Rapaport Magazine

Industry Gets Jump Start

Diamond trading was eerily quiet at the beginning of 2012 but an awakening of Far East demand has given hope that trading may yet gain momentum in the first half of the year.

By Avi Krawitz

Diamond cutters and dealers breathed a sigh of relief at the Hong Kong International Jewellery Show (see page 140 for full report) in mid-February as Far East buyers started to purchase diamonds again after an unusually quiet start to the year. While many exhibitors came to the show with relatively low expectations, they appeared satisfied that their forecasts were surpassed.

Even while the event lacked the speculative buzz and the level of trade that characterized the March 2011 show, sales were made and prices held firm. Buyers did not speculate as they had a year earlier and they were shopping for goods that they needed to fill orders and rebuild inventory that was depleted during the Christmas and Chinese New Year seasons.

The market was deadlocked in the first half of February leading up to the show’s opening as caution reigned and dealers were uncertain about prices. But activity at the show was enough to restore some much-needed confidence in the market.

Prices were largely stable throughout the month as the RapNet Diamond Index (RAPI) for 1-carat stones fell a slight .1 percent during the period February 1 to February 20. The RAPI for .30-carat diamonds rose 2.45 percent, and the RAPI for .50-carat stones increased 1.29 percent. The RAPI for 3-carat diamonds declined by 2.03 percent (see chart on opposite page).

Despite the overall market stability and positive reports from Hong Kong, doubt remained whether the momentum would continue into March and spread to other centers. Activity in the trading centers was restrained, with India’s trade impacted by exchange rate volatility and a new 2 percent import duty on polished diamonds that the government introduced in January. Trade in Israel fell during an investigation — launched in January and suspended in late February — into alleged money-laundering practices in the bourse. These factors combined with weak economic sentiment to effect a decline in global polished trading activity during the month.

Similarly, rough trading on the secondary market was weak, although small-scale mining companies reported improving demand at their tenders. Large quantities of rough from Zimbabwe’s Marange fields continue to enter the market and are expected to affect prices of lower-quality diamonds.  

De Beers, meanwhile, expressed caution despite recording strong 2011 results. Total group sales increased 26 percent year on year to $7.38 billion in 2011, while net earnings grew 72 percent to $939 million (see chart on page 20). De Beers rough sales through the Diamond Trading Company (DTC) rose 27 percent to $6.47 billion, with growth driven by strong price increases in the first half of the year. The company sold 29.29 million carats during 2011, down 24 percent from the 38.63 million carats reported in 2010. At the same time, DTC’s rough prices rose 29 percent through the year, indicating that prices softened by an estimated 6 percent in the second half.

Philippe Mellier, De Beers chief executive officer (CEO), explained that growth cooled in the second half as global economic uncertainty set in, causing consumer buying to slow and restricting cutting center liquidity. Mellier stressed that uncertainty continues to impact the diamond market and that growth in 2012 will be at a slower pace than in 2011.

“‘We still see softness in the market generated by the economic outlook and we still see sightholders being a little nervous,” he said. “The uncertainty will be there for the first half and I hope that by the second half of the year, we will have more visibility and a much better outlook for the market for the rest of the year and 2013.”

Data reported in the consumer centers offered mixed messages for the trade. While U.S. unemployment fell to a three-year low of 8.3 percent in January and many jewelers reported a satisfactory holiday season, overall jewelry sales continued to reflect flat trade when adjusted for inflation. U.S. government data revealed that nonseasonally adjusted jewelry store sales rose 8 percent year on year to $5.72 billion in December and the consumer price index (CPI) for jewelry by the same percentage. For the full year 2011, U.S. jewelry store sales grew 10 percent to $29.56 billion and the jewelry CPI rose 10 percent.

It’s little wonder, then, that wholesalers are carefully monitoring their inventories and controlling the quantities they are buying. Fewer goods are being sold at both ends of the pipeline. Still, U.S. polished imports rose 2 percent year on year to $4.9 billion in the fourth quarter, while polished exports increased 11 percent to $3.92 billion. The U.S. net polished imports — calculated as imports less exports to represent the value of diamonds that remained in the country for consumption — fell 23 percent to $981 million (see chart on opposite page, top). The volume of U.S. polished imports fell 12 percent and the volume of exports by 6 percent, indicating that the growth in the value of trade in 2011 was driven by price inflation.

The jewelry trade in other centers was driven by gold demand, particularly in China, which overtook India as the largest market for gold jewelry in the fourth quarter of 2011, according to the World Gold Council (WGC) “Gold Demand Trends” report for 2011. Global gold jewelry demand by volume fell 15 percent to 477 tons in the fourth quarter, while the value of demand increased 5 percent to $25.9 billion as gold prices enjoyed a strong bull run for most of the year. Gold demand for the full year fell 3 percent to 1,964 tons while it grew 24 percent by value to $98.6 billion (see chart at right, bottom).

Chinese demand was subdued for much of the fourth quarter, but improved in December when the trade started to prepare for the Chinese New Year. WGC explained that Chinese consumers continue to focus their attention on pure gold jewelry, given their penchant for investment-type assets.

At the same time, gold jewelry demand in India trailed off sharply in the fourth quarter, declining 40 percent by volume and 22 percent by value during the period. WGC noted that the Diwali festival failed to lift demand, while weakness in the rupee subdued buying and raised prices for local consumers. “The combination of high and volatile prices led consumers increasingly to demand lighter-weight gold jewelry and forced the trade to react by offering jewelry items at lower price points,” the WGC report stated. “Anecdotal reports suggest that only necessary basic purchases were being made, with consumers largely holding onto their cash as they wait for more opportune buying conditions.”

The same cautious spending pattern appeared to be true for the Indian diamond market; it was certainly evident at the Hong Kong show, where Indian buyers were less of an influencing factor than they usually are. The trade was also looking for lighter-weight diamonds and continues to shift toward lower-color and lower-clarity stones. Rather, it was buyers from Mainland China, Indonesia, Bangkok and the rest of Asia who spurred activity and gave the diamond industry a taste of optimism for the year. Other centers have taken note and are hoping the momentum will spread and help lift forecasts for the diamond industry worldwide for the first half of the year.

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

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