Trading Down

True enough, there is seasonality to the diamond trade that suggests the market generally slows in July and August. Dealers in Israel and Belgium are visibly relieved to take a break in the next two to three weeks, hoping to return to improved sentiment and price stability. But ultimately, current market trends are influenced more by the weak economic environment — that will likely continue — and less by the season.

Much of the weakness is stemming from China as economic uncertainty has taken hold. As explained in last week’s editorial, Diamonomics, global economic sentiment has softened due to a weaker outlook for China, with the country’s economic growth missing forecasts and slowing to 7.5 percent in the second quarter of 2013. 

Anecdotal reports from China signal that a lot of capital investors and speculative traders who were active in diamonds in the past have left the market due to low profitability. There is also a sense that the Chinese jewelry market is overstocked and not ready to buy large quantities of diamonds for now. Furthermore, Chinese buyers are naturally conservative about buying in a downward moving market, especially as economic uncertainty has taken hold and sentiment has weakened.

Even industry-specific factors, such as tight Indian liquidity and low-level manufacturing, stem from economic factors that influence the trade – like the sharp rupee depreciation et al.

Therefore, there’s little surprise that cracks have started to show in the diamond market. While polished prices held relatively stable in the first few months of the year, they have been on a downtrend since mid-to-late May – coincidentally or not, around the same time the rupee began its downward spiral. The Rapnet Diamond Index (RAPI™) for 1 carat certified polished diamonds has dropped 2.2 percent since the beginning of the year having declined by 2.7 percent since May 20.

Therefore, regardless of what is influencing prices, artificially propping them up when they should go down would create an unsustainable market environment. 

Many are waiting to see what will happen next. Will prices continue to decline throughout the third quarter, or for the rest of the year, if at all? Fourth quarter seasonality should offer some support for the market, as should the U.S. recovery.

But should the diamond market continue to downtrend – as many expect it will – the more important question is how to navigate a downward moving market? How do you make money when diamond prices fall? This column has tackled this challenge before when markets have turned and it’s worth repeating now.

The answer is to turn inventory at new price levels rather than at historic costs. Such was the success of the Indian industry during the crash of 2008-09, when they took their losses and continued to trade down, rather than freeze their trading as other centers did.

As explained by Martin Rapaport, chairman of the Rapaport Group, “How to make money when prices go down? Sell cheap and buy cheaper. Let’s say you have a diamond that cost you $1,000 and you can now replace it for $700. Sell it for $770, pocket the profit and replace it or hang on to the cash. As long as you can replace it, you can tell yourself you have not lost money. Don’t hang on to old inventory because of historic cost. A diamond is only worth what you can buy it or sell it for.” (See the op-ed titled Transparency, in the December 2008 issue of Rapaport Magazine).

There certainly are enough bargain hunters currently looking for goods in the market. Israeli dealers have traveled to Mumbai and Antwerp this week looking for polished before their summer break. U.S. buyers are doing the same. Meanwhile in Antwerp, polished trading is said to be relatively active whereas diamantaires would already be in holiday mode in previous years.

Granted, diamond cutters are under pressure to cover the rising cost of their rough purchases. As a result, they may be trying to hold their polished prices firm. But since liquidity is tight, they may also be willing to compromise as they need cash flow.

De Beers prices rose at last week’s sight and tender prices at other companies have been high in July. What’s influencing current rough price levels and whether they are sustainable is a subject for a separate future editorial. For now, it’s sufficient to note that rough prices cannot consistently be higher than polished prices for an extended period. Once rough buyers run out of money, rough prices will have to settle down in line with the polished.

Therefore, it is clearly better to trade polished by selling cheap and buying cheaper if necessary, than it is to manufacture rough at the moment. Why prolong your losses? Either take a one-off loss by trading down on polished, or continue to sustain losses in manufacturing.

By now, the diamond trade should realize that diamond prices cannot maintain an absolute uptrend. There is going to be volatility in the market as there has been since 2008. It’s the way the world works. Like gold, oil, real estate and the like, diamond traders have to learn to respect ups and downs in their market. They have to learn how to make money when diamond prices inevitably go down.

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

Follow Avi on Twitter: @AviKrawitz

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

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