RAPAPORT… A strong seller’s market has emerged in the diamond industry during the first five months of 2011. In this market, the seller is able to obtain better prices for a given sale because demand is outstripping supply for both rough and polished diamonds.
One indicator of the current seller’s market is the shortage of polished goods reported in the run up to the JCK Las Vegas show. The shortages have resulted from a number of trends seen both this year and since the recovery began.
Primarily, output from cutting factories in Surat, India, that manufacture an estimated 80 percent of diamonds, are lagging behind global demand. Local diamantaires report difficulty in hiring back workers laid off during the downturn and some estimate that the industry needs as many as 100,000 additional workers to fill the shortfall.
In addition, the volume of rough diamonds supplied by mining companies has not yet reached 2008 levels, even though rough prices long ago surpassed prerecession levels. At the same time, rough inventories have increased in 2011, suggesting that some diamantaires are holding onto rough — rather than manufacturing it — in anticipation of further price hikes. In contrast, polished inventories remain relatively low — although they appear to be slowly growing again — because banks have maintained strict conditions for financing polished purchases.
U.S. Significance
However, the most significant factor influencing the emergence of a seller’s market has been the increase in global retail sales, driven by growth in consumer demand in China and India, as well as relative improvements in the U.S. While the U.S. market for polished diamonds has grown in value terms compared to 2010, widespread absorption of new price levels in the U.S. has lagged behind other consumer centers in the Far East.
Even though the U.S. is still the largest market for diamond jewelry, it is generally agreed that the country is no longer setting the tone for the market to the extent it once did.
Still, the improvement in the U.S. was evident as the country posted its strongest quarter since early 2008 in the three months that ended on March 31, 2011. Gross polished imports to the U.S. rose 26 percent from a year earlier to $5.16 billion during the quarter, with volumes up 12 percent, while gross polished exports grew 40 percent to $4.33 billion, with volumes declining by 49 percent.
The disparities between value and volume indicate that growth in both categories was driven by price increase.
Similarly, U.S. jewelry and watch sales rose by approximately 6 percent year on year to an estimated $16 billion in the first quarter, boosted by price increases which took effect in the retail market over the past year. The consumer price index (CPI) for jewelry and watches rose 7.9 percent over the 12 months through March 2011 and a further 2.4 percent in April, outpacing the rise in sales volume.
Changing Dynamics
There is concern that higher retail prices may eventually lead to greater price resistance from consumers, particularly in the U.S., where inflation is already impacting economic growth. Initial data from the Bureau of Economic Analysis (BEA) showed that gross domestic product (GDP) grew by less than expected in the first quarter, as food and gasoline price increases weighed on consumer spending. The economy grew by 1.8 percent in the first quarter, compared to 3.1 percent in the fourth quarter of 2010 and 2.6 percent in the third quarter.
Trends in the diamond industry reflected a focus on discounted jewelry by the majority of consumers, with continued growth in the high-end sector. Polished dealers, meanwhile, have expanded their selling options. Not only have sellers taken advantage of the rise of new markets, but they have also been selling a broader, more diversified range of polished goods in these emerging markets. Diamantaires have reported growing demand for SI clarity stones in China and Hong Kong, which traditionally focused on VVS to VS goods. Furthermore, as one diamantaire explained, “In today’s market, there are different customers in different markets buying different stones. So there is good demand across the board.”
Rough and Polished
These increased markets and demand have contributed to a rise in polished diamond prices, which continued in May. The average RapNet Asking Price Index (RAPI) for certified diamonds rose 7.6 percent during the month extending from April 23 through press time on May 23. Average prices on RapNet for .5-carat stones increased 9.2 percent over the same period, while prices of 1-carat diamonds grew 6.9 percent and prices for 3-carat stones rose 6.1 percent.
The price increases followed continued strength in the rough market, with De Beers Diamond Trading Company (DTC) raising prices by an estimated average of 2 percent to 3 percent at its May sight. There are some indications that the rough market softened slightly following the sight, with reports of lower average premiums for DTC boxes on the secondary market. In addition, De Beers Diamdel unit also noted that global demand fell back slightly at its April/May online auctions, particularly from buyers in Israel and Belgium, while there was consistent demand from India-based buyers. Neil Ventura, Diamdel’s chief executive officer (CEO), noted that the auction brought record demand from the Asia Pacific region, with record spot sales made to buyers in Hong Kong and Mainland China. “We continue to anticipate strong demand across all product ranges in the near term,” he added.
The question is whether the strong rough demand will in fact continue. There remains some doubt, or perhaps hope, that the same pace of growth will be maintained in the months ahead. A relative slowdown in rough trading coupled with continued increases in polished prices will bode well for diamond manufacturers, who are seeking some relief from the tight margins that they currently are working with.
As the second half of the year approaches, and as the industry begins to think about potential Christmas inventories, the fundamental challenge for dealers and cutters is whether they can influence further polished price growth without reversing the uptrend in consumer demand. A tussle between manufacturers and retailers is expected.
And while at the moment, a seller’s market prevails, giving polished dealers the upper hand, the question on everyone’s mind is “how long it will last?”
