Rapaport Magazine

U.S. Wholesale

By Brian Bossetta
Tension Between Rough and Polished Prices

With the summer months behind them, U.S. wholesalers are hoping the rest of the year doesn’t remain slow, as did the second half of 2013. But it’s still too early to tell if that pattern will repeat, according to Greg Telonis, president of Mr. Baguette, a manufacturer of small loose diamonds and jewelry in New York City. “Business was good this year until July, but then sales started falling off in August,” Telonis said, adding that while slowdowns in summer are not uncommon, they can often continue well into fall. “But the stock market is strong, and the job numbers are not bad, so those are good indicators for our business,” he said. “Consumer confidence seems to be improving as well.”
   The recovering real estate market — with increased property values — has also lifted consumer confidence, observed Oren Sofer, a partner at Beny Sofer, a New York City–based loose diamond and jewelry supplier. Basic American goods — G to J, SI1 to I1— have been moving steadily, Sofer said. Morris Szklarski, president of Kelsol Diamond Company, also in New York City, said business has been “a little better” than at this time in 2013, which he also credits to a healthier economy. SI goods from 1.25 carats to 2.5 carats are Szklarski’s top sellers.
   For Sumeet Sethi, sales director at Manak Jewels, a gemstone and diamond manufacturer in San Francisco, most of his recent sales have been to clients placing custom orders rather than buying in bulk. And although Sethi described business as “okay,” he was optimistic that the September Hong Kong Jewellery & Gem Fair would pump up sales after what’s been a lethargic summer. “This is the final big show of the year and there’s always a lot of excitement,” Sethi said. “There’s usually a lot of carryover and it’s a big pointer to the Christmas season.”

Help From Asia?
   Telonis isn’t sold on the Hong Kong show having a positive impact on sales this time around. “I think it’s going to be a lukewarm show at best,” he said, “mainly because the Chinese are not buying as heavily as they were two or three years ago.” And, if that’s the case, it is not good news for the U.S. market because Asia, according to Szklarski, is a huge factor for wholesalers in the U.S.
   “The Asian market is becoming more and more important,” Szklarski said. “And if it picks up, especially in China, then our whole industry will get a tremendous boost.” Prior to the economic crash of 2008, the majority of U.S. sales to China, Szklarski said, were in better goods — VS and up. “Historically, the Chinese have kept their wealth in diamonds and gold, with the richer Chinese wanting the most-high-end goods.” Whether the Hong Kong show will help facilitate a return to pre-crash business with Asia remains to be seen, Szklarski said.

   What is most concerning to Telonis is the potential for a “touch of panic” in the market due to strong price resistance since the price of rough remains, in Telonis’ view, simply too high for dealers to make a profit. “The problem is that De Beers is raising prices and it’s very difficult to make money,” Telonis said. “Right now, there’s a lot of insecurity in terms of replacing inventory and selling it.”
   Sethi agreed that the high price of rough creates a burden for wholesalers, especially when trying to replace goods. “Whatever you sell is hard to replace for the same price,” he said. “Prices have to come down. Nobody’s selling.” Sofer described the rough/polished price margins as “challenging” and said that dealing in loose diamonds — especially Gemological Institute of America (GIA)–certified — has become a “super-price-conscious game,” with unprecedented access to information at consumers’ fingertips as the driving factor. “Consumers feel they can go online and figure out exactly what they need to know and what they want,” Sofer said. “Then it’s just a matter of going out and finding it at the right price.”
   “Challenging” is also how Mehul Shah, owner of Shivani Gems, a manufacturer and wholesaler of quality cut diamonds in New York City, described the end-of-summer business climate. “The client isn’t as ‘hungry’ and everyone is working with a very tight cash flow,” Shah said, adding that the final weeks of the summer have been “more competitive” than in 2013.

Liquidity Problem
   The narrow profit margin between rough and polished has created a liquidity problem in the industry, Telonis said, resulting in a reduced turnover of goods. “De Beers has forgotten that there are a lot of old goods currently on the market,” he said. “They are only concerned with gross sales and net profits. They don’t care who gets hurt along the way.”
   And though Szklarski agrees that the liquidity problem is a drag on business, he said it’s nothing new and just one of the realities of the diamond trade. “Diamond dealers have always complained about the price of polished being cheaper than rough,” he said. “There’s always a lag and it’s been going on forever.”

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

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