Trade Report

Will Profitability Return?
The World Diamond Congress discusses numerous challenges facing the industry while the trade hopes for better margins in the second half of the year.

The ability of diamond cutters to profit from their operations again came under scrutiny as rough prices remained stable and polished prices softened slightly in June. In fact, the World Diamond Congress, which took place in Antwerp during the month, highlighted the lack of profitability as the most pressing challenge facing manufacturers and dealers today.
   The congress takes place once every two years, comprising the annual meetings of the World Federation of Diamond Bourses (WFDB) and the International Diamond Manufacturers Association (IDMA). “Diamond manufacturers worldwide are fighting for their survival,” said Maxim Shkadov, president of IDMA, at the start of the congress. “They are caught between a rough diamond supply system that is foul and faulty and a vertically integrated financial structure that basically continues to bleed them.”
   Shkadov and Ernie Blom, the WFDB president, outlined three challenges that dominated discussions at the congress — the lack of industry profitability being the first issue. They also highlighted the need to work with the banks to ensure a responsible approach to financing that supports the entire supply chain. Thirdly, they stressed the need to guarantee that initiatives being launched to develop guidelines for ethical source verification in the trade — such as the Precious Stones Multi-Stakeholder Working Group (MSWG) that recently met in Paris — are done with industry’s involvement.
   The congress also heard updates on issues pertaining to undisclosed synthetic diamonds filtering into the market, human rights violations affecting diamond diggers and “know your customer” efforts to tackle money-laundering issues impacting the trade. An update on the World Diamond Mark was also presented and representatives from the program penned a deal during the congress to launch the generic diamond marketing initiative in Turkey later in 2014, with plans to subsequently launch in Dubai.

Cautious Demand
   The hope is that the World Diamond Mark will stimulate greater demand for diamonds at the retail level that would support higher polished diamond prices and improve profitability all along the supply chain in the long term. Concerns about profitability at the congress reflected feedback received at the various Las Vegas shows and the Hong Kong Jewellery and Gem Fair that took place in June. Polished suppliers noted that while the market was relatively strong in the first quarter of the year, prices have since stabilized and softened in certain categories (see more congress coverage in Antwerp Market Report in the International Section).
   During the period June 1 to 23, the RapNet Diamond Index (RAPI™) for 1-carat certified polished diamonds fell by .3 percent. RAPI for .30-carat diamonds rose .4 percent while RAPI for .5-carat stones increased .2 percent. RAPI for 3-carat diamonds declined by .4 percent during the period (see RapNet Diamond Index (RAPI™) chart in slideshow).
   Reports from the JCK Las Vegas show were mixed, with good demand for commercial quality .30-carat to .70-carat, G to J, VS to SI diamonds for the U.S. market and strong dealer demand for noncertified pointer sizes sold in parcels (see full report in The Vegas Experience in the Industry Section). Trading at the Hong Kong show was subdued and fell below expectations, with buyers expressing no urgency to find goods and willing to hold out for better prices.
   Dealers in Hong Kong reported there was good demand for larger stones above 3 carats, which has driven growth in Hong Kong’s diamond trade so far in 2014. Hong Kong’s polished imports rose 10 percent year on year to $4.93 billion in the first quarter of the year, while polished exports grew 19 percent to $3.51 billion, according to the Diamond Federation of Hong Kong, China. Net polished imports — which represent the excess of imports over polished, indicating the amount of goods that stayed in the region for consumption — fell 7 percent to $1.42 billion (see Honk Kong Diamond Trade chart in slideshow). Imports of polished below 1 carat rose 3 percent year on year, while goods above 1 carat jumped 22 percent, the data showed.
   While the June Hong Kong fair is still smaller than the March and September shows, it has grown its exhibitor base, with more suppliers from the main trading centers attending. The verdict is still out on whether the event has recorded a sustainable growth in the number of buyers attending.

3Q Survival
   Sentiment in the trading centers remains positive despite the cautious mood among buyers. The atmosphere among India’s traders continues to improve as stock markets there have rallied and the rupee strengthened since the election of a new — perceivably more probusiness — government in May. The rupee is up 3 percent since the election results were announced on May 23, but remains 3 percent down for the year to date (see Ruppe Trend in 2014 chart in slideshow). As a result, there are rising expectations for jewelry sales at the India International Jewellery Show (IIJS) taking place in July, which would in turn raise expectations for a better Diwali season than 2013.
   Trading in other centers, including New York, Antwerp and Ramat Gan, is expected to be relatively quiet through July and August as wholesalers and dealers take their summer vacations. As a result, most expect polished prices to remain flat at best in the coming months, adding further pressure to manufacturing margins.
   So far, rough prices have held steady and De Beers kept its prices basically unchanged at the June sight, which closed with a projected value of $640 million. Rapaport estimates that rough prices rose about 7 percent to 10 percent during the first six months of the year, with most of the increases effective during the first quarter. Driven by those price hikes, De Beers rough sales rose 8 percent to approximately $3.25 billion during the first half of 2014, according to Rapaport forecasts, which would be De Beers strongest six-month period since the first half of 2011 (see De Beers Half-Year Rough Sales chart in slideshow). Parent company Anglo American is scheduled to release De Beers interim results on July 25.
   Despite manufacturers’ profitability and liquidity concerns, rough trading on the secondary market remained steady following the June sight. However, many question whether such levels of activity can continue. Rough demand is expected to soften during the slow summer months because prices are perceived to be high relative to the equivalent polished prices. Furthermore, polished inventory levels are relatively high and a large amount of inventory remains stuck at the Gemological Institute of America (GIA) awaiting certification, thus diminishing manufacturers’ need for new rough.
   In the past few years, the third quarter has signaled a slowdown in the rough market and a reduction in prices, which has helped free up some liquidity in preparation for the holiday season. Current trends point to a similar occurrence in the coming months of 2014. The question on everyone’s mind is whether there is sufficient polished demand to enable higher prices and improved profitability in the trade, which would answer the pleas of manufacturers and ensure their survival for at least another year.

Article from the Rapaport Magazine - July 2014. To subscribe click here.