Hoping for a Holiday Bailout

The diamond trade is hoping consumer holiday spending on jewelry will exceed their low expectations.

By Avi Krawitz

Market sentiment improved slightly as October signaled the start of the global holiday season, offering fresh hope for diamond traders. However, overall business remained weak, with buyers still uncertain whether polished prices have bottomed out and jewelry retailers hesitant to hold additional diamond inventory.

Consumers continue to spend conservatively, particularly when compared to levels seen at this time in previous years, and dealers are planning accordingly. They took some solace from reports that there was steady demand for diamond jewelry during China’s National Day Golden Week celebration, which began on October 1. But the pace of growth in China has slowed generally and Far East consumers remain cautious about the global economy.

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While the number of people traveling out of China during the holiday increased, they reportedly spent less on luxury products while abroad. The Hong Kong Retail Management Association (HKRMA) forecasted that Hong Kong’s overall retail sales grew 5 percent year on year during the eight-day Golden Week period, below its earlier prediction of 8 percent growth. The group noted, however, that those categories that particularly target tourists from Mainland China, especially jewelry and watches, recorded a single-digit to double-digit decline in sales. A low double-digit increase had been forecasted for the jewelry and watches category before the holiday.

HOLIDAY COUNTDOWN
As the industry approaches the all-important year-end holidays, the boost in other markets remains relatively muted, as it has been throughout 2012. Volatility in the rupee-dollar exchange rate continues to impact consumer confidence in India. Gold demand improved as the rupee strengthened to a six-month low of 51.85 rupees to $1 around the beginning of October, before depreciating back to above 53 rupees to $1 at press time. Jewelers and consumers are eyeing the rupee rate in advance of the all-important local Diwali festival, which begins on November 13, because a weak rupee raises the price of gold in the local currency and further diminishes liquidity in the country, as well as in the diamond market.

With a relatively stable U.S. market, expectations for the coming holiday period there are for low single-digit growth in jewelry sales. The National Retail Federation (NRF) expects average U.S. gift spending to be $548.56 per spender this holiday season, up about $6 from 2011. That said, the volume of diamonds being traded continues to fall below 2011 levels and diamond buyers are delaying their season’s purchases as they await a clearer price trend from the market.

Their concerns come with good reason as polished prices continued to soften in October. The RapNet Diamond Index (RAPI) for 1-carat diamonds fell 1.6 percent during the period October 1 to October 22. RAPI for .30-carat stones was basically stable, while RAPI for .50-carat diamonds was down .9 percent. RAPI for 3-carat stones dropped by .9 percent during the period (see chart at right).

NINE-MONTH TOTALS DOWN
RAPI for 1-carat stones is down 11.6 percent since the beginning of 2012, reflecting the decline in polished demand. The recent trade shows in Mumbai and Hong Kong did not stimulate activity to the degree hoped for and buyers at both events were price sensitive and selective. Shoppers in general continue to focus on commercial-quality categories below SI clarity, as they move to goods that better fit into their tighter budgets.

With smaller quantities and lower qualities being bought, trade in the major polished centers dropped in 2012. India’s gross polished exports fell 41 percent year on year to $13.28 billion in the first nine months of the year, while the country’s imports — still undermined by the 2 percent import duty introduced in January — declined 76 percent to $4.14 billion.

Declines also were registered in Belgium and Israel during the nine-month period, with Belgium’s gross polished exports down 10 percent to $10 billion and its imports declining 5 percent to $10.03 billion. Israel’s gross polished exports fell 12 percent to $11.66 billion and its imports slumped 25 percent to $3.26 billion (see chart at left, top).

MANUFACTURING LOWS
Given the declines, diamond manufacturers have kept their cutting factories operating at reduced capacities while struggling to keep their skilled workforce. Already, reports in Surat indicate that the medium to smaller operations are planning a prolonged break over Diwali. At the same time, their polished inventories are fairly full, especially with better-quality goods that have been in weak demand.

Manufacturers also are responding to a lower intake of rough, despite the unexpectedly large De Beers Diamond Trading Company (DTC) sight in October. More significantly, they’re also faced with the difficulty of profiting from the manufacturing process at the moment.

Like polished, activity in the major manufacturing and rough trading centers has fallen in 2012, with India’s rough imports down by 4 percent in the first nine months of the year and Belgium and Israel’s imports and exports declining by more significant double-digit percentages (see chart at left, bottom). While cutters’ profit margins improved after De Beers cut prices at its August sight, they have remained tight in the weeks since because the mining company kept its prices largely unchanged in October.

There has been little trading of DTC goods on the secondary market, with most of the company’s boxes selling at low single-digit premiums and even, in some cases, at a loss. With the October sight estimated at around $750 million, making it the largest of the year, that additional influx of goods onto the market has further weakened rough trading. The remaining two sights of 2011 are expected to be far smaller.

Smaller mining companies have reported that rough prices at their tenders have firmed. Harry Winston Diamond Corporation reported that rough demand improved in the third quarter as the market stabilized. The company said it has sold a large portion of its inventory held on July 31, 2012, but the company still expects to be holding higher-than-normal rough inventory as of October 31. Rough dealers are seeing better margins from goods bought at tenders than from contract suppliers.

CONSUMER FOCUS
Manufacturers also recognize that much depends on the consumer markets if they expect to see an improvement in overall market conditions. De Beers stressed that it is changing focus to place a greater emphasis on consumer trends when assessing its supply to the market.

“For years, we have thought of the consumer as the end of the diamond pipeline — with an industry driving their demand without fully allowing their demand to drive us,” said Varda Shine, chief executive officer (CEO) of DTC. “In fact, for De Beers, the reality of a far more competitive landscape is that the consumer must stand at the beginning of our pipeline, shaping our business and enabling us to anticipate the cyclical needs of our sightholders so we can continue to adapt as necessary.”

How that will play out in the coming months remains to be seen. Diamond dealers have come to terms with the declines experienced in 2012 and are satisfied that at least they saw some improvement in October from the previous quiet months. They’ll be hoping the trend continues and that the holiday season gives the trade the boost it craves.

Article from the Rapaport Magazine - November 2012. To subscribe click here.

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Tags: Avi Krawitz