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Rough Strong, Polished Still Shaky

Rough demand surged at the start of 2016 as polished inventories were reduced in the second half of 2015. However, polished demand remained sluggish.

By Avi Krawitz
The diamond market has been characterized by strong rough trading and sluggish polished demand since the start of 2016. That has created some uncertainty among diamond dealers as to which direction the market is heading.
   “The rough market was exuberant in January due to restocking and factory and transaction-driven buying, but we typically have this ebb and flow momentum in the rough market,” said Marcel Pruwer, managing director of International Economic Strategy (IES), a consultant to the diamond industry, among others. “The question is if it is sustainable and how polished demand will be in three months when the new polished supply comes to market.”
   An estimated $1 billion worth of rough entered the market in January, marking a significant increase from the second half of 2015 when demand slumped. Manufacturers explained they need rough to fill shortages in the polished market as a result of the 30 percent to 50 percent decline in manufacturing last year. They added that rough demand is also partly driven by a need to keep their factories churning, as they cannot afford to lose any more workers than they did in 2015.
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   Manufacturers’ polished inventory was depleted following a significant decline in rough supply in the latter half of 2015. Therefore, while it takes about three months for rough to be manufactured into polished and for new production to enter the market, polished prices continued to be supported by shortages in February.
   Polished prices stabilized, calming the uptrend witnessed in the past three months. The RapNet Diamond Index (RAPI™) for 1-carat diamond edged up .3 percent during the period February 1 to 22. RAPI for .3-carat diamonds increased by .3 percent, while RAPI for .5-carat diamonds grew .4 percent. RAPI for 3-carat diamonds declined by 1.6 percent during the period (see RapNet Diamond Index [RAPI™] chart in slideshow).

U.S. Supporting the Market
   Polished trading slowed as buyers in Asia Pacific took vacations during the Chinese New Year festival. Dealers remain cautious about consumer demand given the global economic environment, particularly with reports of declining jewelry sales over the Chinese New Year season.
   Chow Tai Fook, the largest jewelry retailer in the region, noted that weak consumer sentiment for luxury goods due to China’s economic slowdown and recent stock market volatility weighed negatively on its sales during the season (see full report on Chow Tai Fook’s results in Hong Kong Market Report in the International section).
   Dealers therefore traveled to the Hong Kong International Jewellery Show, which began on March 1, with low expectations for the event. Demand in Asia Pacific is slow as jewelry sales have declined over the past year and retail inventory levels remain high.
   Rather, global demand continues to be supported by the U.S. even as trading remains below levels recorded in previous years. Polished imports to the U.S. declined 10 percent year on year to $5.4 billion in the fourth quarter of 2015, while polished exports fell 13 percent to $3.9 billion (see U.S. Polished Diamond Trade chart in slideshow). Wholesalers are selling off old inventory and trading is driven by orders for specific goods rather than inventory purchases. Overall, consumer spending is cautious, with retailers expressing concern about the economy in an election year and that a possible negative wealth effect from declining stock markets will impact luxury spending.

Building Confidence
   Therefore, businesses across the distribution chain are maintaining a cautious outlook for 2016, despite the recent surge in rough demand. While polished supply is expected to increase significantly in the second quarter as that new rough is prepared, De Beers is expected to limit its rough supply in an effort to stabilize the market.
   “We’re selling what our customers want and need rather than doing anything that might not be in ours or the industry’s best interests,” Gareth Mostyn, De Beers head of strategy, told Bloomberg. “The key for us is to continue to build on improving confidence through 2016.”
   Sightholders noted there was good demand for De Beers supply ahead of the February sight, which was ongoing at press time. They explained that there was better value in De Beers rough than other sources after the company reduced prices in January. ALROSA reportedly kept prices unchanged at its February sale, with its prices now unchanged since August. Prices were similarly firm at tenders and on the secondary market.
   While rough demand remained robust in February — and prices high — sales are expected to fall below the heights reached in January, when De Beers sold $540 million worth of rough. Still, sales in early 2016 marks a significant increase in the company’s performance in 2015, and particularly during the tough second half.

Rising Supply, Stagnant Demand
   De Beers rough sales slumped 54 percent year on year to $1.36 billion in the second half of 2015, which resulted in a loss of $102 million compared to profit of $454 million a year earlier (see De Beers Half-Year Revenue, Earnings chart in slideshow). Full-year rough sales fell 37 percent to $4.1 billion, while underlying earnings slumped 72 percent to $258 million.
   Similar declines were evident in the rough trading centers, with Belgium’s rough imports down 32 percent to $4.77 billion in the second half of last year and rough exports declining by the same margin to $5.1 billion (see Belgium’s Biannual Rough Diamond Trade chart in slideshow).
   The latest data published about India’s diamond trade in January confirmed the upward trend in rough trading and continued caution in the polished market. India’s rough imports rose 16 percent year on year to $990 million during the month, while polished exports slumped 42 percent to $1.04 billion, according to provisional data published by the Gem and Jewellery Export Promotion Council (GJEPC).
   De Beers management explained that rough demand in 2016 will depend on consumer demand for diamond jewelry and the resultant levels of restocking by retailers and, consequently, the midstream.
   At least in the first quarter, manufacturers required some restocking as evident in the recent surge in the rough market. However, while the current polished price levels reflect shortages in the market rather than a rise in demand, there is an overriding concern among diamond dealers about how the market will evolve as polished supply increases in the coming months while overall demand remains weak.

Article from the Rapaport Magazine - March 2016. To subscribe click here.

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