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Industry

Razor-thin Margins Tighten Liquidity

With quiet polished trading and rising rough prices, the diamond market has maintained a cautious near-term outlook.

By Avi Krawitz
Sell in May and go away? It seems polished diamond dealers lost some confidence during the month. In fact, suppliers and buyers were as cautious as ever with the low volume of trading effectively unsettling the market.
   Some attributed the lull to seasonal effects of a traditionally slow second quarter. They note that many Indian dealers were away during the school vacation, and that there was no major U.S. or Far East holiday season to significantly boost activity. Manufacturers instead point to rising rough prices that have thrown the market out of sync. They explain that rough prices are not supported by polished demand and that expensive rough is narrowing their margins while further tightening cutting center liquidity.
   In contrast, polished diamond prices remained relatively stable in May in most categories. The RapNet Diamond Index (RAPI™) for 1-carat certified diamonds was basically flat during the period May 1 to May 22, 2013, as were RAPI for .50-carat and 3-carat diamonds. RAPI for .30-carat diamonds rose 2.4 percent during the period as these goods continue to be the standout item in 2013, having increased by approximately 9 percent since the beginning of the year.
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Gold Rush
      Another factor depressing the diamond market this spring was the unexpected plunge of gold prices to levels that haven’t been seen in a long time. That sent people who might have been looking at diamonds shopping for gold in whatever form they could find. Not surprisingly, the rush to buy gold spilled over into an uptrend in gold jewelry demand. That trend was especially evident with Chinese and Indian consumers and retailers, who expect the yellow metal to eventually rebound in price.
   Gold’s popularity also extended to the U.S. The World Gold Council noted in its “Gold Demand Trends First Quarter 2013 Report” that U.S. gold jewelry demand posted its first year-on-year increase in more than seven years. “Further positive signs of recovery in the U.S. economy, coinciding with a correction in the gold price over the course of the quarter, created a positive environment for the jewelry consumer,” World Gold Council stated. The report noted that discount retailers reintroduced their offerings of gold pieces at key price points in recognition of solid underlying demand, while consumers are increasingly seeing gold jewelry as having investment value.
   Overall global gold jewelry demand by value increased 8 percent year on year to $28.9 billion during the quarter, while by volume, demand grew 12 percent to 551 tons, the World Gold Council reported. Demand responded to the decline in the gold price but also to signs of economic recovery in a number of markets, with Chinese gold jewelry demand setting a record quarterly value and Indian demand showing steady growth.

Unexpected Price Hike
   With polished trading sluggish, manufacturers were perplexed when De Beers raised rough prices by approximately 4 percent on average at its May sight, following a 3 percent hike in April. “We just don’t understand why they raised prices again,” one sightholder told Rapaport Magazine. “There is activity and the big companies are doing okay but profitability is very tight.”
   The sight had an estimated value of $600 million, with the price increase reflecting a change in list prices on various goods, as well as adjustments made to De Beers box assortments. As a result, trading of De Beers boxes on the secondary market came to a near standstill and premiums that were previously prevalent have now been eroded.
   With De Beers mining production still below capacity and sightholder applications for goods an estimated 20 percent below 2012 levels, sightholders suspect that De Beers is raising prices in an effort to buoy its sales figures. According to Rapaport estimates, De Beers sight sales fell 5 percent year on year to about $2.35 billion in the first four sights of the year.

Pockets of Demand
   While the rough increases appear out of sync with most categories of polished, demand has been strong for certain goods. There is steady Chinese demand for .30-carat to .40-carat, G to H, VS to SI triple EX diamonds for engagement rings. Chinese demand for commercial-quality stones is also improving.
   The Basel show, which took place toward the end of April, further signaled that demand is indeed selective. Recognized as one of the premier big-stone shows on the trade calendar, diamond suppliers at Basel reported strong demand for collection, large stones above 10 carats, as well as for fancy color diamonds and finely cut fancy shapes.
   Discussions with exhibitors in Basel indicated that the high-end market is being driven by wealth in emerging Far East economies such as Greater China, Malaysia and Indonesia, as well as the Middle East. European luxury retailers were also reportedly looking for unique stones at the show, and many exhibitors were buying such goods to service their clients’ existing orders, as well as to hold in inventory, confident they will eventually sell.
   However, suppliers of commercial bread-and-butter goods continue to struggle because trading has slowed since the relatively positive first quarter of 2013. Back then, trading was driven by post-holiday season restocking in the U.S. and steady sales during the Chinese New Year festival, as indicated by recently published data.
   Polished trading in both the U.S. and Hong Kong increased by value during the first quarter. Hong Kong’s imports from India jumped 20 percent and imports from Belgium rose 3 percent but declined from other major supply centers.

Reasons for Optimism
   While diamond trading may have slowed in the second quarter, the market has been encouraged by improved economic sentiment in the U.S., with stock markets continuing to rally. The Dow Jones Industrial Average (DJIA) hit record highs during May and has increased by about 14 percent since the beginning of 2013, settling well above the 15,000-point level.
   Most encouraging, the U.S. unemployment rate fell to a four-year low of 7.5 percent, driven by an increase in hiring in most states during the month, according to the U.S. Labor Department. As the world’s largest diamond market, any strengthening of the U.S. economic recovery is welcome news to manufacturers, traders and retailers at all points of the supply chain. 

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

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