Rapaport Magazine

Will Spending Replace Caution?

Few expect holiday sales growth to create strong inventory replenishment in 2013.

By Avi Krawitz
   Diamond traders gained some confidence in November with the approach of the U.S. holiday season despite initial reports of a slow start for jewelry sales. Few were surprised that retail sales in the U.S. were relatively sluggish at the beginning of the month. After all, Thanksgiving weekend fell earlier than usual in 2012, giving consumers a few extra days post-Black Friday to shop for Christmas, while Super Storm Sandy and the run-up to the presidential election added some consumer caution.
   MasterCard Advisors SpendingPulse reported that jewelry sales fell 6.7 percent year on year in the first week of November but rebounded to a 7.9 percent year-on-year gain in the second week. Similar trends were observed in other product categories.
   “Our research shows that Sandy clearly depressed the start to the early holiday season, with the storm significantly impacting the year-over-year growth rates in key holiday categories over the first week of November,” said Michael McNamara, vice president of research and analysis at MasterCard SpendingPulse. “By the end of the second week, there were signs of a bounce-back in several categories.”
   Sales naturally improved toward the end of November and initial reports from Thanksgiving weekend were positive, with consumers responding to retailers’ heavy discounts and promotions. Significantly, online sales continued to grow — both in dollar volume and as a percentage of total sales — because consumers are increasingly using their computer and mobile devices to source deals and compare prices and even make purchases.
   The year-end holiday season is something of a last chance for retailers in a year that hasn’t been all positive. Major jewelry retailers reported very modest growth in the third quarter. Signet Jewelers, which operates Jared and Kay stores in the U.S. and H.Samuel and Ernest Jones stores in the U.K., reported sales rose just .8 percent year on year to $716.2 million during the period, while Zale Corporation had a sales increase of 1.8 percent to $357.5 million. Again, online sales bucked the trend during the period, with Signet’s ecommerce sales up 35 percent, while Blue Nile reported that its sales rose 20 percent to $89.8 million.
   Most jewelry retailers are forecasting low-single-digit percentage growth during the fourth quarter and holiday period, which may be enough to satisfy a diamond industry that is still treading cautiously.


Steady Trading, Cautious Prices
   Polished diamond trading was relatively steady in November as dealers scurried to fill last-minute holiday orders, both for the U.S. and for India in advance of the Diwali festival on November 13. Jewelers appear to be holding sufficient goods, with Signet and Zale reporting vastly larger inventories in the third quarter than a year earlier. Demand continues to be focused on commercial quality VS2 to SI goods and fancy shapes continue to offer attractive opportunities for price-sensitive buyers, with cushion, princess and pear shapes the most popular.
   However, average prices continued to edge down. The RapNet Diamond Index (RAPI) for 1-carat diamonds fell .7 percent during the period November 1 to November 26.
RAPI for .30-carat stones was basically stable, while RAPI for .50-carat diamonds was down .6 percent. RAPI for 3-carat stones dropped by .7 percent during the period.

   RAPI for 1-carat diamonds is down 12.5 percent so far in 2012, with demand well below 2011 levels throughout the year. Polished imports to the U.S., the world’s largest market, fell 18 percent year on year to $4.5 billion in the third quarter, while polished exports from the U.S. declined 12 percent to $3.94 billion, according to U.S. Commerce Department. Similarly, data published by the Diamond Federation of Hong Kong reflects the
slowdown experienced in the Far East in 2012. Polished imports to Hong Kong fell
14 percent to $4.15 billion in the third quarter, while polished exports slumped 20 percent to $2.69 billion.

China and India
   Some Far East jewelers expressed hope that the once-in-a-decade change of political leadership in China that began in November would help rejuvenate consumer confidence and luxury spending. The World Gold Council (WGC) noted that gold demand in China lost further momentum in the third quarter. “The well-publicized slowing of China’s economy had a negative impact on consumer sentiment,” WGC wrote in its third-quarter “Gold Demand Trends” report. “This was particularly noticeable among the middle classes whose purchases of 18-karat gold jewelry were among the worst casualties.” The group added that a notable slowdown in the expansion of the jewelry retail network in China further magnified the impact on gold demand because stock building reduced accordingly.
   Conversely, WGC observed consumer sentiment in India, after a tough first half of
2012, improved when a late recovery in rainfall during the all-important monsoon season helped raise everyone’s mood, influencing jewelers to increase their inventories for the wedding season and Diwali. Jewelers were relatively upbeat during the festival and cited steady demand for gold and diamond jewelry, although the verdict was still out at press time whether actual sales exceeded 2011 levels. Polished traders returned to work after a short Diwali vacation in order to catch the U.S. holiday rush, while most Indian factories remained closed for the rest of November.

Rough Outlook
   Rough trading was quiet during November as reflected at the De Beers November sight, which closed with an estimated value of $480 million and prices holding relatively stable.
   Des Kilalea, an analyst at RBC Capital Markets, noted that rough prices are searching for a bottom after declining by around 15 percent to 20 percent in 2012. He stressed, however, that much depends on the major producers, who right now are being fairly conservative in what they sell. De Beers is facing some mining issues and remains focused on maintenance, while ALROSA continues to allow its long-term clients to defer some of their commitments because of the weak market conditions. “We expect that 2013 will be supportive of the price floor which appears to be building in the rough market,” Kilalea added.
   Gem Diamonds reported that while the average price achieved at its high-value
Letšeng mine fell in the third quarter, prices improved at its October sale. Petra Diamonds said it expects diamond prices to remain flat for the rest of 2012, with increases predicted for 2013 due to the effects of production decreases by the major producers and the restocking of inventories in the pipeline, combined with the gradual improvement in
global economic conditions.

   For now, however, it appears there is sufficient rough in the pipeline to support the market and few are expecting a significant increase in trading anytime soon. “For rough
to start moving again, the world needs to see some growth, as well as improved liquidity
in cutting centers and the liquidation of polished diamond inventories,” Kilalea said, noting those forces underpin his view that “2014 is more likely to be the recovery year than 2013.”

   Many seem to agree and do not expect major restocking from jewelers. In the short term, therefore, the industry seems content with current levels of demand and is prepared to hold off on increasing its inventories in a significant manner. Most businesses are waiting out
the holiday season, hoping stability will take hold.

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

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