Rapaport Magazine
Markets & Pricing

Virus afflicts industry

The health scare has dampened retail demand and made global trading difficult.

By Joshua Freedman
February brought new challenges for the diamond sector, just when the trade was sensing a recovery. The spread of the coronavirus left dealers with serious concerns about their ability to sell polished goods in greater China as the region’s luxury retail market reached a near standstill.

The industry had been showing positive signs in January after several difficulties in 2019, including the continued impact of the US-China trade war and reduced shopping activity in Hong Kong due to street protests. The domestic Chinese market was strengthening, largely because the weak yuan had made local spending more attractive for mainland residents than traveling to tourist destinations.

However, polished demand has since slowed, with the RapNet Diamond Index (RAPI™) for 1-carat diamonds declining 1.6% between February 1 and 23. Smaller stones, a popular category in China, saw a reversal of January’s price growth: RAPI for 0.30-carat diamonds fell 1.4%, while the index for 0.50-carat goods dropped 1%. The index for 3-carat diamonds decreased by 2.5%, reflecting continued weakness in the large-stone market.

Supplier disruption

The timing was unfortunate: The outbreak occurred during the Lunar New Year period, when many Chinese people shop and travel. In addition, the trade had been gaining confidence ahead of the important Hong Kong International Diamond, Gem & Pearl Show and the Hong Kong International Jewellery Show, which were supposed to take place in March. The health scare forced the organizers to postpone both events to May.

Indian manufacturers will likely suffer significantly from the slowdown, as many of them benefit from Hong Kong’s role as a cash market, traders noted. Retailers in the municipality mainly buy merchandise outright for money, rather than taking goods on memo, as many US clients do. The temporary closure of businesses in greater China could have a serious effect on suppliers’ cash flow, India’s Gem & Jewellery Export Promotion Council warned.

“Chinese retail is slow, and Hong Kong retail is very slow because there are no tourists,” said an executive at a Mumbai-based cutting firm. “The luxury business has come to a standstill. That will put severe pressure on liquidity.”

Pressure on miners

De Beers gave a moderately optimistic outlook for the coming year in its 2019 results report, noting that inventory levels were more balanced than they had been. But it pointed out several potential risks in addition to the coronavirus, including destocking by retailers as they shift to e-commerce, developments in US-China tensions, and geopolitical uncertainty in the Middle East.

At the mining level, the combination of threats is especially intense for De Beers and Alrosa, which built up large inventories during 2019 as they held back rough due to the weak market. Alrosa may now have a harder time selling the more than 22 million carats of rough stockpiles — equal to nine months of production — with which it began 2020.

“We understand that our clients are very cautious about what is happening [with the virus], and they are also evaluating their strategies for the Asian market for the second quarter,” Alrosa CEO Sergey Ivanov said during February’s International Diamond Week in Israel.

The sector is likely to remain slow until the effects of the virus on the global economy dissipate. That might take a long time.

Article from the Rapaport Magazine - March 2020. To subscribe click here.

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