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Trade Report

By Avi Krawitz
Trading Slow at India Show
Polished markets are seasonally slow and prices soft while rough remains firm as diamond centers close for summer vacation.

Diamond manufacturing margins remained under pressure in July as polished trading was seasonably quiet and prices softened, while the rough market was firm. With many New York dealers on vacation at the beginning of the month, and Belgium and Israel gearing up for their summer breaks, Indian suppliers turned their attention to the local market.
   If dealers were hoping the India International Jewellery Show (IIJS), held July 17 to 20, would provide a significant boost to loose diamond trading, they left disappointed. Activity in the diamond section was relatively weak and suppliers noted that the show increasingly reflects domestic jewelry demand rather than global diamond trading — if it ever did.
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   Encouragingly, the show did signal that sentiment about the economy has improved since the May election of Narendra Modi as prime minister. The local stock market has rallied and the rupee stabilized since the election, fueling expectations that consumer confidence — and with it jewelry demand — will improve in time for the Diwali season that begins October 23.
   Jewelry wholesalers reported that gold and diamond jewelry sales were steady at IIJS but there was still a cautious undertone as retail jewelers bought lower volume than usual. Some reasoned that the show was a month earlier this year and retail jewelers still have time to buy inventory closer to Diwali.
   As a result, jewelers were satisfied with the state of the market at the show, even if their trade wasn’t booming. Diamond suppliers, meanwhile, accepted that the market tends to be weak in July and that international buyers were largely absent from the IIJS show. Therefore, they were looking to the upcoming September Hong Kong show as an indicator of prospects for the fourth-quarter shopping season.

Prices Soften
   Polished prices softened during July, largely on account of weak seasonal demand. The RapNet Diamond Index (RAPI™) for 1-carat certified polished diamonds fell 1.1 percent during the period July 1 to July 21. RAPI for .30-carat diamonds declined .9 percent, while RAPI for .50-carat diamonds was basically flat. RAPI for 3-carat diamonds declined a slight .1 percent (see RapNet Diamond Index (RAPI™) chart in slideshow).
   Diamond manufacturers noted that there has been an increase in the supply of 1-carat diamonds on the market since the Gemological Institute of America (GIA) improved its turnaround time for grading these goods. While demand for 1-carat to 1.50-carat diamonds is stable, cutters explained that the slight oversupply has influenced prices to soften. Demand for pointer-size GIA dossiers remains robust, if slightly lower than previous months. The turnaround time at the GIA remains three to five months for these goods. Demand for .30-carat to .69-carat, G minus, VS to SI goods is stable with some shortages in the market, while demand for .70-carat to .90-carat goods is weak.
   The slowdown in activity in the trading centers continued the trend observed in the second quarter of 2014. Global polished diamond demand diminished following a strong first quarter, which has enabled the main trading centers to report gains for the year to date.
   During the second quarter, Belgium’s polished exports fell 4 percent year on year to $3.65 billion, while polished imports were flat at $3.75 billion. Net polished exports, which is the excess of exports minus imports, fell to a deficit of $99 million, meaning that Belgium was a net importer of polished during the quarter (see Belgium’s Polished Diamond Trade chart in slideshow).
   As a trading center that also engages in manufacturing activity, Belgium should be a net exporter of polished, and that was true if the full year to date is taken into account. During the first six months of 2014, both polished exports and imports rose 6 percent, exceeding even levels witnessed during the speculative boom of the first half of 2011. Net polished exports grew 24 percent to $173 million.

Cutting Frustration
   Dealers note that the market is in a far healthier position than in 2011 when the boost in trading in the first half of the year was driven by speculation and subsequently downturned to a trend that is still evident today. However, despite the improved turnover and healthier markets, manufacturers are frustrated by the low profit margins and persistently firm rough market. Rough trading was relatively strong in July despite further increases in prices.
   De Beers boxes garnered steady premiums of around 5 percent on the secondary market even after the company raised prices — and improved assortments — on select boxes at the July sight. Similarly, ALROSA observed consistent demand for its rough and reported that prices rose 6 percent in the first half of the year.
   Sightholders reasoned that they currently need rough in order to have their polished inventory ready in four months to fill orders for the holiday season. They simultaneously stress that polished prices will have to increase significantly during that time if they are to profit from the rough they are currently buying.
   Still, the prospect of polished prices increasing significantly is unlikely and many are betting on rough prices softening in the coming months to improve manufacturing margins. In addition, dealers expect that given the backlogs at the GIA and the high volume of rough trading during the first half of 2014, there is relatively large inventory in the pipeline.
   Belgium’s rough diamond trade hit record levels in the first six months of 2014, with rough imports up 12 percent to $7.86 billion and rough exports increasing 8 percent to $8.14 billion. Net rough imports — the excess of imports over exports — improved to a deficit of $281 million from a deficit of $559 million a year earlier (see Belgium’s Rough Diamond Trade chart in slideshow).

Rising Production
   Mining companies have kept pace with the steady rough demand in the first half of the year following a period of strong production growth in the second half of 2013. However, production in 2014 has been mixed, with ALROSA reducing its output by 7 percent year on year to 15.9 million carats in the first six months. De Beers raised its production by 12 percent to 16 million carats and Rio Tinto’s diamond production grew 2 percent to 7.5 million carats (see Half-Year Diamond Production of Select Mining Companies chart in slideshow).
   Given the lag between bringing rough from production to market, a significant portion of the second-quarter 2014 production is expected to reach the market in the second half of this year. Furthermore, mining companies have traditionally ramped up production in the second half and might be expected to do so again in 2014.
   These factors suggest that there is sufficient inventory due to arrive at the market in the coming months that would prevent any significant upward trend in polished prices. Certainly, given the quiet polished market in July, it is more likely that traders will take a cautious approach leading up to the holiday rush. At the same time, manufacturers, because they are expecting a correction in rough prices, are likely to refrain from rough buying at current prices in order to increase their chances of higher profit margins when the season does arrive.

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

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