Rapaport Magazine

Hope For The New Year

The diamond industry ended 2012 satisfied with the level of holiday sales, even if the season lacked notable growth.

By Avi Krawitz
Hope For The New Year

Relatively speaking, December was a positive month for the diamond trade. Amid
the on-again, off-again fiscal cliff negotiations in the U.S., the holiday season was reasonable, with anecdotal reports indicating that jewelry sales were about in line with
the 2011 season, if not slightly up. The season was characterized by heavy discounting
and extensive promotions as retailers sought to boost the final numbers by offering
lighter-weight gold and lower-quality diamonds to accommodate consumers’ tight budgets. 

   Regardless of the final sales totals, the U.S. was a steady market for the diamond trade
at year-end, with consistent orders from the major retailers helping to buoy polished prices during December and offsetting slower sales to independent jewelers, who remain more conservative in their buying. Accordingly, there was strong U.S. demand for nice-make
SI-quality goods, while fancy shape diamonds offered attractive price points, with
princess-cut stones the most popular this holiday season. As Christmas sales wound
down, dealers in the trading centers shifted their focus toward the Far East, hopeful
that consumer confidence will rise in advance of the Chinese New Year on
February 10, 2013.

   Overall, certified diamond prices were relatively steady in December and the
RapNet Diamond Index (RAPI) was edging toward its first monthly increase, albeit
a slight one, since March 2012. RAPI for 1-carat diamonds was flat during the period December 1, 2012, to December 26, 2012. RAPI for .30-carat stones increased
1.2 percent, while RAPI for .50-carat diamonds rose .8 percent. RAPI for 3-carat
diamonds grew .3 percent during the period.


Fiscal Cliff
   But while the market appears stable, there remains an undercurrent of caution about
the global economy, particularly because the U.S. at the last minute averted going over a fiscal cliff by passing legislation that did not address spending cuts but did raise taxes on the wealthy. Higher taxes on the wealthy, due to kick in January 1, fueled concern that luxury spending may stagnate, at least in the beginning of the year.

   Despite the difficult economic environment, there was a slight growth trend in
U.S. jewelry sales in 2012. Nonadjusted U.S. government data showed that jewelry
store sales, which do not include sales at big box department stores such as Walmart,
grew 8 percent year on year to $2.18 billion in October. Jewelry prices, as measured by
the consumer price index (CPI) for jewelry, declined 1.3 percent year on year in October, sliding a further .8 percent in November. Jewelry store sales improved 4 percent year on year to $21.89 billion for the first 10 months of the year and the CPI for jewelry held
close to 2 percent.

Back to the East
   Other global consumer markets are keeping a close watch on developments in Washington. A slowdown in U.S. consumer demand could have a detrimental effect
on economic growth in China and India — much the way the euro-zone crisis did in
2012, if not more so.

   Sales at Chow Tai Fook, a Hong Kong–based jeweler with stores across greater
China, grew just 7 percent year on year to $3.28 billion during the six months that
ended September 30, 2012, while same-store sales fell 1.7 percent. The company outlined significant challenges facing the jewelry industry during the period, including a weak global economy that affected China’s trade and subsequently lowered domestic consumption and investment confidence. All these factors affected the sale of luxury goods, especially in
the high-end and gem-set jewelry category, according to company spokespersons. Consumers either refrained from purchasing or lowered their budget for jewelry, the company observed.

   Conditions may have improved toward the end of 2012, with the outlook for China
more upbeat as new political leadership took over who may provide some stimulus to the economy. Polished dealers were encouraged by an uptick in demand in December from
the Pacific Rim for certified round, .30-carat to .40-carat, H+, VS+ goods as dealers began to prepare for the Chinese New Year.

Balancing Rough
   Dealers also note that overall demand remains selective, with shortages in nice-make SI, nontint, Gemological Institute of America (GIA)–certified diamonds as Indian cutters resumed manufacturing at low capacity after a month-long Diwali hiatus. Many workers were still away from Surat in December due to the ongoing wedding season. Even though operations are slowly ramping up, and a normal flow of new goods is expected to resume in January, manufacturers are holding sufficient rough to work through the initial post-Diwali manufacturing cycle.
   Rough trading was therefore relatively weak through December, particularly for expensive De Beers goods, which were selling at low-to-no premiums on the secondary market after the company kept prices relatively stable at the small December sight. There was some improvement in demand for rough from other sources, including Russia’s ALROSA, where dealers noted better value during the month and all the goods were reportedly taken.
   ALROSA’s clients deferred taking portions of their allocated supply at previous sales, mainly in the third quarter, when the market was at its weakest. They are expected to
take those deferred goods in the first half of 2013 when market conditions are expected
to improve.

   In contrast to De Beers, which has curbed production and supply and maintained high prices, ALROSA is currently selling larger volume at lower prices. ALROSA’s diamond sales by volume declined 44 percent year on year to 5.1 million carats during the third quarter, while production rose 32 percent to 9.1 million carats. Revenue from diamond
sales dropped 38 percent to $752.3 million. The average price of ALROSA’s gem-quality diamonds dropped 9 percent year on year to $211.30 per carat during the quarter, and appears to have declined further in December. Production for the full year is expected to
be slightly down from 2011, while annual sales are forecasted to have increased slightly, boosted by a stronger fourth quarter.

Relative Hope
   As a result, manufacturers, who have consistently struggled to profit from rough in 2012, are seeing better margins of late. But they are concerned these may be short-lived because some expect rough prices to rise in the first quarter of 2013. It remains unclear whether such an increase would reflect the limited supply strategy of the major mining companies or a successful holiday season. Similarly, time will tell whether polished prices will rise.
   Either way, manufacturers are hoping the recent improved sentiment will filter through the New Year and that they can enhance their profit margins, or at least maintain them. Much depends on the Far East in the first quarter, and whether demand during the next major retail season stimulates a need to buy more rough, and whether others along the pipeline replenish their diamond inventory. For even as December was a positive month for the diamond trade, the improved mood was being measured relative to a difficult year, and coupled with hope for a better start to 2013. 

Article from the Rapaport Magazine - January 2013. To subscribe click here.

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Tags: Avi Krawitz