RAPAPORT... Even in the best-case scenario, it seems that 2008 will be remembered by many as a lost year. Profit, business, trade, sales or even diamonds are painful subjects to talk about nowadays. People would rather be anywhere other than in the middle of this frozen situation, where cash has become as rare as clients and trust.
The worst estimates for the U.S. market at year’s end were a decline of two-thirds for the wholesale business. The philosophy has become not to expect anything and to just seize whatever life’s going to be kind enough, if not generous enough, to give you.
There’s nothing in the NASDAQ sting,or any other stock exchange news, that will smooth things out. The impact is being felt by everyone. To put things in perspective, let’s point out that $50 billion -- the estimated loss for NASDAQ clients -- represents a little more than half of the yearly global diamond jewelry trade. We’re not talking here of a loss in some secondary, highly specialized niche!
Cash EvolutionCharles Berkovic of Berkovic Klausner confirmed the trend. “Sales are almost at a stop. We’re making barely 10 percent of the sales we were making six months ago, whereas we should be selling at least 50 percent.”
Berkovic elaborated on the negative climate. “There’s kind of a psychosis when it comes to big sizes,” he explained. “Diamond dealers still fear that the week after they buy, prices will go further down, and if not then, then even in January or February, so they postpone their purchases. It’s the opposite of what we were seeing before, when people would rush to close deals before prices would go up.”
Due to the ambient cash crunch, diamantaires have become very picky, especially in the bigger sizes, and don’t move before they’re sure they have a client. Ziv Knoll of Sygma Diamonds found one reason for optimism in the current crisis. “The positive aspect of the situation is that, because of the shortage of cash, the market for larger stones is evolving toward a cash market, which is much more healthy. Less credit and more cash,” he said. “However, the constant fear and the rumors of bankruptcies are causing a temporary setback to this process because trust is currently very low.”
But Vimal Lakhani of Kiran Export gave the most optimistic reading of the current market. “The crisis affects deeply and first of all the wealthiest people,” he said. “Consequently, the effect is felt primarily on the larger stones. But if you consider the smaller goods range, from 50 points and below, there’s a real opportunity. People will always want to offer diamonds to their wives, and if they can’t afford a 1- or 2-carat stone, as in the past, they might just go for a smaller diamond. That’s why we could reasonably expect a good January to February period in 2009.”
Shoshin Choksi of Swati Gems sees another opportunity. “The way the prices have been evolving recently changes the trend we had been seeing to bypass as many intermediates as possible. This crisis actually seems to reopen the door for them. The pricing structure of the polished leaves more room for intermediate fees. And our job is becoming essential. The manufacturers are clearly producing less, and less rough is entering the pipeline.” Some in the industry estimate that $2 billion less rough entered the market over the past few months, and that the rough supply could drop by another $3 million in the beginning of 2009.
As a result, Choksi said, “Everyone is slowly getting rid of their inventories, either because they manufacture less or because they decide to sell, even at a loss, in order to get cash to repay their banks or for any other reason. Consequently, if a client needs a given assortment, he’ll have more chance of finding it from an intermediate agent whose role is to act as a buffer, building up his own inventory from sporadic purchases made on the market and from all kinds of manufacturers.”
In any case, the crisis will have an interesting impact on several aspects of the trade.
Market CorrectionPeople are taking their losses wherever they have to and many companies are reported to be writing off a substantial reduction in inventory, in such a way that it can offset all the profit of 2008. By doing so, they can at least start 2009 with a clean slate.
Choksi confirmed that “Rapaport told us about eight months ago that after prices more than doubled over two and a half years, there would inevitably be a correction. Here we are!”
TheMarketplace• 1 carat up: K-P colors are in strong demand.
• It appears that since September 2008, the Chinese, who are traditionally attached to VVS, have begun to opt for a quality downgrade to VS-SI stones.
Article from the Rapaport Magazine - January 2009. To subscribe click here.