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Shifting Demand
Editorial
Oct 3, 2014 1:33 AM
By Avi Krawitz
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RAPAPORT... Diamond prices continued to fall in September maintaining a long-term downtrend that started in mid-2011. Apart from the positive first quarter of 2014, when polished prices rose, average prices have been on a consistent, gradual decline. As a result, September marked the end of another weak quarter for the diamond trade.
In fact, the third quarter was arguably the weakest quarter recorded in two years. The RapNet Diamond Index (RAPI™) for 1-carat lab-graded diamonds – D to H color, IF to VS2 clarity – fell 4.7 percent during the quarter. All four categories tracked by Rapaport News – RAPI for 0.30-carat, 0.50-carat, 1-carat and 3-carat diamonds – declined.
The downtrend has not gone unnoticed by the mainstream press. In mid-September, The Wall Street Journal cited the Rapaport Research Report – September 2014, among others, to state that “diamonds continue to lose their sparkle.”
Indeed, the article quoted the author of this column to state that demand has shifted to smaller diamonds as China’s middle class has grown and matured toward new, more affordable categories of diamonds – particularly for 0.30-carat to 0.50-carat stones, which consequently bucked the downtrend in the past year and a half. The third quarter of 2014 signaled another shift in demand – this time away from the 0.30-carat and 0.40-carat diamonds, suggesting just how price sensitive the diamond trade has become.
Anecdotal reports suggest that the third quarter decline was influenced by both supply and demand factors, particularly evident in September.
On the supply side, a lot of goods remain in the market. The Gemological Institute of America (GIA) has reportedly released more goods from its labs in the U.S. and India as diamonds that have been stuck in its backlog for the past few months are being returned in time for the holiday season. Furthermore, polished sales were slow during the summer and suppliers have built up inventory as they have continued to manufacture – and buy rough accordingly – on a consistent basis.
As a result, the recent Hong Kong Jewellery and Gem Fair saw a larger volume of loose diamonds on display than usual. Furthermore, Rapaport has seen a notable increase in the volume of diamonds listed on RapNet – Rapaport Diamond Trading Network in the past month. Suppliers are also struggling with tight liquidity as banks have reduced their credit to the industry – or pulled out completely, as Antwerp Diamond Bank announced just two weeks ago.
As a result, a buyer’s market has emerged as cash-strapped suppliers are prepared to lower prices in order to generate cash flow.
Meanwhile, there has been a shift in demand and a notable cooling in the market for 30 to 40 pointers due to a suggested burnout in Chinese taste for these diamonds. Chinese retailers have been aggressively buying these goods for a year and a half, which influenced the increase in prices (RAPI for 0.30-carat diamonds is still 7.8 percent higher than it was on October 1, 2013, one year ago). Chinese buyers laid low for a while, holding relatively large inventory during the June-July summer lull. However, when they returned to the market in the past month, it appears that they shifted toward larger, pointer-size diamonds above 0.50 carats and toward lower qualities in order to maintain their price points.
Diamond buyers tend to keep a close watch on discounts. In the past two years or so, discounts on 0.30-carat and 0.40-carat goods declined, meaning that prices rose, to unprecedented levels. Meanwhile, discounts on other items, for example 0.70-carat goods, have been relatively stable and are now looking more attractive to buyers. Similarly, demand has shifted from better-quality VVS goods to lower clarities as discounts and prices have changed.
The apparent slump in prices does not mean that the market is depressed. There is sustainable demand in the U.S. and the Far East, as was evident at the Hong Kong show, but demand has shifted to lower-quality, larger diamonds.
Trading is currently steady as the market is entering a busy buying period with retailers in need of diamonds for jewelry setting in time for the holiday season. Both buyers and sellers will want to complete their orders before Indian manufacturers take their month-long Diwali break, which is not too far off, on October 23.
Buyers are primarily looking to fill U.S. holiday demand while Chinese buyers are filling the ongoing National Day Golden Week demand and carefully preparing for the Chinese New Year.
Despite this, prices are not rising because buyers are price sensitive and aware of suppliers’ liquidity issues. That reality is likely to continue for the rest of the year. Only in the first quarter next year might we expect polished prices to rise again as buyers replenish inventory they would have sold off during the Christmas and Chinese New Year shopping seasons – as they did in the first quarter of this year.
The burning question is whether or when a sustainable uptrend will emerge. The steep increases between 2009 and mid-2011 came to an end after trading was fueled by speculative demand in the first half of 2011. Since then, markets have been more selective and average prices have deflated as the trade adjusts demand between goods that offer the most attractive discounts.
This all makes for a difficult environment for manufacturers to navigate, especially given the dynamics of the rough market. They’re largely unable to shift between price points when buying rough.
One De Beers executive noted that there has been consistent demand for 4 to 8 grainer rough boxes in 2014, which are goods that produce 0.30-carat to 0.70-carat polished, as well as strong demand for SI to I2 clarity types of rough material. He added that the shift in purchasing patterns in China, from high VVS to VS-SI clarity range, is similarly evident in the rough market.
However, manufacturers are unable to pick and choose their rough as they seek consistent supply. A typical De Beers box, for example, would contain a combination of qualities. In addition, a miner cannot choose to extract more SI-clarity stones or 50-pointers to adjust supply to specific market demand.
As a result, manufacturers have a difficult job in adjusting their supply to buyers’ demand. As we’ve seen in the past month, polished demand can swing at fairly short notice. The reality is that the downtrend evident in the market since mid-2011 is as much about price as it is about the types of goods being bought. The shift in demand adds another layer of analysis required for dealers and manufacturers to garner profit margins in an already challenging environment.
The Rapaport Monthly Report – October 2014 will be published in the coming week.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz and on LinkedIn.
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.
Copyright © 2014 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 Editorial 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, De Beers, diamonds, jewellery, Rapaport, RAPI, RapNet
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