The eyes of the trade turned to India in August as polished
diamond suppliers sought out price stability in advance of the all-important
fourth-quarter buying season. Trading at the India International Jewellery Show
(IIJS) met their diminished expectations and they did not leave disappointed.
But the bar had been set low.
Price-sensitive Indian buyers were looking for inexpensive,
small diamonds and were pushing for deeper discounts. However, suppliers held
their prices relatively firm overall, despite the presence of some diamond
manufacturers with significant liquidity challenges. There was good demand for
low-color, SI-clarity stones at IIJS, while demand for better-quality VVS goods
remained weak. There was also steady demand for fancy shape stones,
particularly pear, heart, princess and emerald cuts. Cushions remain strong in
the U.S. market.
Indian retailers continue to keep their inventories low but
signaled some intention to buy diamonds before the upcoming Diwali and wedding
seasons. In addition, Indian polished suppliers noted that Chinese buyers have
begun to inquire about goods again, slightly raising expectations for the
September Hong Kong show. That was encouraging news to dealers in Belgium and
Israel, who returned from their annual vacations still uncertain about market
conditions. For additional IIJS coverage, see India market report on page 72.
The RapNet Diamond Index (RAPI) held relatively steady
during August, at least easing the downtrend that had prevailed in the
preceding months. For the period August 1 to August 27, RAPI for 1-carat
diamonds declined by .8 percent, while RAPI for .30-carat stones rose .6
percent. RAPI for .50-carat diamonds was flat for the period, as was the index
for 3-carat stones (see chart on opposite page, top).
RAPI for 1-carat diamonds is down about 10 percent so far in
2012 following sharp declines that began in May, when Far East and Indian
demand grew cautious. Indian consumers are facing rising inflation and interest
rates and the weaker rupee — down about 21 percent over the past year — is
taking its toll on consumer confidence, while pushing gold prices in rupee
terms to record levels.
As a result, India’s total gold demand fell 34 percent year
on year to $9.38 billion in the second quarter of 2012, with gold jewelry
demand down 26 percent to $6.46 billion, according to the World Gold Council
(WGC). Jewelry wholesalers reported steady demand for gold products at IIJS but
noted a shift toward lighter-weight gold jewelry. Similarly, total gold demand
in Greater China, including Hong Kong and Macau, was flat at $8.08 billion,
while gold jewelry demand dropped 2 percent to $5.33 billion.
WGC explained that China’s economic slowdown and the lack of
clear direction for gold prices were the main factors behind the year-on-year
decline in domestic gold demand. “Chinese consumers prefer to buy into an
established trend in the gold price and the period of consolidation during the
second quarter therefore acted as a deterrent to gold jewelry demand,” WGC
explained.
Global demand for gold jewelry fell 9 percent year on year
to $21.6 billion while in volume terms, demand declined 15 percent to 418 tons,
its lowest quarterly volume level in two years (see chart at right, bottom).
Diamond suppliers reported that Far East buyers, who have
been largely absent from the market in recent months, have begun to return. The
hope was that their return would impact sales at the Hong Kong show, which
begins on September 19.
While retailers have held off from large-scale diamond
buying for much of 2012, many sense they are ready to raise the bar as they
prepare for the fourth-quarter buying season that incorporates China’s October
1 Golden Week, India’s November Diwali festival and Christmas. Despite some
encouraging signs from the East, diamond dealers maintain that the U.S. is
still the best market to sell polished at the moment.
However, suppliers are being careful not to raise their
hopes too high, especially given the prevailing economic uncertainty and the
fact that high-end consumers have also cut back on their discretionary
spending.
“Not surprisingly, sales growth has been affected by
economic weakness in a number of markets,” luxury jeweler Tiffany & Co.
explained after reporting that net sales rose just 1.6 percent to $887 million
in the second quarter that ended on July 31, 2012 (see chart at left). The
group’s same-store sales fell 3 percent, while the Americas market posted a 5
percent drop, and Asia-Pacific and Europe both saw 7 percent declines. The
company reduced its full-year outlook given the challenging economic
environment.
Other major retailers did better. Signet Jewelers reported
that net sales rose 7 percent to $853.9 million, with its U.S. same store sales
up 8.2 percent and its U.K. same store sales increasing 2.1 percent. It should
be noted that at Signet, growth was driven by the company’s midpriced Kay
stores, where sales rose 12.5 percent, while its higher-end Jared division
posted a more lackluster 2.4 percent sales increase.
Caution also continues to emanate from the supply side,
where manufacturers have curbed their buying of rough diamonds. Russia-based
ALROSA, the largest diamond supplier by volume, reported that it lowered its
supply to the market in the second quarter and that it approved the sale of
$130 million worth of rough to Gokhran, the Russian treasury, for the first
time since 2009.
Diamond Trading Company (DTC) sightholders, meanwhile,
rejected De Beers goods at the June and July sights, complaining that
overpriced rough was hurting their liquidity. The August sight, which was
beginning at press time, was expected to be lower than anticipated.
In light of its own concern about the weak overall economy
and the decline in rough prices, midtier miner Gem Diamonds delayed its
expansion project at the high-value Letšeng mine in Lesotho and development of
its Ghaghoo mine in Botswana. The company saw net profit slide 51 percent year
on year to $14.3 million in the first half of 2012 as revenue fell 8 percent to
$180.2 million. The average price of its rough sold from Letšeng fell 30
percent to $2,133 per carat (see chart at right).
The mining company noted that reduced liquidity and a
decline in emerging market demand for rough diamonds during the second quarter
created especially challenging trading conditions, which led to higher polished
and rough inventory levels in the manufacturing centers.
Cutters in India acknowledge that the bigger diamond
manufacturers are holding large inventories of goods but added that they may
not possess the right type of goods. Some have cautioned that there is a
pending shortage of well-made SI goods and fancy shape diamonds, which have
maintained relatively steady demand. Some smaller manufacturers have closed
their factories until they sense an improvement in market conditions.
It’s been suggested by some that IIJS may have signaled a
turning point for the industry. Even though it was not a boom show, it was good
enough to raise hopes that Hong Kong could provide the boost that the market
needs in advance of the holiday season. But expectations remain deliberately
low. As IIJS proved, it’s not necessarily the amount of trade taking place, but
the sentiment surrounding it that boosts confidence.
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