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A First Quarter Review


Mar 28, 2014 8:36 AM   By Avi Krawitz
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RAPAPORT... By most accounts, the first quarter of 2014 was positive for the diamond industry. Polished prices rose, turnover increased and liquidity improved, after a challenging year in 2013. Rough prices also increased and continue to challenge profit margins and liquidity.

However, at least in the short term, profit margins improved as polished sales garnered higher prices and were made predominantly from goods manufactured from rough bought during the fourth quarter of 2013 – when rough prices were reduced. While diamond manufacturers have enjoyed the reprieve, they question whether current higher rough prices are sustainable and suspect that their profit margins will be squeezed again when new rough enters the market as polished in two to three months.

Therefore, concerns remain about profitability as further rough price increases are expected in the second quarter. In fact, rough producers may take the current positive sentiment as a catalyst to raise prices already in April, with the De Beers sight taking place next week.

De Beers somewhat surprisingly raised its prices in January but (equally surprisingly) maintained stable prices in February. Philippe Mellier, De Beers CEO, told Reuters this week that rough prices have increased by 2 percent to 3 percent so far in 2014, which was about the same growth margin as during 2013.

Simultaneously, polished prices rose with particularly strong demand for certified diamonds below 1-carat. The RapNet Diamond Index (RAPI™) for 1-carat certified diamonds increased 2.4 percent from the beginning of the year to March 27 at press time, while RAPI for 0.30-carat diamonds rose 8 percent.

The market remains selective, although there is demand for a broader range of goods than there was in 2013.

Backlogs at the Gemological Institute of America (GIA) have created shortages of dossier certificates in the market and dealers are shifting toward diamond parcels, non-certified goods and 0.25-carat sizes in order to avoid the wait. The turnaround time for diamond grading at the GIA was about 50 to 60 days at the GIA’s labs in Carlsbad and New York during the quarter, and rose to as much as 110 days in Mumbai. GIA has said it expects to see some easing of its backlog in the second half of the year.

While the backlog is symbolic of the long-term rise in demand for certification, it also signaled a steady ramp-up in manufacturing that occurred in the past three months. In this, and many other respects, the first quarter of 2014 stood in sharp contrast to trends prevalent in the preceding quarter of 2013.

Whereas manufacturers were restrained toward the end of last year – resulting in refusals of high-priced rough and maintained diminished levels of cutting – they’ve been more active in the market in 2014. At the beginning of the year, manufacturer’s rough inventories were depleted and their wholesale and retail clients were readying to replenish polished inventory sold during the Christmas and Chinese New Year shopping seasons.

Indian manufacturers, who had largely been absent from the market since the November Diwali break, were back buying rough during the first quarter. While the local Indian market remains cautious ahead of the April-May elections, exporters were encouraged by stable U.S. and Chinese demand.

In fact, the dynamic of the market shifted from the U.S. to the Far East between January and March. Solid U.S. demand upheld the diamond market during the first two months of the year, while Far East demand was cautious as the Chinese New Year approached in mid-February. The U.S. holiday season was good, discounting retailers’ reduced profit margins.

The verdict is still out regarding the Chinese market as economic caution lingers. Analysts at Goldman Sachs last week noted that trade and consumption in China, two factors they expected to provide positive support to the economy, were disappointing in the first two months of the year. Consumption was adversely affected by efforts to curb corruption through gift giving to officials. Encouragingly, while the anti-corruption campaign affected luxury items such as watches and wine, jewelry sales were relatively robust during the Chinese New Year retail season.

Gold jewelry demand was the main driving force, but gem sales at the major jewelry retailers were steady. As a result, Far East diamond demand started to improve and expectations rose for the March Hong Kong show. By most accounts, the show didn’t disappoint, confirming steady Chinese and Far East demand for VS-SI diamonds and larger stones. Buyers in the Far East adapted to seller’s higher asking prices quicker than their counterparts in the U.S.

Diamond manufacturers, therefore, have been in a better mood this year and that sentiment continues as the market transitions into the second quarter – albeit with a few caveats.

Liquidity levels are a primary concern as banks have adopted a more conservative attitude toward the industry. ABN Amro reduced its financing to 70 percent of rough purchases effective on January 1, leaving its clients to finance the rest and urging other banks to follow suit.

The reduced credit lines haven’t influenced trading yet, as evidenced by the buoyant rough market in the first quarter. Rather, lowering the advance lending rate is anticipated to have an impact in the coming months given the time delay to make these measures effective, Erik Jens, ABN Amro CEO, explained to Rapaport News. While the Indian banks have not implemented similar measures, they are exerting greater caution in lending to diamantaires. Furthermore, Indian credit lines have been reduced due to the depreciation of the rupee.

Therefore, rough demand is expected to slow in the coming months. Part of the market dynamic is cyclical. The first quarter is traditionally characterized by stronger trading as inventories were being replenished across the pipeline – in both the rough and polished markets. The uptrend is expected to continue for a few months before the market tends to overheat in the summer around July.

While that has been the pattern in the past few years, it doesn’t have to be that way. Should the market adopt a more conservative approach, particularly regarding its rough buying, the positive momentum can be extended longer than usual. In that sense, conservative lending from the banks may be a positive thing as it will exert restraint in the industry at a time when rough buyers appear to be becoming over-exuberant. The diamond trade is set up for a good year in 2014 and certainly got off to a positive start in the first quarter. But it may take some collective restraint to ensure the momentum continues. 

The writer can be contacted at

Follow Avi on Twitter: @AviKrawitz and on LinkedIn.

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