Tight profit margins frustrate diamond manufacturers while U.S. and Far East holiday sales bolster the industry.
Diamond market sentiment improved toward the end of December as last-minute Christmas orders helped spur polished trading after a slow start to the month. U.S. demand was steady but retail and wholesale diamond buyers remained conservative in their inventory management.
Diamond dealers and manufacturers were therefore relieved to end the year on a relatively positive note, even if the market wasn’t booming. However, they continued to express their frustration regarding low profit margins in the manufacturing sector, which they expect will continue in the New Year due to high rough prices and tightening bank credit.
Many of the banks that lend to the diamond industry are planning to tighten their credit policies in 2014. ABN AMRO reduced its financing of rough purchases from all sources from 100 percent to 70 percent effective January 1. As a result, manufacturers will have to finance 30 percent of their purchases from their own capital.
Polished suppliers saw some relief in December, as rough prices stayed basically stable, while polished prices were slightly positive. The RapNet Diamond Index (RAPI) for 1-carat certified diamonds increased by .4 percent during the period December 1 to December 23. RAPI for .30-carat stones rose .6 percent, while RAPI for .50-carat diamonds increased by .8 percent. RAPI for 3-carat diamonds fell .5 percent (see
RapNet Diamond Index chart
in slideshow).
U.S. demand was focused on commercial-quality diamonds, with good demand for VS2 to I2 clarity stones, as consumers, constrained by tighter holiday shopping budgets, gravitated toward lower price points. In fact, analysts noted that the season was characterized by discount shopping and promotional items, continuing a trend witnessed since the 2008/2009 recession.
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Consumers entered the year-end shopping season in a cautious mood, as reflected by the Conference Board’s Consumer Confidence Index, which fell to 70.4 in November from 72.4 the previous month. Economists at the Conference Board explained that sentiment regarding current conditions was mixed, with consumers saying the job market had strengthened but that economic conditions had slowed. Consumers also expressed greater concern about long-term job and earning prospects, suggesting that the holiday season would be challenging for retailers with such uncertainty prevailing.
Many economic forecasters preferred to focus on the improving job market as a signal that the U.S. economy, and in turn the retail environment, has a solid platform on which to post gains in the coming year. Unemployment fell to 7 percent in November, according to the Labor Department, which was the lowest level in five years (see
U.S. Unemployment chart in slideshow).
Analysts noted that the decline reflected a pickup in hiring, rather than a shrinking labor force, with an estimated 455,000 people joining the job market, after the labor force declined by 720,000 in October. The month-to-month increase was partly due to federal government employees returning to work after the October shutdown, the Labor Department explained.
The better job numbers spurred the Federal Reserve to believe the economy is ready to stand on its own, as it took the much anticipated first step toward tapering down its stimulus program. While the Fed will reduce its monthly bond buying from $85 billion to $75 billion, it pledged to keep interest rates low, for now.
Diamond markets continue to look to the U.S. to ensure stability for the global industry, especially since economic growth remains cautious in emerging markets. China’s leadership is pushing ahead with economic reforms, which has muted expectations for economic growth in 2014.
The most recent available data suggests that the Far East diamond trade continues to grow. Polished imports to Hong Kong rose 15 percent year on year to $4.78 billion in the third quarter of 2013, while polished exports rose 15 percent to $3.09 billion, according to data published by the Diamond Federation of Hong Kong, China. Net polished imports, representing the amount of goods that stayed in the region for consumption, rose 16 percent to $1.69 billion during the quarter (see
Hong Kong’s Polished Diamond Trade chart in slideshow).
Putting the Christmas season behind them, diamond dealers are hoping the momentum will continue as they turn to the Far East for the Chinese New Year, which begins on January 31. Until now, Far East demand has been selective and price sensitive, with strong demand for .30-carat to .40-carat, G to H, VS to SI triple EX diamonds.
Those goods have been a bright spot for polished suppliers throughout 2013, but the question remains if that is enough to influence better profit margins in the year ahead. Manufacturers despairingly expect the polished market to remain two steps behind the rough, despite the relatively modest rough price outlook provided by some mining companies.
ALROSA, the largest rough producer by volume, said it expects a stable rough market in 2014, with “a potential gradual growth in rough diamond prices by 2 percent to 3 percent.” The company also forecast that its production will stay in line with 2013 at about 36 million carats this year (see
ALROSA’s Annual Production chart
in slideshow).
Global production grew in 2013 but both mining companies and manufacturers reportedly were holding relatively large rough inventories at the end of December. After all, the year was characterized by increased production, manufacturing at levels below capacity and cautious polished demand.
As the year drew to a close, diamond cutters continued to ramp up their factory output as they worked to fill U.S. and Far East holiday orders. Rough demand improved accordingly in December, both at the De Beers sight and on the secondary market. Whether rough buyers are simply hedging their bets against future expected price hikes or genuinely need the goods to fulfill demand remains to be seen.
As one manufacturer told
Rapaport Magazine, “Rough is still expensive relative to polished. So you either reject the goods or buy and hold it in inventory until polished prices increase.” While that may have been a recurring approach in 2013, the theme is likely to continue in the months ahead. For now, at least, the mood is slightly more upbeat as the industry waits for a balance of rough and polished that is needed to bring stability.
Article from the Rapaport Magazine - January 2014. To subscribe click here.