Rapaport Magazine

Frustration Mounts As Profits Decline

Diamond manufacturers rejected unprofitable rough as polished prices continued to slide in July. Meanwhile, new data served as a reminder just how tough the first half of 2015 was for all.

By Avi Krawitz
Frustration mounted in July as the diamond industry appears to have contracted across all segments during 2015. Diamond cutters were under pressure and noted that they were unable to buy rough from the major suppliers and profit from the resulting polished.
   They responded by refusing to take “unprofitable” rough at both the July ALROSA alliance sale and the De Beers sight. Sightholders left an estimated 65 percent of goods on the table at the De Beers sight and the sale closed with an estimated value of around $200 million, its lowest level since the 2008 to 2009 downturn, according to Rapaport records.
   De Beers reportedly kept overall diamond prices and assortment quality stable at the sight, as did ALROSA at its sale. Both companies reported that sales fell in the first half of 2015 due to lower volume and a gradual decline in rough prices. ALROSA’s rough price index fell 6 percent in the six-month period, while De Beers price index dropped 8 percent.
   Manufacturers argued that those declines were not far reaching enough as contracted rough supply remains well above prices achieved at rough auctions and tenders and also on the secondary market, where trading faltered in July. With one eye on the polished market, manufacturers drastically reduced their rough buying and polished production.
   Diamantaires expect that jewelers will be getting their supply for the holiday season mostly from the existing excess of polished inventory rather than from new production. As of July, there was little rough coming to the market and still a lot of polished available.

Polished Prices Decline
   Polished prices continued to soften during the month, as they have consistently through the first seven months of the year. Discounts on RapNet — Rapaport’s Diamond Trading Network — exceeded 40 percent and the Rapaport Price List was adjusted accordingly.
   The RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds fell 2.3 percent from July 1 to July 27 at press time. RAPI for .30-carat diamonds dropped 5.7 percent, while RAPI for .50-carat diamonds declined 4.3 percent during the period. RAPI for 3-carat diamonds fell 1.3 percent (see RapNet Diamond Index chart in slideshow).
   The Hong Kong show, which took place at the end of June, reflected weak luxury demand in the Asia Pacific region. Sentiment in China was also impacted by a drop in the Shanghai Stock Exchange during July, which some cautioned might influence wealthy consumers to trim their luxury spending. U.S. demand remained steady, although dealer trading quieted slightly during the July summer vacation period.
   The quiet didn’t escape polished dealers in the trading centers of Mumbai, Antwerp and Tel Aviv, who continued to try and offload goods. While they’re holding sizeable inventory, there are also shortages of certain categories due to a significant reduction in manufacturing this year. Consequently, there has been an increase in demand for recycled diamonds during the month, particularly for larger sizes.
   Trading levels have declined since the beginning of the year, with Belgium’s polished exports and imports down 4 percent respectively during the first half of the year, while India’s polished exports fell 3 percent and its imports slumped 40 percent (see Belgium’s & India’s 1H Polished Diamond Trade chart in slideshow). Israel’s polished exports, which, unlike Belgium’s and India’s data is reported net of returns, fell 17 percent, while polished imports declined 21 percent during the six-month period.

Lower Carat Content
   The Antwerp World Diamond Centre (AWDC) suggested that Belgium’s trade with important partners such as Hong Kong and the United Arab Emirates (U.A.E.) was positive during the period, but there has been a shift in demand toward lower-quality goods. “We also notice this in overall consumer demand, as consumers are looking for more affordable diamond jewelry containing lower carat content,” an AWDC spokesperson said.
   Similarly, De Beers in its interim results pointed to lower Chinese demand as a key factor contributing to the weak market environment during the first half of the year. The company projected that consumer demand for diamond jewelry would be stable in 2015, having registered 3 percent growth in 2014, with moderate increases in the U.S. and other major markets in local currency, although offset by the strength of the U.S. dollar and softness in China.
   De Beers noted that consumer demand already was softer than expected in the fourth quarter of 2014, which, combined with the Gemological Institute of America (GIA) clearing its backlog, led to “abnormally” high polished inventories, which put added pressure on the pipeline.
   Those pressures extended to the mining sector. Anglo American reported that De Beers sales fell 21 percent year on year to $2.78 billion during the six months that ended June 30, 2015, while other sales — including sales at its Element Six industrial diamond unit and from the Forevermark brand — fell 21 percent to $246 million. Gareth Mostyn, De Beers chief financial officer (CFO), noted that the biggest part of Element Six’s business is servicing the oil and gas sector where activity was significantly reduced as oil prices slumped. De Beers underlying earnings dropped 23 percent to $360 million (see De Beers Half-Year Revenue, Earnings chart in slideshow). Similarly, ALROSA’s sales fell by an estimated 22 percent to $2.1 billion during the half year, according to the company’s trading update.

Indigestion Relief
   Mining company declines were reflected in the significantly lower level of rough imports to the trading and manufacturing centers. Belgium’s rough imports fell 19 percent year on year during the first half of 2015, while exports dropped 21 percent. Similarly, India’s rough imports dropped 18 percent and exports fell 12 percent (see Belgium’s & India’s 1H Rough Diamond Trade chart in slideshow).
   The AWDC explained in its commentary that rough purchases declined in all trading centers, including Antwerp, Dubai, Mumbai and Ramat Gan, as manufacturers have been pressured by low profit margins. “The price of rough diamonds remains high worldwide, despite the slight price decrease implemented by the major mining companies, while prices for polished diamonds were very low and global demand for polished diamonds also declined,” the AWDC noted.
   De Beers added that ongoing liquidity and profitability challenges facing the midstream and concern over recent bankruptcies in India have resulted in significant indigestion throughout the pipeline.
   The midstream seemed to have taken matters into its own hands during July, as cutters and dealers were determined to relieve the indigestion felt on their end. As Belgian and Israeli dealers traditionally take their summer vacations in August, the focus to restore liquidity is still on the rough market and they’re expected to continue to refuse unprofitable rough at the next rough sales cycle. In fact, De Beers informed sightholders they can defer up to 75 percent of their allocated supply in August. Therefore, rough supply remains low and mining company sales continue to drop as businesses start to prepare for the fourth-quarter holiday season while relying on existing inventory. By acting now in refusing unprofitable rough, the hope is that industry frustrations will abate — perhaps by year’s end.

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

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Tags: Avi Krawitz