Rapaport Magazine

Market Slow As China Demand Softens

Members of the diamond trade traveled to the March Hong Kong show hoping that polished demand will begin to revive.

By Avi Krawitz
Diamond trading remained cautious in February and the market lacked the buzz it usually has leading up to the Chinese New Year, which this year is the Year of the Sheep. The volume of holiday transactions was notably down compared to previous years and dealers were waiting for the March Hong Kong International Jewellery Show to provide a clearer perspective on market conditions. Contributing to the lull was the fact that while U.S. demand was stable, U.S. jewelry retailers have not yet made the large inventory purchases they typically do in the first quarter to replace holiday-depleted stock. One reason may be a slightly disappointing Christmas season.
   With little market movement or momentum, polished suppliers were still pressured by tight liquidity and thin profit margins, while inventory levels remained relatively high across the distribution chain. Diamond manufacturers have reduced their rough purchases and polished production by 20 percent to 30 percent in recent months in an effort to realign their operations.
   There was good demand for 1-carat G-J, SI-I2 diamonds, while demand for .30-carat to .50-carat stones continues to be soft, having slowed from a year ago when Chinese demand for these goods was strong. The RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds rose .4 percent during the period February 1 to 23. RAPI for .30-carat and .50-carat diamonds both fell 1.3 percent. RAPI for 3-carat diamonds fell 1.5 percent during the period (see RapNet Diamond Index [RAPI] chart in Slideshow).
Polished Trading
   The prevailing market softness in February continues the downward trend witnessed in the previous few months. Diamond trading was quiet throughout the fourth quarter of 2014 and into January as reflected in data recently published by the trading centers. Polished exports fell from all of the major hubs during the fourth quarter, except India (see 4Q Polished Diamond Trade at Major Centers chart in Slideshow).
   The high volume of goods exported from India resulted from diamantaires sending a lot of goods out on consignment and offering lower prices in an attempt to boost their sales turnover and improve their liquidity levels. India’s polished exports rose 9 percent year on year, while polished imports jumped 42 percent during the quarter. The high level of imports resulted partly from returns and also from dealers wanting goods on hand to satisfy domestic demand during the Diwali season in October and November and the wedding season that traditionally follows.

Thin Profit Margins
   As polished diamond prices continued to soften in February, as reflected in RAPI, manufacturers pushed for lower rough prices to help improve their profit margins — with varying success. While De Beers reduced its rough prices at the January sight, prices reportedly stabilized on the auction and tender circuit. Petra Diamonds stated that it witnessed good levels of interest and slightly firmer market conditions at its January tender. Similarly, Lucara Diamonds reported that it saw improved market conditions and firmer prices at its first sale of 2015, “following a period of weakening diamond prices toward the end of 2014,” the company explained.
   However, diamond manufacturers continued to express concern about their contracted supply, noting that prices at De Beers and ALROSA have not dropped to the same extent as prices at the rough auctions and tenders.

Rough Trading In Sight
   De Beers said in Anglo American’s recent 2014 earnings report that its average rough price index rose 5 percent in 2014. Sightholders maintained fairly high levels of rough purchases throughout the year, although their intake dropped off slightly during the fourth quarter (see 4Q Rough Diamond Trade at Major Centers chart in Slideshow). Rough imports to India were slightly down from a year earlier during the final three months of 2014, while imports to Belgium fell 11 percent year on year and to Israel, they declined by 16 percent. Hong Kong’s rough trade was slightly up during the period.
   As liquidity pressures continued to build, sightholders refused, or deferred, a large volume of goods in January, a significant proportion of which will likely be taken in February or March. De Beers reduced prices by an average of 4 percent in January and expectations were that it would adjust to slightly lower average prices at its February sight, which began at press time.
   De Beers again allowed companies to defer up to 25 percent of their supply to the March sight, which will be the final sight of the current contract period. Therefore, the ongoing February sight is expected to be of a medium size as sightholders are reluctant to defer too much of their supply to March when they will have to take it or lose out on the supply altogether. Manufacturers also require goods to keep their operations churning — albeit at lower-than-normal capacity — and have to consider whether their current buying will affect their supply in the coming contract period.

De Beers Results
   De Beers is currently accepting applications from potential sightholders for a new three-year contract that begins on April 1, 2015. Bruce Cleaver, De Beers executive head of strategic and corporate affairs, noted that applications have not been affected by the current softness in the market.
   While supply has been relatively low in the past two to three sights, Cleaver said that De Beers ended 2014 with relatively normal inventory levels and that the weaker market has not affected its operations. He added that although liquidity levels remain weak, they have not deteriorated further in 2015 and that the outlook for the year is still positive — even if De Beers is expecting a slightly tighter year in 2015 than it experienced in 2014.
   De Beers reported its strongest financial results since 2011 (see De Beers Revenue & Earnings chart in Slideshow) as underlying earnings jumped 74 percent year on year to $923 million in 2014, according to Anglo American’s 85 percent share in the diamond company. Growth was driven by higher rough diamond prices, foreign exchange gains as the South African rand and Canadian dollar depreciated against the U.S. dollar and improved efficiencies at its Botswana mines. Revenue rose 11 percent to $7.11 billion, while rough diamond sales increased 12 percent to $6.5 billion. The remaining $614 million was generated mainly by the company’s Element Six industrial diamond business.

Heading to Hong Kong
   De Beers noted that its growth was supported by solid consumer demand for jewelry in the U.S., despite a “slightly lower than expected Christmas selling season,” while India has started to improve. However, demand in China remains a bit on the low side, De Beers management observed.
   Polished suppliers added that caution about China has continued into 2015, particularly since the selling season leading up to the Chinese New Year was slightly muted. As a result, they shifted their focus toward the Hong Kong International Jewellery Show taking place on March 4 to 8, which is unusually soon after the Chinese New Year Golden Week.
   The World Gold Council (WGC) noted that the Chinese New Year occurred about three weeks later this year than in 2014, which meant that jewelry retailers deferred their year-end stock building from December to January. And while the diamond market stayed eerily quiet in February, members of the trade traveling to Hong Kong were hoping that jewelers are now ready to build up stock again, and rejuvenate trading after a slow start to 2015.

Article from the Rapaport Magazine - March 2015. To subscribe click here.

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Tags: Avi Krawitz