The September Hong Kong Jewellery and Gem Fair failed to
ignite significant trading in advance of the all-important fourth-quarter
selling season, but few expected it would. Rather, demand at the show reflected
market conditions that have been prevalent for most of 2012, with Far East
buyers remaining selective, price sensitive and cautious.
Diamond suppliers noted, however, that they are doing
business. Activity at the show was focused on lower price points, with steady
demand and solid sales for VS2 to SI clarity, medium-to-lower color stones.
Demand for better-quality VVS goods is still weak.
While Chinese retail buyers have been out of the market for
the past three to four months, they have started to buy again to fill orders
and they are testing price levels. But they are not building inventory and
remain cautious in the face of continued global economic uncertainty. Indian
dealers, meanwhile, were bargain hunting, but with only limited success.
Overall, business was done at a price in Hong Kong and suppliers were prepared
to adjust prices down slightly in light of strong competition to close
sales.
Such sentiment was reflected in certified polished price
trends during September. The RapNet Diamond Index (RAPI) for 1-carat diamonds
declined .9 percent for the period September 1 to September 23. RAPI for
.30-carat stones fell .6 percent and RAPI for .50-carat diamonds was down .2
percent. RAPI for 3-carat stones was also down .2 percent during the period
(see charts in slideshow).
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Still, the volume of trade at the show was down from
previous years, as it has been throughout 2012. Retailers are happy to work
with smaller, streamlined inventories but want to know that the goods will be
available if and when they need them. Businesses across the pipeline are
realigning their inventories accordingly.
With high production costs and subdued demand, diamond
manufacturers are operating their factories at lower capacities, fueling
concerns that there may be pending shortages of popular goods in the market.
Already, the lack of certified VS2, triple EX goods and fine-cut fancy shape
diamonds was a feature of the Hong Kong show.
Diamond manufacturers stressed that they are still not
profiting on polished, especially since the goods sightholders are currently
bringing to market are based on rough that they bought in May to July, at peak
prices. “It’s just better to buy polished than rough at the moment because you
can’t profit on the rough,” said one exhibitor at the Hong Kong show.
Questions, therefore, remain regarding the extent to which
manufacturers will buy rough in the fourth quarter. While demand is down,
manufacturers need to keep their factories turning at certain base levels in
order to maintain their skilled workforce. Already, there is a sense that with
less rough coming to the cutting centers, many workers have left the industry.
India’s rough imports fell 37 percent year on year to $522.9 million in August,
according to the Gem and Jewellery Export Promotion Council (GJEPC), the lowest
level in three years (see chart at right, bottom). India’s rough imports
declined by 8 percent to $9.51 billion during the first eight months of the
year.
De Beers is hedging its bets. Philippe Mellier, the
company’s chief executive officer (CEO), said that the Diamond Trading Company
(DTC) will be unable to meet sightholder applications for the rest of the
current intention to offer (ITO) period through March 2013. He cited a
shortfall in production at the company’s operations, which have focused on
waste mining and maintenance since the fourth quarter of 2011, when the market
started to soften. Production has been particularly down at De Beers
highest-value Jwaneng mine in Botswana, which was closed for one month
following a fatality there on June 29.
One sightholder said he believes the pending shortfall is
being driven by the demand, not the supply, side of the market. “DTC is not
meeting its ITOs because sightholders will continue to reject their goods,” he
noted.
Mellier added that the October sight would be a small one
and acknowledged that the impact could have been far worse if the market was in
an uptrend. He stressed that the company will not make any further adjustments
on price. DTC cut prices by about an average 10 percent at its August sight,
“bringing rough and polished prices into alignment,” according to Mellier. De
Beers maintained its full-year outlook for production of 28 million to 30
million carats, representing a decline of up to 11 percent from 2011. The
company’s production in the first half of the year fell 13 percent to 13.449
million carats.
ALROSA’s production is also down for the year. The Russian
mining company reported that its output fell 15 percent to 16.4 million carats
in the first half of 2012, while its rough diamond sales rose 11 percent to
$2.4 billion (see chart at left). ALROSA also recently sold some rough to
Gokhran, Russia’s state repository, in response to softened demand.
Robert Gannicott, Harry Winston’s chairman and CEO,
explained that destocking in the processing chain has depressed demand and
rough diamond prices. Harry Winston decided to hold about $65 million worth of
stock from the second quarter to sell later in the year, when prices are
anticipated to improve.
The company’s consolidated sales fell 20 percent to $176.9
million during the quarter that ended on July 31, with mining segment sales
down 31 percent to $61.5 million and its luxury segment brand sales declining
13 percent to $115.4 million (see chart at right). Gannicott explained that the
almost complete loss of customers in Europe, combined with the slowdown in
China and India, have depressed general industry conditions and optimism.
“Luxury brands like Harry Winston have generally outperformed the broader
market because customers favor trusted suppliers with clear marketplace recognition,”
he added.
Similarly, margins were stronger for diamond exhibitors at
the Hong Kong show who also have branded jewelry lines and they noted that Far
East customers are becoming increasingly brand-conscious in their diamond
purchases. In the midst of market caution, members of the industry still
project retail growth for the full year, albeit at lower single-digit levels.
Mellier stressed that China’s growth will be driven by expansion to tier-3 and
tier-4 cities, while consumer demand in the U.S. remains stable and may get a
boost from the recent decision by Ben Bernanke, chairman of the Federal
Reserve, to inject capital into the U.S. market with another round of
quantitative easing.
Diamond traders at the Hong Kong show, however, questioned
whether the U.S. actions would have any real impact on the global industry.
Most expect diamond buying to remain selective and price sensitive, while their
profit margins remain tight. “The mood among buyers has improved, but they are
still cautious because there’s a lot of uncertainty out there,” said one
exhibitor. “The volumes are not there because the demand is not there; it has
nothing to do with price. If people are hungry, they will eat.”
Article from the Rapaport Magazine - October 2012. To subscribe click here.