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Diamonds and Dragons

Editorial

Jan 20, 2012 3:47 AM   By Avi Krawitz
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RAPAPORT... There may be some irony in China’s current economic juncture. Just as the country enters the “Year of the Dragon,” said to be the mightiest of the Chinese zodiac signs, its economic fire seems to have lost some steam.

Already in the fourth quarter of 2011, the country’s gross domestic product (GDP) grew at its slowest pace in about two years. Official data published this week showed that the economy grew by 8.9 percent in the fourth quarter, compared to growth of 9.1 percent in the previous quarter.

Nonetheless, the economy was still robust, growing by 9.2 percent for the full year 2011, although the World Bank forecasted that growth would slow to 8.4 percent this year and 8.3 percent in 2013.

“Developing countries should prepare for further downside risks, as euro area debt problems and weakening growth in several big emerging economies are dimming global growth prospects,” the bank stated in its Global Economic Prospects 2012 report. Economists noted that the global slowdown and inflation pose the biggest challenges to China’s continued economic growth.

The uncertainty has filtered down to the diamond industry. Cutters and dealers in the major trading centers report that polished diamond demand from the Far East softened during the fourth quarter of 2011. Somewhat disappointingly, the run-up to the Chinese New Year, which begins on Monday, January 23, failed to spark a buying frenzy at the wholesale level.

That doesn’t mean that Chinese retailers are forecasting a weak season. The Lunar New Year remains to them what Christmas is to their U.S. counterparts, with the added benefit of a growing local Christmas retail season. But their buying was influenced by market trends in 2011 and inventories are still relatively large after strong buying in the first half of the year. More importantly they have become cautious about buying as the market has softened in the second half, concerned that prices may slump further.

This week’s economic data and outlook will not help spur confidence. Neither does the fact that China’s recent buying restraint ranks among many factors fueling caution in the diamond market at the moment.

However, while it is significant, the relative slump should be placed in perspective. As one Israeli trader told Rapaport News, “Even when the Chinese market appears down, they’re still opening new jewelry stores every month there.”

True enough, a recent study by Bain & Company on China’s luxury sector stressed that growth is still being driven by new store openings, even if the pace of these have also slowed. “Bain saw a continued expansion into tier two and tier three cities, although the pace of store openings in China has cooled in 2011,” the researchers explained. While some brands are consciously reducing the pace of their expansion and focusing more on store performance, Bain stressed that the Chinese market is still supply driven.


The influence of China’s consumer demand extends beyond its borders. Chinese consumers are known to spend while traveling, especially in Hong Kong and Macau but also in the West. Tiffany last week reported that higher sales to tourists offset a weakness in spending by U.S. customers at its New York flagship store during the November- December holiday period. One might assume that some of those tourists were from China.

Back on the Mainland, consumers are becoming more brand aware as their standards of living rise. Bain noted that the top five brands in each luxury category accounts for about half the category’s sales. The report ranked China’s top jewelry brands in alphabetical order to include Bulgari, Cartier, Chow Tai Fook, Tiffany and Van Cleef & Arpels.  

Bruno Lannes, head of Bain’s consumer products and retail practice in Greater China and lead author of the study, noted that the country has transformed from a niche emerging market to a core target for global luxury brands in less than five years. He added, however, that there are signs that the market is maturing.

A maturing market might find it difficult to maintain the same impressive growth figures. Bain estimated that China’s luxury segment grew by 25 percent to 30 percent in 2011, around the same range as it did in 2010. The report acknowledged that there was a gradual softening of luxury consumption in the fourth quarter. Jewelry sales increased 25 percent, up from 22 percent in 2010.

But while diamond demand also softened gradually in the fourth quarter, China’s diamond trade still had a bumper year. Turnover of diamond imports, exports and inter-dealer trade in the Shanghai Diamond Exchange (SDE) rose 63 percent year on year to $4.7 billion in 2011, SDE reported. Imports through the SDE grew 56 percent to $2.04 billion. The growth reflects both rising demand for diamonds and an increase in trading through the proper channels.

However, given the economic scenario, the industry is wondering how these numbers will be impacted in the year ahead. The Diamond Administration of China (DAC) appears determined to keep the momentum going. Its management led delegations to India, Belgium and Israel toward the end of 2011 to learn from their respective systems and experiences in the diamond industry.

An important part of the DAC’s strategy this year will aim at increasing trade volume by stimulating domestic demand. Its program includes raising consumer awareness about diamonds through events such as the September Diamond Festival. Many in the industry have also noted increased advertising spend by diamond companies in the country.

These are important initiatives for the global trade. Time will tell whether the impressive growth can be maintained in the coming year or if signs of maturity will become more apparent.

Either way, there will be growth. It is therefore little wonder that the three major cutting centers eagerly welcomed their Chinese guests and continue to seek further penetration into the Chinese market.

For they recognize the long-term prospects that China holds. In fact, even as economic growth is expected to slow in 2012 and Chinese buyers remain cautious, the country will continue to be the growth engine for the diamond industry. If Far East demand appears to have lost its spark at the beginning of 2012, the industry is still looking at China to breathe life into the market. Things could still get hot in the year of the dragon.

The writer can be contacted at avi@diamonds.net.

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.

Copyright © 2012 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.

Disclaimer: This Rapaport Weekly Market Report is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights


 

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Tags: Avi Krawitz, Bain & Company, Bulgari, Cartier, China, Chow Tai Fook, Deena Taylor, Diamond Administration of China , diamonds, Lazare kaplan, luxury, Rapaport, Shanghai Diamond Exchange, Tiffany & CO., Van Cleef & Arpels
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