RAPAPORT… Polished diamond prices rose consistently and sharply in the first half of 2011, with the uptrend continuing through June. The increases have been stimulated by a number of factors, primarily strong consumer demand in India and China and a steady improvement in the U.S. retail market, as jewelers refill inventories following a relatively successful end-of-year 2010 selling season.
Also contributing to the market strength are strong dealer demand in the main trading centers of India, Belgium and Israel, rising investment demand for diamonds, higher rough prices and shortages of polished goods caused by lagging diamond manufacturing, as cutters hold back goods to ensure profitability.
All these trends were evident in June, before, during and after the Las Vegas shows and in advance of the Hong Kong show, which took place after press time. Perhaps the most significant market development emerging from Las Vegas was the diminished influence that U.S. retailers have on overall trade. In the current seller’s market, they were forced to meet higher prevailing prices because they were in competition for scarce goods with Far East and Indian buyers.
The RapNet Diamond Index (RNDI) for 1-carat polished diamonds rose 8 percent during the month from May 20 through June 20. The RNDI for .50-carat stones increased 10 percent, while 3-carat diamonds rose 9 percent.
While most in the trade were confident that current prices are sustainable, they also expressed hope that the market would stabilize in the second half of the year, much as it did following a strong first half in 2010. That hope was encouraged by the even stronger pace of growth seen in the first six months of 2011, compared to the corresponding period in 2010. The RNDI for 1-carat diamonds rose 28 percent in the first half of 2011 to June 20, while .50-carat stones increased 33 percent and 3-carat diamonds grew by 31 percent, far outpacing the increases in the same period in 2010.
Far East and India
The worldwide diamond price recovery has been largely driven by the rise in Far East demand, which is evident in the recent strong increases in diamond trade through Hong Kong, the region’s largest hub.
Polished imports to Hong Kong rose 35 percent year on year to $3.96 billion in the first quarter of 2011, according to the Diamond Federation of Hong Kong, China Ltd. Polished exports grew 49 percent to $3.23 billion. Net polished imports —imports minus exports, a calculation of the amount of polished absorbed by Hong Kong during the period — fell 6 percent to $729 million. It is suspected that a significant portion of that net import amount represents undisclosed goods that were exported to Mainland China and the rest of the region. The average price of polished imports to Hong Kong rose 20 percent from a year earlier to $536.74 per carat, while the average export price increased 32 percent to $560.62 per carat.
Similarly, India’s polished exports grew 36 percent year on year to $14.44 billion in the first five months of 2011, with average prices up 28 percent to $443.23 per carat, according to data published by the Gem & Jewellery Export Promotion Council (GJEPC). Polished imports rose 72 percent to $11 billion, with average prices up 40 percent to $510.30 per carat.
Significantly, India’s net diamond account — again, total polished and rough exports less total imports — fell to a deficit of $2.96 billion, from a deficit of $894.4 million in 2010. That number indicates the value of rough and polished that India has absorbed and the extent to which India has grown as a net importer of diamonds during the same period. Since January 2009, India has absorbed approximately $6 billion worth of polished and rough diamonds.
This amount is accounted for by India’s dominance as a diamond manufacturing center. Reports indicate that Indian sellers are holding back polished until they can get a reasonable replacement price relative to the cost they paid for the rough. There also is a strong rough trade in the country, with manufacturers opting to deal in the rough because of the high prices they can get rather than manufacture.
Another contributor to India’s high import levels and subsequent net diamond account deficit has been the rising retail sales in the country, mirroring economic growth there. That growth has enabled the development of such jewelry brands as Titan Industries’ Tanishq and Gitanjali Group’s portfolio of brands. Titan’s jewelry sales rose 40 percent to $308 million in the fiscal quarter that ended March 31, 2011, while Gitanjali’s jewelry sales rose 45 percent to $300 million.
U.S. Retail Growth
The large U.S. specialty jewelry retailers have displayed similar strength and that strength has carried the rest of the industry, which may not have been as strong, through the recovery in the U.S. Signet Jewelers, Tiffany & Co. and Zale Corporation all posted double-digit year-on-year growth during the first fiscal quarter that ended April 30, 2011. That growth continues the uptrend seen in the previous few quarters as the specialty jewelers edge toward their 2008 prerecession sales levels. Of the three, only Signet’s 2011 first-quarter U.S. sales were higher than in the first quarter of 2008, while Tiffany sales were flat and Zale’s down 14 percent. Each retailer noted that they implemented price increases during the quarter, which also contributed to the rise in value of their inventories.
Investment Demand
Another contributor to 2011’s price increases is a growing awareness of the investment value in diamonds. The investment market has been mainly focused on better-quality, high-end, D color, internally flawless goods. Investor interest in diamonds was apparent as Harry Winston unveiled its new sales model by establishing a $250 million diamond investment fund in partnership with Diamond Asset Advisors. The fund will source high-quality diamonds from Harry Winston and other companies, which will be used in Harry Winston’s jewelry. The price paid to replace polished diamonds sold by Harry Winston in its finished products will then be used as a basis to determine the market value of the fund.
Rising Rough
While these underlying market strengths bode well for the sustainability of current prices, cutters note the difficult profit margins they work with due to the current high rough prices. De Beers Diamond Trading Company (DTC) raised prices at its June sight, primarily on better-quality rough goods above 2 carats, while smaller and cheaper Indian goods remained relatively stable. Reports indicated that premiums in the trading centers remained strong after the sight. In addition, De Beers reported continued strong demand at its May/June Diamdel auctions, with demand for large 2 carat-plus, grainers and smalls rising again from the levels seen during the previous sales cycle.
In this environment, it is natural for polished cutters and dealers to question whether rough prices can continue to rise in the months to come at the pace they did in the first half of this year. As long as rough prices continue to rise, they are expected to pressure the polished market to follow. While sellers have been encouraged by the willingness of buyers to meet their prices so far, there is a lingering concern whether this will endure through the second half of the year, particularly as U.S. consumers budget for Christmas. Despite that concern, diamond dealers point to the stability of rough, and subsequently polished, in the second half of 2010, which helped feed the current confidence, and they hope history will repeat itself.
