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Polished Prices Soften, Rough Remains High

Diamond traders continue to be restrained by Far East caution and Indian exchange rate volatility.

By Avi Krawitz

Polished Prices Soften, Rough Remains High

Confidence in the trading centers got a bit of a boost from positive reports emanating from the JCK Las Vegas show but it was relatively short-lived as demand from other consumer markets remained cautious and polished prices were slightly softer in June.
   The RapNet Diamond Index (RAPI™) for 1-carat diamonds was down .1 percent during the period June 1, 2013, to June 24, 2013. RAPI for .30-carat diamonds fell .3 percent and for .50-carat diamonds, decreased by .4 percent. RAPI for 3-carat diamonds dropped .6 percent during the period.
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Slow Far East
   The Far East market was slow and selective, as reflected in quiet trading at the June Hong Kong Jewellery & Gems Fair. Some noted that the market is traditionally slow during the second quarter with no major holidays to boost activity, while others point to overall economic caution in China.
   Chow Tai Fook, the world’s largest jeweler, which has 1,640 points of sale in Mainland China and is considered a bellwether of Chinese jewelry demand, reported that its revenue on the Mainland fell 5.3 percent to $3.88 billion in the fiscal year that ended March 31, 2013.
   The company explained that the drop in sales resulted from weak retail sentiment and slower wholesale business, especially in the high-end gem-set jewelry products. Worse-than-expected sales during the October 1 National Day holiday and stagnant economic conditions throughout fiscal 2013 led to lower consumer confidence among the group’s retail customers and franchisees, the company added.

India Under Pressure
   Fueling industry concerns even more was the sharp depreciation in the Indian rupee as the currency fell to a record low of 59.9 against the U.S. dollar. The rupee has depreciated by about 9 percent since the beginning of 2013.
   While the weak rupee is favorable for exporters, it pressures the domestic market that relies on imports. The government has been trying to curb imports in an effort to contain the country’s large current account deficit, which prompted the Finance Ministry to raise the import duty on gold from 6 percent to 8 percent in June after domestic demand for the metal surged in May. The hike in duty was the second such increase this year. The government first raised it from 4 percent to 6 percent in January, a move that was met with criticism from the local jewelry market.
   In particular, the weak rupee pressured diamond manufacturers of small goods — largely sold as polished in India, which remains the largest market for small diamonds. The Reserve Bank of India (RBI) also warned of an increased risk of inflation with the depreciated currency. (See more information in the India market report.)

Rough Profit
   Cutters were equally concerned about the low profit margins achieved in manufacturing. Anup Zaveri, a member of the Gem and Jewellery Export Promotion Council’s (GJEPC) committee of administration, noted that while polished prices have been outpaced even by global inflation in the first half of 2013, rough prices have increased by an estimated 12 percent.
   Varda Shine, De Beers executive president of global sightholder sales, told Rapaport Magazine that average prices have increased by more moderate mid-to-high single-digit percentages, with certain categories of rough seeing double-digit growth so far in 2013.
   De Beers kept its prices relatively stable at its June sight with minor adjustments both up and down on certain goods. The sight had an estimated value of $540 million. Assortments were adjusted from the May sight — which included a larger proportion of higher-quality Canadian goods — to a more regular mix of goods in June.
   There is a sense that dealers are holding rough because manufacturing levels are below capacity. Zaveri cautioned that Surat factories will soon start to close if margins do not improve. Already, cutters report that factories are beginning to lay off workers because they are operating at such low capacity.
   Still, there were few refusals of goods at the June sight and rough imports to the manufacturing centers continue to rise. India’s rough imports grew 45 percent year on year to $1.64 billion in May, the most recent available data showed, and were up 10 percent to $7.28 billion during the first five months of the year.

ALROSA Selling to Market
   ALROSA has sold all its goods to the market so far in 2013 and has not found a need to negotiate sales to the Russian state depository Gokhran. During the worst of the global recession, the miner was able to maintain steady production by selling surplus goods not wanted on the market to Gokhran. In the first quarter of 2013, the market has absorbed all of ALROSA’s production.
   The company reported that revenue rose 6 percent to $1.2 billion in the first quarter of 2013 driven by an 8 percent increase in sales volume to 10.3 million carats. The company’s production fell 7 percent to 7.5 million carats but remains on track to meet the 2012 level. Net profit slumped 51 percent to $190 million during the quarter due mainly to exchange rate losses. (See more information in Russian market report.)

Overall Vegas Vibes Positive
   Industry sentiment received a boost at the Las Vegas shows that took place at the beginning of June, even if diamond trading that took place there was relatively slow. While diamond suppliers observed that traffic was slightly down from 2012, many noted that buyers were more focused and knew what they wanted at the show.
   On the whole, diamond buyers were selective and resisted any attempts to raise prices. There was good demand for commercial-quality SI and lower-clarity diamonds, while triple EX certificates sold at a premium to non-triple EX goods. There was also steady demand for off sizes — 2.50-carat and 3.50-carat, G-J, SI1-SI2 stones — while demand for fancy color diamonds remained strong. The show indicated continued good demand for fancy shapes, while cushions were slightly softer due to oversupply.
   Polished suppliers were encouraged that there were steadier orders further up the pipeline. Wholesale jewelers reported positive activity at the show with orders from their retail customers for both bridal and fashion jewelry. U.S. retail jewelers have gained confidence on the back of better economic news and that was enough to lift the mood at the show.

Frustrated Optimism
   Mining companies, like the rest of the pipeline, are looking toward the U.S. for short-term optimism. Many noted that U.S. retail sales are improving, with independent jewelers upbeat, while the larger, publicly listed companies — Tiffany, Sterling, Zale and Blue Nile — reported a relatively strong first quarter. However, they’re keenly aware of the caution exerted elsewhere.
   With China at an economic crossroads, and India hedging its volatile currency, the mature U.S. market currently offers the best environment for selling diamonds and jewelry. While that may be enough to ensure a reasonably positive outlook for the second half of 2013, the middle of the pipeline remains squeezed, conservative and frustrated. 

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

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