Rapaport Magazine

Caution Continues

Polished prices were stable in March driven by dealer demand, while wholesale and retail jewelers maintain cautious inventory control.

By Avi Krawitz
Despite the improved atmosphere that enveloped the diamond industry in the first quarter, diamond dealers felt some fatigue during the Baselworld show that took place over eight days in the middle of March.
   Exhibitors noted that traffic was lighter than usual with fewer high-end luxury retail brands looking for goods than in previous years. More tellingly, they observed that liquidity is tight among diamond buyers, who are cautious about spending in the current geopolitical and economic environment.
   “Europe has tremendous problems if we consider the weakness in currencies, instability of immigration patterns and the fact that money is not moving as freely as it used to,” said Bruno Scarselli, of Scarselli Diamonds, a New York–based supplier of fancy color diamonds. “That shake-up largely explains what we are seeing in Basel this year. Traffic is light and those individuals who used to be buyers are not even lookers today.”
   Others added, with three days of the show still remaining at press time, that they had not yet seen the high-end buyers and luxury retail brands that usually converge on the diamond section at Basel looking for goods to fill orders. They also expressed frustration that Baselworld was too close to the Hong Kong International Jewellery Show, where they had met many of the same clients just two weeks earlier.
Polished Prices Stable
   Leibish Polnauer, president of Leibish & Co., a supplier of fancy color diamonds, noted that the Hong Kong show had a better energy than Basel. While Hong Kong wasn’t “the most amazing show we’ve ever had, there was movement,” he said. (See Hong Kong Shows Compete For Business in the Show section.)
   Dealers returned from Hong Kong fairly optimistic about the market and reported steady demand for .30-carat to 1.99-carat, G through J, VS to SI diamonds with shortages in specific items such as triple EX eye-clean SI goods. Polished prices were relatively steady during March with a slight downtrend witnessed in the .30-carat diamonds.
   The RapNet Diamond Index (RAPI™) for 1-carat diamond slipped .1 percent during the period March 1 to 21. RAPI for .3-carat diamonds fell .5 percent, while RAPI for .5-carat diamonds was flat for the period. RAPI for 3-carat diamonds rose .6 percent (see RapNet Diamond Index [RAPI™] chart in slideshow).
   Prices continue to be supported by shortages and tight inventory control as jewelry manufacturers, wholesalers and retailers have been careful not to overstock. Demand in Asia Pacific remains cautious with the large Hong Kong–based jewelers consolidating their operations by closing unprofitable stores. Dealers explained that the majors are shifting to a more focused strategy and exerting greater restraint in their inventory management after they overbought in 2013 and 2014 to support expansion programs that are now being reversed.
   Anecdotal reports suggest that small-to-medium size independent jewelry retailers in the region had a more positive Chinese New Year season than the larger chains and are back in the market looking for goods. However, China’s economic slowdown and anticorruption campaign have resulted in a reduction in diamond trading levels across the region. Hong Kong’s polished diamond imports contracted by 11 percent to $17.5 billion in 2015, while polished exports fell 3 percent to $13.3 billion (see Hong Kong’s Polished Diamond Trade chart in slideshow). China’s polished imports showed similar trends, declining 14 percent to $6.7 billion during the year, while polished exports declined 21 percent to $2.1 billion, according to data obtained from the China Customs Information Center (see China’s Polished Diamond Trade chart in slideshow).

Dealer Demand
   Exhibitors at both the Hong Kong and Basel shows noted that polished trading is being driven by dealer demand, while consumer demand remains cautious in most markets. Dealers are looking for goods as inventory levels were depleted toward the end of last year and they’re low on sellable stock.
   Diamond manufacturers have consequently raised their polished production since the start of the year and bought a high volume of rough to fill shortages in the polished market. De Beers rough sales rose to $610 million in its most recent February sight cycle, after it sold $545 million worth of rough in January. The company did not host a sight in March.
   Similarly, ALROSA’s sales reached an estimated $780 million through January and February, while sources close to the company told Rapaport Magazine that demand at the March session was in line with the previous months.
   Andrey Zharkov, ALROSA’s president, told Russian media that strong sales in the first quarter helped the company reduce some of the excess rough inventory it built up in 2015 — when production rose 6 percent to 38.3 million carats, while sales by volume plummeted 24 percent to 30 million carats.
   The company’s stockpile increased by 8 million carats through 2015 as inventory stood at 22 million carats valued at more than $2.5 billion at the end of December, management reported in its full-year earnings conference call. Revenue, meanwhile, jumped 8.4 percent to $3.28 billion — RUB 224.5 billion — for the year boosted by the positive translation of dollar-based sales to reporting in Russian ruble after the currency depreciated by 21 percent against the greenback in 2015. ALROSA swung to a profit of $470.9 million in 2015 from a loss of $246.2 million in 2014 with a strong first half compensating for weakness in the second half (see ALROSA’s Half-Year Revenue & Profit chart in slideshow).
   ALROSA will make a decision after the first quarter whether or not to reduce production in 2016 to approximately 36 million carats as it seeks to avoid further inventory buildup, or whether there is sufficient demand to meet its current plan of 39 million carats.

Second Quarter Slowdown
   Already, manufacturers noted that rough trading on the secondary market cooled in March and that rough sold at the auctions had become expensive. They added that ALROSA’s supply was expensive since the company has not reduced prices since September, while De Beers reduced prices by 7 percent to 10 percent in January.
   Manufacturers were therefore pleased that new polished from De Beers 2016 rough supply was providing some profit, since polished prices have firmed since October. From that aspect, the market was in a healthy state in March, according to one Israel-based dealer who requested anonymity.
   However, as polished production has increased, dealers remain concerned that there will not be sufficient demand to meet the new polished supply anticipated to become available in the coming months. They therefore expect rough demand to slow in the second quarter, especially as April and May are traditionally quieter months in the polished trade — and as the March trade-show season signaled, there is continued caution in the retail sector.

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

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