Rapaport Magazine

Trade Report

By Avi Krawitz

Price Sensitivity Continues

While polished trading improved in October, dealers are reading mixed messages in the global market.

Anticipation has risen for the holiday season across the globe. Expectations are focused on November, when India’s Diwali festival on November 3 and the U.S.’s Black Friday on November 29 give the earliest indicators of how the year-end holiday will play out. Sales totals on those two periods are traditionally seen as an important barometer for the season.
   Although polished diamond demand improved in October, there was still a jittery mood among diamond dealers and manufacturers after enduring the uncertain environment that was prevalent during the third quarter. As a result, trading remained selective and price sensitive despite the pending holidays.

   There also was concern within the industry regarding the impact of the 16-day U.S. government shutdown on consumer confidence and spending plans for the holiday. The shutdown resulted from an impasse over the funding of the Affordable Care Act, referred to as Obamacare, coupled with heated negotiations to raise the country’s debt ceiling before the October 17 deadline.
   While the debt ceiling crisis was resolved at the very last minute — but only temporarily — the publication of official economic data was delayed due to the deadlock. Analysts warned that the impasse may continue to impact economic growth and consumer confidence into the holiday period because the negotiated solution is only temporary and the debt debate will have to be revisited.
   Throughout the crisis in Washington, diamond dealers in the major trading centers noted steady U.S. demand for polished diamonds. The busiest categories were .30-carat to .50-carat, G to I, SI- goods, while better-quality VVS clarity diamonds continue to be weak. The RapNet Diamond Index (RAPI) for 1-carat diamonds fell 1.1 percent during the period October 1 to October 21. RAPI for .30-carat diamonds rose .4 percent, while RAPI for .50-carat diamonds increased by the same margin. RAPI for 3-carat diamonds declined by .2 percent.

Golden Week & Diwali
   The declines resulted in part from continued quiet in the Far East wholesale market, where retail buyers are in no rush to build up inventory. The major jewelry retailers Chow Tai Fook and Luk Fook Holdings reported strong sales during the October National Day Golden Week, continuing the momentum from a positive second fiscal quarter that ended on September 30. Retail activity in China, Hong Kong and Macau is being dominated by gold jewelry demand, with consumers bullish about forecasted price trends for the yellow metal.
   The Chinese government is trying to restructure the economy so that consumption will be the main catalyst for growth rather than investment and export demand. But it seemingly has a long way to go since investment has remained a far more important contributor to economic growth than consumption demand in the first nine months of 2013. China’s gross domestic product (GDP) rose 7.8 percent year on year in the third quarter, which was its quickest pace so far in 2013.
   Similar consumer caution has been seen in India although the mood has improved with the approach of Diwali and the stabilization of the rupee during the past month. Diamond dealers regained some lost confidence and were more active in looking for polished diamonds. They were competing for goods in the local market with the many international buyers — mainly from Israel and New York — who were in Mumbai this past month shopping for the holidays.

Reduced Manufacturing
   Foreign buyers sensed the liquidity crisis in India’s manufacturing sector and were hoping to pick up a bargain or two. But none of the significant large manufacturers was dumping goods at lower prices en masse to generate cash. Rather, they, and particularly the small- to medium-size companies, are reducing production in order to better control inventory levels. The Gem and Jewellery Export Promotion Council (GJEPC) noted that India’s manufacturers have already reduced their factory capacities due to the lack of profitability resulting from high rough prices, the earlier rupee volatility and the recent slowdown in global demand.
   In the meantime, the council appealed to manufacturers, who didn’t need too much convincing, to curb their rough purchases. Sightholders refused about 15 percent of the goods on offer at the October sight due to their persistent profitability and liquidity challenges. They had refused about 20 percent to 25 percent of goods at the previous sight.
   De Beers responded by decreasing prices by mid- to high-single-digit percentages on the rejected Indian goods, but changed the assortments in some of the boxes, which sightholders noted effectively increased their value. The company raised prices on some boxes, most notably in the 4-grainers to 8-grainers by low to mid-single-digit percentages, with some adjustments made to the assortments. Rough trading on the secondary market remains quiet, with most De Beers boxes selling for cash at discounts or with long-term credit.
   Still, India’s rough imports continue to rise compared to 2013 and were up 18 percent to $3.64 billion in the third quarter. The fourth-quarter numbers are expected to be softer with many businesses closed for most of November during the Diwali break. However, the mining companies continue to ramp up production with De Beers, ALROSA and Rio Tinto having all increased their output during the first nine months of the year, continuing the trend seen during the third quarter.
   Therefore, there appears to be enough rough in the pipeline, with both mining companies and manufacturers seemingly holding excess inventory. That has eased any fears that there might be shortages in the polished market when wholesale buyers need goods more urgently to fill Christmas orders. For now, the trade is being driven by dealers looking for the right goods at the right price, which has resulted in some shortages in select goods. With retailers prepared to delay their Christmas inventory build-up by as much as possible, those market conditions may well continue through November.

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

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Tags: Avi Krawitz