Rapaport Magazine

Prices Soften, Lower Quality in Demand

Strong visitor traffic in the diamond hall of the Hong Kong show signaled an end to quiet summer trading, even as polished prices continue to soften.

By Avi Krawitz
The mood in the diamond industry improved during September as the Hong Kong Jewellery & Gem Fair exceeded expectations. Strong visitor traffic in the diamond hall signaled steady Far East demand even if sales were mediocre. Buyers continued to shift toward lower-quality goods and prices softened.
   The show, which took place from September 15 to 21, revealed a fair bit of tension between polished diamond suppliers who have liquidity and those who don’t. As a result, there was some discrepancy on prices between companies willing to sell cheap in order to generate cash flow, and those demanding value for their goods and holding firm on prices. Suppliers who lowered their prices sold off some inventory, often to bargain hunters, but there also were buyers willing to pay a little extra for consistent and reliable supply (See Hong Kong Show Stays the Course in the Show section).
   Despite the strong show traffic, the market is not booming. Buyers were looking for specific items to fill existing orders and were avoiding large inventory purchases through September. There is stable demand for Gemological Institute of America (GIA) dossiers, but profitability is low on these goods. Demand for dossiers of small .30-carat to .40-carat stones has softened, and demand for 2-carat-and-larger diamonds is relatively slow. There is stable demand for commercial-quality 10-carat-and-larger G-, VS2- stones, while high-end large stones are weak. In general, there has been a notable shift away from D to F, FL to VVS goods toward lower colors and clarities in all sizes. Demand for small melee goods remains strong.
   With the trade focused on the show, polished prices in September maintained the downtrend witnessed since April. The RapNet Diamond Index (RAPI™) for 1-carat lab-graded diamonds fell by .7 percent during the period September 1 to 22. RAPI for .30-carat diamonds declined by .3 percent, while RAPI for .50-carat diamonds was flat. RAPI for 3-carat diamonds dropped .3 percent (see RapNet Diamond Index (RAPI™) chart in slidshow).

High Inventory
   Polished trading has been slow throughout the third quarter, with dealers in New York, Antwerp and Ramat Gan taking their annual vacations at various times. Many hoped the show would spark an improvement in time for the Far East holiday buying season, which begins with the October 1 National Day Golden Week and extends until the Chinese New Year on February 19. However, the boom is yet to come. Dealers note that the major Hong Kong–based retail jewelers have cut back their buying activity. Their own retail sales slumped precipitously in 2014 against a backdrop of comparatively high gold sales that were recorded in China during 2013 and overall retail sales declines in Hong Kong as a whole.
   Still, the value of goods traded through Hong Kong continues to grow. During the second quarter of 2014, Hong Kong’s polished imports rose 9 percent year on year to $4.79 billion, while polished exports increased 14 percent to $3.26 billion, according to data published by the Diamond Federation of Hong Kong, China. Net polished imports, representing imports minus exports, fell 2 percent to $1.53 billion (See Hong Kong’s Polished Diamond Trade chart in slideshow).
   The trend was expected to continue through the third quarter, particularly as a large volume of goods was sent to the September show. In fact, dealers noted that there was more inventory than usual at the show this year, reflecting the low level of market trade witnessed in the past few months and the large amount of stockpiled goods exhibitors had available to bring to the show. Traders are hoping that the busy visitor traffic might translate to a strong follow-up after the show in the coming months that would help deplete their excess inventory.
   Doing so would also help ease some liquidity concerns, which deepened with the news that KBC Group has decided to wind down the operations of its Antwerp Diamond Bank (ADB) subsidiary, after efforts to sell it fell through. KBC stated that it would carry out the process in an orderly manner, with respect for diamond clients and the contractual arrangements already in place. No new loans or business will be conducted through ADB and KBC Group will absorb outstanding loans through KBC Bank NV. The industry also continues to come under greater scrutiny from other lenders, with less credit being made available than previously.

Rough Profits
   Simultaneously, manufacturers’ profit margins remain tight and diamond cutters subsequently reduced their rough diamond purchases during September. While there was no De Beers sight during the month, trading on the secondary market was quiet and premiums declined, with some goods selling at a discount to De Beers list price. Manufacturers are eyeing whether that will translate into lower prices at the upcoming De Beers sight in October.
   Steady rough prices have helped buoy mining company profits in the first half of 2014. ALROSA, the second largest diamond miner by value, claimed its most profitable quarter to date during the second quarter of 2014, helped by the depreciation of the ruble against the dollar.
   ALROSA’s revenue increased by more than 12 percent to $1.43 billion during the quarter with sales of gem-quality diamonds up 2 percent to $1.22 billion. By volume, the sale of gem-quality diamonds fell 12 percent to 6.1 million carats as the company carried out maintenance on some of its mines.
   The miner’s management said that revenue growth was influenced by the improved quality of its diamond assortments offered for sale. As a result, the average price it received for gem-quality diamonds rose 15 percent to $200 per carat during the quarter, while the company noted that market prices for rough increased between 7 percent and 8 percent during the first six months of the year. Higher rough prices helped boost ALROSA’s bottom line as net profit more than doubled to $509.5 million during the quarter (see ALROSA’s Diamond Sales vs. Profit chart in slideshow).

The End of Summer
   ALROSA wasn’t alone in its strong reporting. All the major mining companies, including De Beers, Rio Tinto, Dominion Diamond Corp. and Petra Diamonds posted strong earnings for the first half of 2014 on the back of strong manufacturer demand. Dealer trading remained fairly robust through July and August, with Belgium’s rough imports up 20 percent year on year to $1.23 billion in July and increasing 30 percent year on year to $1.09 billion in August. Rough exports rose 17 percent and 36 percent respectively in each month (See Belgium’s Rough Diamond Trade chart in slideshow).
   The slowdown in rough demand in September was partly seasonal since manufacturers already had purchased the bulk of the rough they needed to prepare sufficient polished inventory to satisfy holiday season demand. In particular, Indian manufacturers have ramped up polished production ahead of the Diwali festival that begins on October 21, after which factory workers usually take a month-long vacation.
   With polished inventory levels already high and a significant volume of goods moving into the supply pipeline as production increases, manufacturers are gearing for a positive end-of-year season. U.S. polished demand has been steady throughout the year and the Hong Kong show at least signaled that there is interest to buy goods, even if it might be at lower prices.
   With softer prices, profit margins remain under pressure but at least there is business to be done. Expectations for the show were low but suppliers left with greater confidence about the market than before. Whether that translates to a firming of polished prices and improved profit margins in the coming months remains to be seen. At least, the Hong Kong show signaled that the long and quiet summer months have passed.

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

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Tags: Avi Krawitz