RAPAPORT…
Diwali, Hanukkah, Christmas and the Chinese New Year —
different names, different cultures, religions and symbols — but all of them,
coming at the end, or beginning, of the year, have something in common: the
hope for future prosperity.
If the first half of 2011 was very good, the second half of
the year is when the diamond industry pays for the overheating of the first six
months. Since January, diamond prices have risen by as much as 75 percent in
rough and 40 percent in polished. One diamond manufacturer commented that
“about 70 percent of the people I know are neither buying, nor selling,
currently. Everybody’s waiting for the market to take off again.” Everybody, of
course, except those who are short of cash and need to unload goods to stay
liquid.
Basically, if a buyer is shopping for one or two stones, no
seller will give him any serious discount, but if he is looking for a volume
buy, a 15 percent discount is definitely a possibility. Even so, there’s a real
limit. Buyers asking for anything more — a discount of 20 percent, for example
— will not get the goods.
Slowdown in Asia
Many members of the diamond industry would agree with Axel
Beck of Beck Diamonds that “The growth comes nowadays from Asia — India and
China in particular. India and China are essential to our trade. Unfortunately,
we’re all sensing a slowdown in those countries, and for different reasons.
First, there is India, where the rupee has depreciated by about 10 percent, which
means that diamonds right now are 10 percent more expensive than they used to
be. Even if India’s domestic retail market is strong, it is still difficult to
overcome a sudden 10 percent increase in prices and pass it down to the end
users overnight. As far as China is concerned, my analysis is that its market
slowdown is a consequence of the economic instability and financial problems
the Western economies are having. Indeed, if recession reappears in the U.S.
and in Europe, those markets will consume less and therefore import less from
the manufacturer of the world: China.”
On the Bright Side
Dilip Mehta of Rosy Blue sees some reason for optimism.
“Retail sales in China were up by 50 percent for the country’s popular Golden
Week holiday,” he said, noting that comparable store sales have also shown good
growth. “However, those growth numbers also reflect new stores that have opened
in the industry. Although retail sales volume in India is still growing, it is
not growing at
the same pace we’ve known during the first half of the year.”
Mehta said an additional factor in the market is “the strong increase in the
polished prices recently. Together, the increase in polished prices and the
weakening of the rupee have led to the consumer price resistance we’re facing
currently.”
Add to that the liquidity issue. It is Mehta’s belief that
“It’s much more difficult to borrow money in the second half of 2011. People
end up with interest rates that are 4 percent to 5 percent higher than they
were paying just four months ago. When you consider that the Indian diamond
industry borrows about $7 billion annually, we’re looking at an
increased
financial cost of around $350 million in interest a year.”
Looking Ahead
Looking forward, the industry is hopeful that inventory
levels will diminish and prices will get back to acceptable levels so that
sales can resume by the first quarter of 2012. Realistically speaking, no one
expects prices in the short term to reach the levels achieved in July. As one
Diamond Trading Company (DTC) sightholder said “People have been overeating,
and now’s the time for digestion.”
The cost of that overeating will probably be that a share of
the big profits made during the first part of 2011 will be lost. In the current
environment, it might be fair to say that a winner in the diamond business is
someone who manages to lose less on the descending phase of the business cycle
than he won during the ascending phase.
The Marketplace
Rough:
- Prices of rough have continued to decline, but at a slower
pace than between August and September. - Better-quality rough has been more
resistant to price declines than lower-quality rough. - The price of sawables is more stable than makeables of
equivalent quality. - The industry is watching BHP Billiton sales as an
indicator of future price trends. - Bargain discounts of 25 percent or even 30 percent are
considered realistic on Diamond Trading Company (DTC) or Russian boxes because
the sellers need to collect cash to pay for their next sights. The argument is
that they are giving up some of their profits from the first half of the year
to keep their commitments to their sources. - Speculators are expected to push prices down even further
by offering prices that allow them to resell short and make a profit even if
the bull market continues.
