Hong Kong Market Report

RAPAPORT...The term “Black October” was used to describe the start of the Great Depression in 1929 and the crash of the stock markets in 1987. October 2008 has been compared to 1929 and that portends the start of a very long and painful recession. It is a recession that could have slipped into a full-blown depression had it not been for massive government interventions, not only in the U.S. but in economies throughout the world.

The diamond market in Hong Kong has come to a grinding halt. Retailers and dealers have all stopped buying goods into stock as they feel that the price of diamonds will drop as demand continues to weaken in the months to come. Some diamond manufacturers have been aggressively dropping prices in the hope of stimulating demand, but the market has not responded and continues to be dead during a period that is usually a hive of Christmas shopping activity.
Price Drops
The industry was dreading the day when the Rapaport price list would start to show declines and two lists published between the end of October and mid-November that were filled with prices printed in italics — to indicate price drops — had an unnerving effect on a market already reeling from the economic crisis. The fear was that a loss of confidence in diamonds would lead consumers not only to stop buying diamonds, but to follow the lead of investors in the equity markets and try to sell the diamonds they already own, further depressing prices.

In a market of continuing declines, it is almost impossible to conclude any sales as buyers hold off purchases in anticipation of getting the same diamond at a cheaper price the following week. It is a similar scenario in the stock markets. Although shares have lost more than half their value from the heights, investors are not in a rush to reinvest in stocks because they are not sure that the bottom has been reached. What is crucial for both the diamond and stock markets is that a true bottom is established so that business can continue from that point onward.

Another reason for the slow demand is that retailers and dealers are trying to conserve their cash for fear banks will call in loans. This unfortunately already has begun in some cases. Government intervention to shore up banks to keep them from failing is not filtering through to businesses. Credit remains extremely tight.

Weathering the Storm
The irony of the current economic crisis in Hong Kong is that retailers are not doing too badly, especially those that cater to Mainland Chinese tourists or have retail outlets in the Mainland. Providing sellers are willing to pare their margins, consumers are still in the market for a bargain. Although officially Hong Kong is in a recession, one would certainly not think so from the crowds jamming into department stores’ yearly sales and buying tickets to participate in the liquidation sales of electronic products from a bankrupt retail chain.

For the moment, the East still has not felt the pain of the recession to the extent of Western economies. This is especially true in China, which recently announced a $586 billion economic stimulus package that will include infrastructure developments and incentives to revive consumer spending.
Another difference is that while Western countries are operating in deficits, many Asian countries are still flush with cash, and today, cash is king. Their main concern is how to preserve these cash reserves until the world economic crisis is over. When that does happen, the economic takeoff of Asian countries will be much faster and will accelerate in leaps and bounds.
For that reason, it is important for the diamond industry to maintain and sustain ties to this part of the world, especially Hong Kong and China. In the case of Hong Kong, it has a unique position as a source of financing for the industry and as the stepping-stone for trade in the Mainland due to its free movement of precious metals and diamonds.

The key to the advantageous Asian position is Asian adaptability and quick response to any changes, be they climatic or economic. Many factories in the Mainland have closed down and the workers have been paid off and sent back to their villages to sit out the slump until better days return. Some diamond manufacturers as well as jewelry manufacturers have taken this course already and, if things get any worse, others may well follow suit.
The answer for the diamond industry in the short term is that production must be cut to a minimum. This might mean even larger cuts in rough allocation than the proposed 30 percent or 50 percent. If price levels are to be maintained, production must match the demand, which, at the moment, is close to zero.

The Marketplace
The overall market is extremely weak, with sporadic demand for the following:
• Sizes larger than 10 carats in top colors and clarities to SI.
• Stones 2 carats and smaller, especially in SI in colors I and better.
• Oversizes, as consumers try to sacrifice size to lower budgets.
• Hearts and pears in fancy cuts.

Article from the Rapaport Magazine - December 2008. To subscribe click here.