Rapaport Magazine

Retailers Stocked For Short Term

After a relatively positive first quarter, the industry is bracing for a quieter period, still concerned about lower levels of consumer demand.

By Avi Krawitz
The diamond trade tends to view the second quarter as a seasonally quiet period of the year when many dealers and wholesalers take vacation. This year was no different as activity slowed in April, with many businesses in Ramat Gan, New York and Antwerp working with skeleton staff during the eight-day Passover holiday.
   There was concern, however, that the slowdown resulted from more than just seasonal factors. One Israeli supplier cautioned that demand is “just not what it used to be” and that jewelry stores are still filled with supply. After a positive first quarter, which saw some much-needed restocking across the distribution chain, there is now a sense there are enough diamonds available to satisfy short-term demand. Retailers are avoiding unnecessary inventory purchases and taking goods on memo.


   Sentiment consequently weakened during the month as trading failed to maintain the upward momentum from the beginning of the year. Selective buyers were offering lower prices for goods as inventory rose and new polished supply became available. Suppliers, meanwhile, refused low offers for better-quality RapSpec A2 diamonds but were also keen to reduce unwanted excess inventory. There was good demand for .30-carat to 1.99-carat, G through J, VS2 to SI1 diamonds, while big-stone demand was weak.
   The RapNet Diamond Index (RAPI™) for 1-carat, Gemological Institute of America (GIA)-graded diamonds was flat during the period April 1 to 24. RAPI for .3-carat diamonds fell .9 percent, while RAPI for .5-carat diamonds slipped .1 percent. RAPI for 3-carat diamonds dropped 2.1 percent during the period (see RapNet Diamond Index [RAPI™] chart in slideshow).

Focus on U.S. Demand
   Dealers noted that levels have dropped off from 2015. Even amid positive first-quarter trading, Belgium’s exports declined 7 percent year on year in the first three months of 2016, while Israel’s polished exports slid 17 percent. Polished imports to both countries also fell during the period (see Belgium & Israel Polished Diamond Trade chart in slideshow).
   The data, along with anecdotal reports, suggest that U.S. demand is steady and compensating for weak markets elsewhere. Belgium’s exports to the U.S. rose 1 percent to $823 million during the three months whereas exports to Hong Kong fell 21 percent to $919 million.
   The focus of the trade shifted back toward the U.S. after the Hong Kong and Basel shows that took place during March. Dealers anticipate the “quiet” period will continue until the JCK Las Vegas show that begins on May 31 and were encouraged by the unexpected recovery in stock markets in April. The Dow Jones Industrial Average (DJIA) climbed above the 18,000 mark for the first time since July 2015.
   However, consumer confidence declined in April for the fourth consecutive month, according to the University of Michigan’s survey of consumers. Richard Curtin, the group’s chief economist, explained that consumers reported a slowdown in expected wage gains and weakening income expectations and there are growing concerns that slowing economic growth would reduce the pace of job creation.

Tighter Margins
   Such sentiment weighed on diamantaires, who are still uncertain how the market will evolve after the Las Vegas shows and in the second half of the year. Manufacturers in particular expressed concern that weak polished demand coupled with high rough prices meant that their operating margins are already being squeezed again.
   Rough demand was robust in April even as De Beers raised prices by an estimated average of 2 percent during the month. Trading on the secondary market was steady and De Beers boxes were selling at premiums of 5 percent to 10 percent around sight week, although they softened as the month progressed.
   The flow of rough diamonds rose significantly from the end of 2015, with the volume of Belgium’s rough trade increasing year on year during the first quarter. However, imports by value slid 7 percent and exports by 1 percent (see Belgium’s Rough Diamond Trade chart in slideshow) as rough prices declined by an estimated 15 percent in 2015.
   The mining companies, meanwhile, registered strong sales at the beginning of the year. De Beers reported rough sales of $660 million during April, bringing its total across the first three sights of the year to $1.8 billion — up 13 percent from last year, according to Rapaport estimates.
   Similarly, ALROSA’s sales rose an estimated 16 percent to approximately $1.3 billion in the first quarter with the average price of its gem-quality diamonds down 9 percent year on year to $146 per carat. ALROSA managed to reduce some of the rough inventory it built up in 2015 as its first-quarter sales volume rose 34 percent to 12.1 million carats, while production fell 2 percent to 8.2 million carats.

Staying Prudent
   Of the top three rough diamond miners, only Rio Tinto raised production during the quarter (see Quarterly Rough Diamond Production chart in slideshow), as it has shifted to underground mining at the Argyle mine. The company last year lowered its production guidance for 2016, as did De Beers and ALROSA, since their stated goal is to reduce inventory.
   Having stayed on track to reach that goal during the first quarter, analysts expressed some confidence about the diamond sector for the rest of the year. VTB Capital wrote in an April note about ALROSA, in which the analyst has a stake, that 2016 is likely to mark a significant recovery that is driven by industry restocking through the pipeline. That will result in a marked pickup in rough sales as cutters and manufacturers are increasingly pressured to reverse the unprecedented destocking that took effect in 2015, VTB Capital added.
   Manufacturers note that polished production is stabilizing now that they’ve restocked from 2015 and their polished inventory is rising. Therefore, rough markets are expected to slow over the next two months and mining executives, too, acknowledged the seasonality of diamond trading.
   “So far, 2016 has seen significantly stronger rough diamond demand than that experienced at the end of 2015, as the actions taken by the industry continue to have a positive effect,” said Philippe Mellier, De Beers chief executive officer (CEO). “However, we are now moving into a part of the year where rough diamond demand has historically been lower as a result of seasonality, so we continue to adopt a prudent mind-set.”
   While dealers and wholesalers take vacation in April and May, they’re still uncertain if it’s seasonality or just lower demand that has influenced the slowdown in trading. Either way, they’re expected to be more cautious in the next month or two as profit margins have tightened and polished inventory levels increased amid sluggish demand. That is, with some hope that trading at the Las Vegas shows will reignite confidence in the diamond market.

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

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Tags: Avi Krawitz