Rapaport Magazine

Trade Report

By Avi Krawitz
Liquidity Woes
Slowed polished trading, soft prices and steady rough markets put further pressure on manufacturers’ liquidity.

Polished diamond markets were relatively quiet and conservative in August as liquidity tightened in the manufacturing centers and buyers avoided large inventory purchases in advance of the September Hong Kong Jewellery & Gem Fair. With an eye on the show, trading in the Hong Kong market showed signs of improvement although Chinese consumer demand remained cautious. Retailers in the region note that shoppers from Mainland China are spending less than normal due to continued economic uncertainty and a slowdown in gold buying. With no major holidays taking place in recent months, retailers are looking toward the October 1 National Day Golden Week as a barometer of Far East consumer demand.
   Much of the slowdown in activity during August was seasonal, with Belgian and Israeli dealers taking their annual summer vacation for most of the month. Diamond prices declined, continuing the downtrend witnessed during June and July.
   The RapNet Diamond Index (RAPI™) for 1-carat lab-graded polished diamonds fell 1 percent during the period August 1 to 25. RAPI for .30-carat diamonds decreased by 1.1 percent, while RAPI for .50-carat diamonds declined .8 percent. RAPI for 3-carat diamonds fell .8 percent (see RapNet Diamond Index (RAPI@™) chart in slideshow).
U.S. Polished Exports Rise
   The trade was largely focused on the U.S., where dealers have exhibited steady demand for commercial quality SI to I1 clarity diamonds and dossiers. In general, 2014 has signaled a continued shifting away from expensive better-quality goods toward lower-priced commercial and promotional qualities.
   Recent data published by the U.S. Commerce Department suggest that U.S. demand is steady at both ends of the spectrum — very small and larger diamonds — while the country has become a supplier of medium-range goods to other markets. Within the category of goods below .50 carats, U.S. exports exceeded its imports by $1.59 billion during the second quarter, compared with a $385 million deficit a year earlier.
   The imbalance between U.S. small diamond imports and exports widened with all major diamond trading centers, including Belgium, Hong Kong, India and Israel. Furthermore, it appears that U.S. exports of smaller diamonds are focused on the .30-carat to .49-carat range, while imports in this category are weighted toward the goods on the smaller end.
   Overall, however, the U.S. remains a net importer of polished, as it should be considering its status as the world’s largest market for diamond jewelry. During the second quarter, U.S. polished diamond imports rose 5 percent year on year to $6.76 billion, while polished exports grew 15 percent to $6.52 billion. As a result, net polished imports — imports minus exports, indicating the amount of goods staying in the country — fell 71 percent during the quarter, to $239 million, due to the strong growth in polished exports (see U.S. Polished Diamond Trade chart in slideshow).

Large Inventory, Tight Liquidity
   U.S. polished diamond exports rose sharply in June, reflecting unsold returns from the JCK Las Vegas show. In fact, the show was somewhat of a turning point for the trade as polished trading has slowed since then. Simultaneously, rough trading has increased, affecting manufacturers’ profit margins and liquidity levels. Rough imports to India rose 14 percent year on year in July, maintaining a strong uptrend compared to the previous year (see India’s Rough Diamond Imports chart in slideshow).
   The De Beers July and August sights were the largest of the year, closing with estimated values of $775 million and $715 million, respectively. Indian manufacturers need to buy rough during these two months in order to have the bulk of their polished supply ready before reducing their operations during the Diwali break that will begin on October 23.
   There is currently a lot of inventory in the pipeline, following the recent strong rough buying and considering the continued backlog of goods below 1-carat sizes being graded at the Gemological Institute of America (GIA). Those goods are expected to enter the market in the coming months. The weak polished trading and price declines evident in recent months, combined with De Beers rough prices rising in July and holding in August, have tightened liquidity in the manufacturing centers.
   As liquidity tightened, rough trading slowed and premiums were reduced on the secondary market in late August. Sightholders expect the trend to continue in the coming months.

A Miners’ Market
   A cyclical slowdown in rough demand would represent a contrast to the trend witnessed through most of 2014. Recent reports from the diamond mining companies indicated a strong first half of the year for the mining sector, with growth largely driven by an increase in prices and relatively modest growth in production and sales.
   Among the major mining companies, Anglo American reported that De Beers rough sales rose 15 percent year on year to $3.5 billion in the first six months of 2014 (see De Beers Half-Year Revenue, Earnings chart in slideshow). Underlying earnings jumped 59 percent to $320 million, representing the company’s strongest results since the first half of 2011 when rough price speculation spurred mining company revenues.
   This time, the price increases were more gradual. De Beers reported that rough prices rose by about 7 percent during the first half of 2014, which was about in line with increases reported by other diamond miners. Philippe Mellier, De Beers chief executive officer (CEO), explained that the company sold more lower-quality goods compared to 2013 as Indian manufacturers returned to the market. During the first half of 2013, liquidity among Indian diamond cutters was squeezed as the rupee depreciated sharply against the U.S. dollar, affecting their ability to buy dollar-denominated rough.
   The relative stability of the rupee in 2014, coupled with strong polished demand in the first quarter, has contributed to the overall improved sentiment in the diamond market compared to 2013. However, many have begun to question whether that will last through September because polished trading has been cautious so far in the third quarter.
   Some questions may be answered at the upcoming Hong Kong show. Polished suppliers are hoping the fair will signal renewed Far East demand to complement the steady U.S. market. That might lift liquidity levels and, with it, shatter the quiet that defined the polished market in August.

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

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Tags: Avi Krawitz