Rapaport Magazine

Low Profit, Excess Inventory Unbalance Market

Industry discussions highlighted some pressing issues that became even more urgent as market conditions softened in June.

By Avi Krawitz
The biennial Presidents’ Meeting that took place in Tel Aviv in mid-June highlighted the pressures facing diamond manufacturers and dealers that appeared to intensify following the JCK Las Vegas show.
   Diamond markets were quiet and trading activity was relatively slow in June as post-show demand was not as strong as in previous years. Diamond dealers left Las Vegas fairly confident that the U.S. market was steady, even if sales at the show were mediocre (see Las Vegas Jewelry Week story in the Cover Stories section).
   However, sentiment softened as diamond prices came under pressure due to continued sluggish global markets. There was select demand for fine-quality VS to SI diamonds but slow polished sales throughout the first six months of the year have resulted in diamantaires holding significant excess inventory.
   Consequently, diamond prices continued to decline during June. The RapNet Diamond Index (RAPI™) for 1-carat diamonds dropped .3 percent during the period June 1 to June 22. RAPI for .30-carat diamonds declined .8 percent, while RAPI for .50-carat diamonds fell 1.3 percent. RAPI for 3-carat diamonds dropped .2 percent (see RapNet Diamond Index (RAPI™) chart in slideshow).
   There has been steady demand for 1-carat diamonds, while demand for better-quality .30-carat to .50-carat diamonds has been soft due to weakness in China. Market activity in June continued the trends witnessed so far in 2015. RAPI for 1-carat diamonds was basically stable during the first half of the year and RAPI for .30-carat and .50-carat diamonds declined by more than 6 percent.

Frustrated Presidents
   Sensing the frustration of the trade, representatives of the World Federation of Diamond Bourses (WFDB) and the International Diamond Manufacturers Association (IDMA), which hosted the Presidents’ Meeting, highlighted the main challenges facing the industry in 2015.
   Speakers at the three-day event noted that their most pressing issues were:
  • Lack of profitability in the midstream.
  • Declining bank credit to the industry and the high-risk perception that the banks have about the trade.
  • Over-grading and the temporary color treatment of diamonds.
  • Undisclosed mixing of synthetic diamonds. 
  • The need to increase competition and transparency among service providers, with particular reference to the Rapaport Price List.
   Still, the lack of profitability emerged as the most urgent challenge, particularly as polished prices continued to decline in June, while rough prices were relatively stable. Ernie Blom, president of the WFDB, urged members of the trade to stop buying rough at prices at which it’s not possible to make money.
   Much frustration was also leveled at the mining sector and Blom appealed to the mining companies to work with the trade to ensure that all segments of the market are profitable and remain viable.
In his address to the Presidents’ Meeting, Philippe Mellier, De Beers chief executive officer (CEO), stressed that every diamond company is responsible for its own margins and must make its own choices about how to succeed in the new market reality.

Stable Rough Prices
   Manufacturers expressed support for De Beers strategy to reduce its supply and maintain relatively stable rough prices during the weak market period. They argued that a sharp reduction in rough prices would negatively impact market sentiment and exert further downward pressure on polished prices.
   Rough prices were reportedly stable at the De Beers June sight, which closed with an estimated value of $550 million. Sightholders noted a slight increase in the box price of larger goods and some added that De Beers also improved the assortment quality on those same boxes. However, sightholder sentiment was largely negative as manufacturers stated that polishing rough diamonds at current prices is still unprofitable.
   Despite their low profit margins, sightholders took most of their rough supply in June and the amount of rejections at the sight was small. Sightholders rejected a large amount of goods earlier in the year.
   Consequently, Rapaport’s estimated sight value for each of the five De Beers sights that took place in the first half of 2015 were lower than those registered for each respective sight in the past five years. De Beers rough sales dropped 28 percent year on year to approximately $2.52 billion in the first half of 2015, according to Rapaport estimates (see De Beers Half-Year Rough Diamond Sales chart in slideshow).
   De Beers has responded by lowering its production plan for the year to between 30 million to 32 million carats, from its previous forecast of 32 million to 34 million carats.
   In contrast, ALROSA President Andrey Zharkov told the Presidents’ Meeting that his company’s goals are to maintain stable volumes of rough supply and price stability. Still, ALROSA’s sales by volume fell 26 percent year on year to 7 million carats during the first quarter, albeit compared to an extraordinary high base the previous year. Its average price achieved grew 4 percent year on year to $161 per carat (see ALROSA Sales Volume vs. Average Price chart in slideshow). ALROSA’s underlying revenue and profit, which is stated in Russian rubles, showed significant gains as reported earnings were boosted by the weak currency during the first quarter. During ALROSA’s earnings conference call on June 4, Zharkov said that the company reduced its prices by 6 percent since the beginning of the year.

Manufacturing Squeeze
   Zharkov further stressed to the Presidents’ Meeting that under-performance in the diamond cutting and polishing sector could potentially disturb future growth of the entire industry. He echoed Blom’s call to work together to overcome the rough-to-polished price imbalance.
   Similarly, Sarine Technologies, which supplies equipment used in diamond manufacturing, noted that business sentiment was dampened as manufacturers’ profit margins were squeezed due to high rough diamond prices relative to polished prices and weak consumer demand across most markets outside the U.S. Sarine posted its weakest quarter in years with revenue down 50 percent year on year during the first quarter and profit slumping 90 percent (see Sarine’s Revenue & Profit chart in slideshow).
   Rather than invest in equipment upgrades, manufacturers have maintained low operating levels during June and appear focused on depleting existing polished inventory levels. Buyers have become very selective and while nice makes are selling well — and are in short supply — there are a lot of excess goods in the market that are not moving.
   Zharkov stressed that the main problem is that there is currently an oversupply of polished in the market. He, and others at the Presidents’ Meeting, emphasized that the industry needs to raise its marketing activity to boost demand.
   Certainly, lagging demand was the underlying concern at the Tel Aviv meeting and raising consumer demand was presented as a prerequisite to dealing with all the challenges facing the trade. While few expect a quick-fix solution to those challenges, most are hoping the market will improve in the second half of the year, and that such marketing activity will at least influence an improved outlook for the market in the long term.

Article from the Rapaport Magazine - July 2015. To subscribe click here.

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Tags: Avi Krawitz