to 2.5 million carats and BHP Billiton’s output dropped 28 percent to 551,000 carats (see graph at left). Heavy rainfall in southern Africa and in Australia impacted De Beers and Rio Tinto operations, and Rio Tinto and BHP Billiton are both transitioning to underground operations at their respective Argyle and Ekati mines, resulting in a more volatile grade. The result is that rough supply continues to be basically in line with 2010 levels, supporting the consensus that there appears to be enough rough on the market, but not enough polished being manufactured. The EconomyUltimately, trading levels will be sustained only if they are supported by consumer demand, both in the U.S., which remains the largest market for diamond jewelry, as well as in the emerging economies of China and India. While U.S. consumer sentiment, as measured by Thomson Reuters/University of Michigan, improved for most of April, there remains deep concern about the potential impact of recent inflationary oil and food price trends. In addition, U.S. and European sovereign debt concerns have escalated, with Standard & Poor’s lowering its long-term outlook on U.S. federal debt from “stable” to “negative.” Oil rose 10 percent from March 21, to trade at $112 per barrel a month later. Together with a weak dollar, the high oil prices fueled demand for precious metals, with gold setting a new record of $1,509.60 an ounce on April 21 and silver reaching a 31-year high, rising above $46 per ounce. These developments serve as a stern reminder that the global economic recovery is not yet entrenched and that consumer demand in mature markets such as the U.S. and Japan is still cautious.As a result, many in the industry view Vegas as the next test for the industry and are hoping that the show will be the best in years, as Hong Kong was, indicating that the U.S. is indeed on the recovery path. Such an outcome would surely spur the same confidence for the rest of the year that was evident at the start. Article from the Rapaport Magazine - May 2011. To subscribe click here.
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