Rapaport Magazine

Trade Report

By Avi Krawitz
Going With Lower Prices
Manufacturers and dealers are hoping positive holiday demand and lower rough prices will boost sentiment and liquidity levels.

Polished diamond prices continued to decline in October as liquidity concerns deepened and global demand remained relatively weak. Trading was sporadic during the Jewish holiday period and further impacted when Indian businesses closed for two to three weeks during the Diwali festival that began on October 23.
   The slow market was also influenced by supply factors. There are a lot of goods currently on the market, particularly since the Gemological Institute of America (GIA) improved its turnaround time for grading and reportedly released more goods from its laboratories in the U.S. and India.
   The new goods coming onto the market, coupled with slow summer sales and production continuing on a consistent basis, has resulted in a buildup of inventory. Rapaport saw a 12 percent rise in the volume of diamonds listed on RapNet – Rapaport Diamond Trading Network from the beginning of September to the end of October.
   In an effort to boost turnover and raise liquidity levels, suppliers lowered their prices, while buyers continued their shift to lower price points. There was markedly weak demand, and softening of prices, for better-quality IF to VVS clarity diamonds.
   The RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds fell 2.3 percent during the period October 1 to 27. RAPI for .30-carat diamonds declined 2.9 percent, while RAPI for .50-carat stones dropped 2 percent. RAPI for 3-carat diamonds decreased by 1.6 percent during the period (see RapNet Diamond Index (RAPI™) chart in slideshow).

Uncertainty Reigns
   Given the declines, the trade has mixed expectations for the holiday season. While most still project positive growth in end-of-year jewelry sales, recent economic and geopolitical developments have further unnerved market confidence.
   A wide variety of factors from around the world are contributing to overall global uncertainty. Included are economic stagnation in the euro zone, particularly in Germany, slowed growth concerns in China — where third-quarter numbers were disappointing — and Japan and fears about investor confidence and consumption levels in the U.S. being negatively impacted by rising interest rates if the Federal Reserve winds down its quantitative easing program. Nor is world, economic or market confidence helped by Ebola, volatility in the Middle East, Russia’s Ukraine crisis and political protests in Hong Kong.
   Citing many of these factors, Bain & Company projected that the global luxury market will grow by 5 percent to $281.2 billion this year, down from the 7 percent growth recorded in 2013. Bain noted in its annual global luxury study that consumers are seeking out greater value for their money, capping their luxury budgets and downgrading to more affordable brands.

Buyers’ Market
   Throughout the luxury market, there has been a shift in demand away from high-end goods toward lower price points, including in diamonds. During the past few months, there has been a notable cooling in the market for .30-carat to .40-carat diamonds. Dealers at the recent Hong Kong Jewellery & Gem Fair suggested a possible burnout in demand for these diamonds by Chinese consumers, whose aggressive buying of these goods over the past two years influenced an increase in their prices. RAPI for .30-carat diamonds is still 4.5 percent higher than it was at the end of October 2013.
   Chinese buyers laid low during the June-July summer lull, holding relatively large inventory. When they returned to the market around the Hong Kong show, they shifted toward larger, pointer-size diamonds above .50-carat and lower qualities in order to maintain their price points.
   Chinese demand slowed slightly again during October, while retailers held sufficient inventory for the National Day Golden Week holiday that began on October 1. Dealers are also waiting to assess price trends during the U.S. Christmas shopping season before embarking on their purchases for the Chinese New Year, which falls on February 19.
   Still, a buyers’ market prevails with the trading centers focused on supplying the U.S. market for the holiday season. While the third quarter tends to reflect a strong flow of goods to the Far East — boosted by the Hong Kong show — the market tends to shift focus toward the U.S. during the final months of the year. Belgium’s polished exports to Hong Kong rose 20 percent year on year to $1.1 billion in the third quarter, while exports to the U.S. increased 6 percent to $919 million (see Belgium’s Polished Exports to the U. S. & Hong Kong chart in slideshow).

Rough Margins
   Suppliers are hoping to spur stronger polished trading in the coming months, particularly as they seek to raise liquidity levels and garner more attractive profit margins. While the banks have reduced their credit to the industry, and some withdrew from lending to the industry altogether, many manufacturers are self-financing more of their rough purchases than before.
   Rough trading slowed in October because manufacturers had already bought the rough they needed to have their polished stock ready in time for the holiday season. De Beers kept its prices basically stable at the October sight, which, at an estimated value of $460 million, was the smallest of the year to date, while prices on the secondary market fell.
   The slowdown in the rough market came as a welcome reprieve for manufacturers after strong rough trading squeezed margins in the third quarter. Belgium’s rough imports rose 26 percent to $3.66 billion year on year during the three months that ended on September 30, while rough exports grew 20 percent to $3.89 billion (see Belgium’s Rough Diamond Trade chart in slideshow).
   Trading, along with De Beers and ALROSA sales, is expected to remain relatively subdued for the remainder of 2014, which should influence further softening of rough prices. Meanwhile, the mining companies are on track to maintain annual production in line with 2013, if not slightly higher. While ALROSA’s production fell 2 percent in the third quarter, the company is forecast to increase production to achieve full-year output of 36 million carats. Fairly modest De Beers fourth-quarter production will push annual output for the company to the 32 million carats it has projected (see ALROSA & De Beers Production chart in slideshow).
   Much of the ongoing mining production will become available in the first quarter of 2015, when many industry observers expect polished trading to pick up again. Manufacturers are hoping that rough prices will sufficiently decline in the next two months to enable better profit margins at that time. As a result, polished market sentiment may well improve in the new year, after a lull that has continued in October. That is especially likely if consumer demand proves to be positive during the Christmas shopping season. 

Article from the Rapaport Magazine - November 2014. To subscribe click here.

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Tags: Avi Krawitz