Rapaport Magazine

Poised For Growth

A dichotomy has developed along the diamond pipeline, as polished trading has turned relatively quiet while demand for rough remains robust.

By Avi Krawitz
While U.S. wholesalers were on summer break in July and dealers in Belgium and Israel prepared for their vacations in August, most remained confident that the industry is poised for sustainable growth, even with the risks inherent in the market.

Still, the relative quiet in the trading centers didn’t dampen activity in the rough market as the diamond producers have all seen increases in the prices of rough, citing strong sales in some markets as justification. De Beers raised prices by approximately 10 percent at its Diamond Trading Company (DTC) July sight following hikes by ALROSA and BHP Billiton during the month. But while the increases proved a bitter pill to swallow for diamond manufacturers, they came with little surprise since premiums on DTC boxes in the secondary market prior to the sale were relatively high. With the July increase, Rapaport estimates that average DTC rough prices have increased by more than 40 percent so far in 2011.

Over at Petra Diamonds, strong sales were reported for its fiscal 2011 while high prices compensated for the slight decline in production. The average price of production at Petra’s flagship Cullinan mine rose 48 percent in the six months that ended June 30, 2011, compared to the previous six-month period, to $178 per carat. 

Petra reasoned that the rough market has been buoyed in the first half of 2011 by firm retail demand in China and India and to a lesser degree in the U.S., restocking throughout the diamond pipeline to support the retail expansion and increased liquidity in the market. The company reported strong demand for larger stones and commercial goods, which has caused a shortfall in supply in many categories, triggering further price increases. Petra also noted the exceptional growth in the price of smaller gem diamonds — goods that are increasingly being used across a wider range of luxury goods, such as watches, and in mainstream jewelry.

Third-Quarter Stability

The high sales at the July DTC sight, which closed with an estimated value of about $850 million, could well signal a rush for goods before the August summer vacation period in Belgium and Israel, following the substantial growth in rough trading in the major centers during the second quarter of 2011. India’s gross rough imports rose 39 percent year on year to $4.32 billion. Belgium’s gross rough imports increased 48 percent to $3.68 billion, while exports rose 43 percent to $4.21 billion. Similarly, Israel’s gross rough imports grew 52 percent to $1.47 billion, while its rough exports rose 37 percent to $1.23 billion.

However, there is growing concern that some of the larger rough dealers are holding back stock from manufacturers because they anticipate further price increases in the future. As a result, there is some question whether the price increases have been driven by dealer demand, and are not reflective of conditions at the consumer level. 

Still, the market should take some comfort in the outlook of Johan Dippenaar, Petra’s chief executive officer (CEO), who reported that he expects the market to stabilize in the coming months before trading and prices pick up again in the fourth quarter.

The Pace of Polished

It is traditional that polished trading slows in July for summer vacation — and this year was no exception. In addition, buyers in the Far East appeared to have refilled their inventories in advance of the summer and were buying more only to satisfy existing orders.

Still, polished prices remained firm and the RapNet Diamond Index (RNDI)™ for 1-carat polished diamonds rose 2.1 percent during the month from June 21 to July 21. The RNDI for .5-carat stones increased 2.1 percent, and 3-carat diamonds rose .6 percent.

The increases followed the strong uptrends in both polished prices and trading levels seen so far in 2011. Polished exports from India rose 9 percent year on year to $6.48 billion in the second quarter, while polished imports to the country increased 28 percent to $4.8 billion. Belgium’s polished exports grew 44 percent to $3.9 billion and its imports by 48 percent to $3.69 billion, while Israel’s polished exports rose 42 percent to $4.6 billion and its polished imports grew 51 percent to $1.63 billion. 

Economic Risk

With the summer break in Belgium and Israel, even more attention will turn to India at the August India International Jewellery Show (IIJS) in Mumbai. The event has become an important indicator for the Diwali season sales and for the prospective end-of-year sales environment. Trading in Mumbai appears not to have been significantly impacted by the bomb blasts that hit the city’s diamond areas in July and the outlook for the rest of the year there remains positive.

The strongest caution in the market continues to revolve around global economic trends and the impact another downturn could have on the diamond market. As the European Union (EU) considered bailouts for Greece, Ireland and Portugal and the U.S. debt debate raged on at press time, currency markets grew increasingly cautious, while gold prices reached record highs above $1,600 an ounce. Since the beginning of 2011, the dollar has lost 6 percent in value against the euro, 2 percent versus China’s yuan and 1 percent against India’s rupee. The dollar’s decline has served to increase the buying power of wholesalers in emerging markets such as China and India, while also decreasing the buying power of all dollar-based economies.

While Western economies in Europe and the U.S. continue to display risk, the strength of economies in the Far East and Asia has led to a more diversified diamond market and has helped diminish the impact that a possible downturn might have on the industry. For now, at least, the U.S. retail market continues to show growth compared to 2010, with jewelry sales edging upward.  

Overall, global trends bode well for the industry’s forecasts for the remainder of 2011. Despite the caution expressed regarding rough dealer speculation and inherent economic risks, most in the trade remain confident the second half of the year will be a successful one. Even if trading appears to have quieted in the third quarter, the current calm seen in the polished market is expected to pass.

Article from the Rapaport Magazine - August 2011. To subscribe click here.

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