Rapaport Magazine

Serious Times Ahead

Hong Kong Market Report

By Gaston D’Aquino

The year started off well, as some of the larger jewelry chains resumed their buying to replace diamond inventory sold during Christmas and in anticipation of the Chinese New Year, which started January 23. But a lull was expected to follow. That’s because the buying period for January was short, with the diamond market virtually shut down for about two weeks until early February. In addition, with this year’s usual March Hong Kong jewelry show moved up to open February 16, it is expected that most people will wait to buy at the show.

General sentiment in the trade is one of trepidation, reflecting the sense that there will be some serious movements in the world’s economies in 2012. The first has already occurred: Standard & Poor’s credit downgrades of nine countries among the 17 European member countries that make up the Euro Zone. Among them is France, which has maintained an AAA grading for a long time. Like the U.S. in 2011, France was downgraded to AA+.

Where Demand is Strongest

Since just before the financial crisis in 2008, when sales — and payments — began to slow in the U.S., many jewelry and diamond suppliers cut back on their exposure in the U.S. and concentrated instead on capturing new market share in Europe and the Middle East. Right now, no one is pinning much hope for 2012 business on the European market, where the debt crisis continues.

At the moment, it appears that the winds blow more favorably toward the Far East. Even if demand for diamonds is a bit weaker there than in 2011, it will still be much better than in the U.S. and Europe. Even Japan, which was considered the sluggard in the region, is showing signs of improvement in diamond demand, despite the catastrophic tsunami and nuclear contamination that occurred in March 2011.

Shopping at the Low End

Although the demand for diamonds might not have declined much in terms of overall volume of carats sold, there seems to be a definite change in the grades that are selling. In recent months, demand moved down into lower clarities for better colors and lower colors for better clarities, but right now, the demand is for lower colors in lower clarities. At the same time, rose gold settings for solitaires are being reintroduced. The use of rose or yellow gold helps to mask the lower-color diamonds, making them appear whiter than they actually are.

The key word is “cheap.” Even fluorescent diamonds are no longer shunned but, in fact, are sought after, mainly because of their larger discounts. In fact, there has been a notable increase in calls for fluorescents in recent weeks.

The Chinese New Year is a time when expensive “gifts” are presented to high-ranking officials in governments and financial institutions to pave the way for mutually beneficial relationships — and business accommodations — for the rest of the year. This tradition extends also to some of Hong Kong’s Southeast Asian neighbors. In 2011, only the best would do for these gifts and large stones in DIF were eagerly sought, but this year, gift-giving budgets appear to have been drastically reduced and stones of lesser qualities are more in demand.

Prices have stabilized and are not falling. In fact, SI prices have firmed somewhat due to the shortage of goods in this grade that are suitable for the Hong Kong and Chinese markets. There are also fewer goods being dumped by weak sellers. People with inventory feel comfortable defending their goods — and their prices — in the present market environment and they are not desperate or running scared as they were just a few months ago.

Year of the Dragon

The Chinese zodiac sign for this year is the water dragon. The Year of the Dragon has traditionally been one of great changes and movements, sometimes for good and also the opposite. Water is both nourishing and life giving, but when its force is concentrated, such as in floods, typhoons and tsunamis, it can be destructive. So what is there to look forward to from this year’s dragon?

It appears there could be major upheavals in 2012, both economically and politically. There will be new faces coming onto the scene who will be leading nations and businesses, as older leaders are replaced. This will further add to the overall sense of nervousness — new management might not have the experience or perspective to quickly solve the problems left by their predecessors.

One benefit to the industry in the Year of the Dragon is that a sharp increase is expected in the number of marriages by couples hoping to have babies this year. Dragon year babies are considered to be lucky and more likely to grow up to be powerful individuals. This should result in more diamonds being sold.

The more optimistic hope the industry can sail through this year smoothly, even while negotiating the unpredictable twists and turns of the dragon.

The Marketplace

  • Lower price points is the biggest story in the industry. In virtually all sizes, adjustments in size, color, clarities and cut are being made to find diamonds that can retail for lower prices. Even diamonds from Zimbabwe are now beginning to look more attractive to those who once shied away from them for political reasons, simply because of their lower prices.

  • Internet buying has become more relevant and more pervasive. Not only final consumers but dealers are finding the web useful for their diamond purchases. At a glance, they can compare what many diamond distributors and manufacturers have available and pick up what they want or need without having to stock the diamonds themselves. If they latch on to a reliable supplier, they can first offer the goods to their clients and then arrange to buy the stone after the buyer commits.

  • Dossiers below 1 carat are proving popular, but in G color and lower and in VS, SI.

Article from the Rapaport Magazine - February 2012. To subscribe click here.

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