Shifting Sapphire Market

RAPAPORT…

Sapphire, particularly blue, is the best-selling gem in the
marketplace, most notably in the Western market. But recent changes in supply and
demand are transforming the sapphire business, particularly declining
production at the world’s most popular sapphire mines and greater demand from
emerging consumer markets like China, India and Brazil.

“The United States and Japan were the biggest consumer
markets for sapphire, but the economic situation in both countries has slowed
demand,” says Ron Rahmanan of Sara Gem Corp., New York City. “Yet prices have
risen more than 50 percent, while availability of raw material is 40 percent
less than it was a year ago.”

With untreated sapphire in short supply, there are more
heated and beryllium-diffusion-treated stones making their way onto the market
and their prices, too, are increasing as they become more accepted.

Declining Production

Rahmanan tells of how he used to buy parcels of 2-carat to
4-carat, high-quality blue sapphires that contained at least 70 to 100 pieces.
Now, the biggest lots he sees have at most 15 to 20 pieces of poorer-quality
goods at much higher prices.

Sapphire production in the past few years has declined at
the better-known mines, with no new major sources discovered that could offset
those reductions, reports Stuart Robertson, analyst for The GemGuide,
Glenville, Illinois. In particular, he cites the current scarcity in the marketplace
of fine, blue sapphire from Burma, along with a major decline in Madagascar
sapphire production in the past decade.

Kashmir, the most coveted species of blue sapphire because
of its rich color, has become almost impossible to buy due to high prices and
low availability. In its place, notes Rahmanan, Burma sapphire has become the
“new Kashmir,” and its prices have risen up to 100 percent on fine, large
pieces since early 2008. The higher prices also reflect the fact that Burmese
sapphire production has declined because the government diverted attention from
gem to uranium mining, a more profitable endeavor as emerging markets like
India and China are chasing resources.

Also affecting the global supply of sapphire is the fact
that gemstone production in Madagascar — which supplied the majority of the
world’s sapphire for the past 15 years — has taken a real nosedive, reports
Rahmanan. Most miners have moved out of the area since the former government
stopped exporting rough gems in 2008 in hopes foreign gem buyers would open
cutting factories in Madagascar. Unfortunately, the global economic slowdown
and political turmoil in the island nation kept investors at bay. Despite a
lift on the export ban a year ago, miners are reluctant to return to sapphire production.

In Sri Lanka, the government stopped issuing mining licenses
to most miners and put a hold on many old contracts, citing environmental
concerns. As a result, operational costs are higher, which miners are passing
on in higher premiums for the sapphires they do produce, says Rahmanan.

Overall, most of Rahmanan’s sapphire suppliers are doing
little mining because of the high cost of energy and resources like water, with
most of their production in lower-quality stones, whose selling price does not
cover rising operational expenses.

Among sapphire sources, Australia is considered a bright
spot in supply. According to Robertson, this source is best known for producing
commercial-grade material used in mass-manufactured jewelry. “I visited the
Hong Kong office of Sino Resources Mining Co. to examine its initial Australian
sapphire production,” he says. “The material was pleasant looking, while also
fitting the lower price points of today’s price-conscious consumers.”

Yellow Rising

Rahmanan notes that only three years ago, fancy color
sapphires were “out of fashion and oversupplied in the U.S.,” causing prices to
decline by 30 percent to 40 percent. “Now, they are popular in Brazil and China
and prices are rising directly because of these new consumers.”

While blue sapphire remains a leading seller for Pala
International, Bill Larson, president of the Fallbrook, California, gem house,
has seen recent growth in yellow sapphires, especially untreated. “I attribute
the gain to India, as yellow is a favorable color in its culture.”

The price of yellow sapphire, Rahmanan says, has more than
tripled in the past few years. “Our stock is at its lowest in 25 years.
Untreated goods are so expensive — $1,500 a carat.” Larson notes that the
popularity of pink sapphire — fueled by celebrity demand and trending fashion
colors — peaked about ten years ago. But he reports consistent, strong demand
for untreated, purer pink, nonpurplish color sapphires.

U.S. Disadvantage

The GemGuide tracking shows price increases in sapphire of
20 percent to 30 percent since the start of 2011, which Robertson attributes to
a weak U.S. dollar and rising labor costs in key cutting centers like China. On
a buying trip in September 2011, Rahmanan saw a large production of 1-carat to
2-carat calibrated sapphires that his supplier collected over a period of six
months. “The price was 35 percent higher than I paid less than a year ago. My
offer of 15 percent less than the asking price for a 30-day payment was
rejected. The parcel sold to a Chinese buyer for the original price. How can we
compete?” Compared to 2010, Rahmanan says the price for blue sapphire is up 35
percent, yellow sapphire is up 50 percent and other fancy color sapphire is up
10 percent to 15 percent.

A challenge for U.S. dealers is that jewelers aren’t buying
many goods outright, comments Gina Taylor of Taylor Gem Corp., Lincoln,
California. She says jeweler requests are specific — i.e., pale sapphire colors
that emulate fancy color diamonds. “There are few jewelers making jewelry
anymore, so they’re not stocking up like they used to” on raw materials such as
gemstones.

Protecting Margins

Despite market challenges, buyers of better sapphire should
be able to continue to reap greater profit margins.  As proof, New York–based wholesaler Jeffrey Bilgore cites
the widening price differential between sapphires and diamonds. “For the cost
of a 3-carat, VVS diamond, a consumer could have an 8-carat to 10-carat
unheated blue sapphire. That’s a great value!”