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Short-Term Diamond Markets

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Mar 10, 2016 8:43 AM   By Avi Krawitz
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The Hong Kong show that ended March 7 revealed a diamond industry that is focused on the very short term. Dealers who spoke with Rapaport News were relatively upbeat about the exhibition, but uncertain of market developments in two-to-three months.

Their caution largely stems from restrained demand among jewelers, who were looking to replenish the limited amount of inventory they sold during the Chinese New Year, but not much more than that. Also on everyone’s mind is the large volume of rough that recently entered the market and whether there is sufficient demand to absorb the new polished expected in the coming months.

While Rapaport News was not in Hong Kong last week, our off-record telephone conversations with numerous exhibitors unveiled some noteworthy trends – with the two separate venues that make up the event telling different stories.

To start with the positives, dealers reported a positive sentiment at the Diamond, Gem and Pearl Show that was held from March 1 to 5. Traffic was better than expected and the exhibition was busier than last year’s show. It seems dealers have gained some confidence to close deals – something that was lacking just a few months ago.

Primarily, the show signaled the dealer market is active again after a prolonged period of quiet during 2015.

New-Found Profitability

Suppliers didn’t talk about shortages as much as they had in recent months. If anything, their jewelry manufacturer, wholesale and retail clients have been careful not to over-stock. And, hopefully, diamond cutters and dealers have learned their lesson from 2015, when prices softened as they sought to offload excess inventory.

It seems the market has found some momentary equilibrium between supply and demand, which was reflected in price stability at the show. Demand is cautious, but new polished supply has been reserved for some time. Manufacturers also stood their ground as they’re just not prepared to lose money anymore and are determined to take advantage of the new-found profitability they’re able to garner.

Dealers explained that profit improved as polished prices have firmed since October, while De Beers reduced rough prices in January. The RapNet Diamond Index (RAPI™) for 1-carat, GIA-graded diamonds rose 2.2 percent in the five months to March 1, while RAPI for 0.30-carat diamonds jumped 13.2 percent and RAPI for 0.50-carat climbed 8.3 percent. Shortages, rather than rising demand, supported prices throughout the period, according to the Rapaport Monthly Report.

“If you stay in rotation and are working with current rough prices, there is money to be made,” said an Indian manufacturer. An Israeli dealer stressed suppliers showed resistance at the show and were prepared to hold onto the goods rather than sell cheap.

Independents & the Majors

There was a similar lack of urgency among buyers at the show. Dealers were looking for goods because their inventory levels are down. And jewelers were only looking for diamond supply to get them through the next three months or so, a Hong Kong-based supplier said. He added that it took a day or two for them to get used to prices, but they eventually bought what they needed.

It was largely the small-to- medium-size independent jewelers looking for goods. They appear to have had a better Chinese New Year season than the likes of Chow Tai Fook, Luk Fook or Chow Sang Sang. Chow Tai Fook earlier reported a 29 percent drop in sales during the holiday’s main selling period.

Some explained the majors expanded too quickly pre-2015 and are now working with lower inventory as they’re closing non-profitable stores. The independents, meanwhile, have smaller, more efficient operations and have been somewhat sheltered from the current slowdown.

An exhibitor who supplies some of the majors noted that the larger chains generally don’t buy at the shows as they require consistent supply that they order throughout the year. He observed, however, that there has been a shift among those larger jewelers toward a more focused strategy, forcing them to be more restrained about their stock management.

Jewelry Show Slow

Therefore, while dealer sentiment improved at the show, the event did not inspire renewed confidence about Far East consumer demand. Perhaps most tellingly, exhibitors at the International Jewelry Show, which ran at a different venue to the diamond exhibition from March 3 to 7, reported traffic was light and business was slow.

One high-end diamond and jewelry supplier presenting at the jewelry exhibit noted a lot of his regular clients from China, Thailand, Indonesia and Singapore didn’t come this year. “It was just extremely quiet and we had a difficult time selling, which was a bit surprising after we heard that traffic was strong on the diamond side,” he said.

If anything, the slower jewelry show should be viewed with caution. If jewelry manufacturers and wholesalers are not selling, why are diamond dealers rushing for goods? The short answer is they’ve reduced inventory and are low on sellable stock. And, they’re eager to do business again after such a long lull. After all, dealers trade – that’s what they do.

But dealers cannot sustain a market and, for that reason, the March Hong Kong show was not a game changer. The diamond market continues to view the Chinese consumer landscape and its own medium-to-long-term prospects with caution.

Waves of Inventory

No one would dare predict whether the current stability will continue throughout 2016. Almost all traders who spoke with Rapaport News expressed concern about more than $2 billion worth of rough that entered the manufacturing sector in January and February. De Beers sold $1.2 billion worth of rough during the two months, while ALROSA sold $780 million worth.

“I see the first billion being consumed because people have not been able to completely fulfill demand,” said one manufacturer. “But who knows about the second billion, especially as the market tends to slowdown in the second-and-third quarter summer months.”

An Israeli dealer added no one knows whether the new rough will result in excess supply and put downward pressure on polished prices in three months. “That was the pink elephant in the Hong Kong trading hall,” said another dealer – especially as Chinese jewelers were not looking beyond June in their purchases at the show.

The diamond market, therefore, seems to be locked in a routine of managing waves of inventory.

There was a rush to buy rough to supply polished for China’s expansion in 2014. Polished suppliers rejected high-priced rough a year later as they focused on reducing polished inventory they were left with when the Chinese demand didn’t materialize. In 2016, as the midstream manufacturers and dealers replenish some of that reduced inventory, rough demand has spiked while Chinese demand – the show confirmed – remains guarded.

The industry is now waiting for the next wave of polished to be processed, unsure of the impact it will have on the market.

Perhaps, it is the manufacturers’ recently acquired profitability that is motivating them to buy rough at current prices. Maybe polished suppliers will be prepared to hold onto excess polished supply as long as rough prices don’t go up and polished doesn’t go down.

That would be a significant gamble given the unpredictability of the market. After all, if the Hong Kong show signaled one thing, it’s that no one across the diamond and jewelry distribution chain is prepared to take a long-term position. Put another way, it’s very difficult to develop a long-term strategy in such an environment.

Midstream manufacturers and dealers ought to exert some restraint if their current profitability is to be sustained. And while there is that awareness in the market, there is also concern that they’ll be left with too much supply in three months’ time. That may exert downward pressure on polished prices and their profitability. Arguably more worryingly, it would prolong their inability to plan beyond the short-term.
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Tags: Alrosa, Avi Krawitz, De Beers, diamonds, Hong Kong, jewellery, Jewelry, Rapaport
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