The diamond industry got over its nervous spell that began in early 2009 and grew in confidence as trade started to pick up again toward the end of March. The industry was focused on the two big trade events of the season — in Hong Kong, at the beginning of the month, and in Basel, toward the end. Two shows, two different markets, but one strong trend emerged: There are buyers out there, but deep discounts remain the order of the day. The test for dealers was whether they would hold firm on price levels as they were forced to negotiate with bargain hunters at the two shows.
The industry knew to keep its expectations low in the run-up to Basel, with even the event organizers saying the recession would influence fewer buyers to attend. Their predictions proved true. Traffic was particularly slow during the first two days, warming up to a relatively steady pace over the weekend, but nowhere near the levels seen at the 2008 show. Buyers were not afraid to ask for big discounts, as was the case in Hong Kong. However, more were taking the bait in Basel.
While cash-strapped dealers — generally, smaller manufacturers under pressure to move their goods — were giving into buyer demand, larger companies were determined to hold their price levels, dismissing such deep discounts as “desperate, sporadic deals that don’t reflect the market.” In reality, the market has been trying to find its base levels.
Such was the trend throughout the market during March, as prices stabilized and dealers gained confidence to close deals they would have dismissed in the volatile preceding months. As a result, optimism grew across all markets — New York, Antwerp, Tel Aviv and Mumbai — where diamantaires reported more trading as the month progressed.
Overall, strong demand remains in 0.30 to 2 carats, VS to SI, triple EX certs. There is a slight and growing demand for larger stones of 5 carats and up, in particular, 10-caraters, where a shortage of supply has emerged. Dealers are starting to look for rough again as their inventories become depleted.
Some Positive EconomicsConfidence in the diamond industry was further boosted by the better economic data that filtered through from the U.S. A Gallup poll surveying 1,464 adults from March 17 to 19, 2009, indicated that public optimism about the U.S. economy was at its highest level since Gallup started daily tracking of such data in January 2008. “Gallup began to see significant improvement in Americans’ evaluation of the economic direction the second week of March, coinciding with the start of a sustained rebound in the Dow Jones Industrial Average since that index sank to a 12-year low on March 9,” Gallup explained. The Dow rebounded to trade at approximately 20 percent above that low point at press time toward the end of March.
Another positive came when the U.S. Commerce Department reported that the number of new home sales increased in February for the first time in eight months, posting a 4.7 percent gain over the January figures. David Crowe, chief economist for the National Association of Home Builders (NAHB), however, cautioned not to get too excited about the figures. “Keep in mind that the January-February average for new-home sales is still below the fourth-quarter 2008 average, and we do expect sales numbers to bounce around a bottom before climbing slowly mid-year and beyond,” he said. Gallup also put its figures into perspective, noting “no recent increases in consumers’ retail spending.”
Similarly, as the diamond market enjoys its new-found price stability, confidence in the market is generally improved compared to January through mid-February, when trading levels were at an all-time low. Most dealers appear confident that as long as prices maintain stability, consumer confidence will edge up and trade will continue at sustainable levels.
Bank DebtThe low level of trade seen in the final quarter of 2008 and through January 2009 helped drastically reduce the industry’s bank debt. Official figures in Israel showed that the local industry’s bank debt fell 29 percent from October 2008 to $1.75 billion in March 2009. Similar declines have been reported in the other major centers of New York, Antwerp and Mumbai as total industry bank debt dropped to an estimated $11.5 billion, from a peak of $14 billion in 2008. One banker, who requested anonymity, noted that while banks tightened their credit terms, the trend was more a natural consequence of the recession as diamantaires collected proceeds from old sales and stopped buying new inventory.
There has also been a dramatic increase in the amount of physical diamonds held by the banks as collateral, which has “skyrocketed” since the crisis began, the banker reported. The Belgium banks, in particular, have been aggressive recently in demanding inventory collateral from clients.
Opportunity in AdversityLiquidity has certainly emerged as the key component for companies throughout the pipeline and those with cash are beginning to see some growth opportunities in the market. Among the mining companies, key assets such as Harry Winston’s stake in Canada’s Diavik mine, and DiamonEx’s Botswana-based, diamond-producing Lerala mine were snatched up in March. Dealers such as Namakwa Diamonds have expressed that, in addition to asset acquisitions, they are focused on seeking out “distressed diamonds,” or high-quality stones that can be bought at large discounts from distressed sellers in the market.
The decision by Collectors Universe to discontinue its Gem Certification and Assurance Lab (GCAL) and the American Gemological Laboratories (AGL) diamond-grading units has cleared the way for both labs to continue as independently run entities, under new ownership. Also in the retail market, as more jewelry companies are forced into liquidation or Chapter 11, the long-term prospects for those that are able to weather the tough market improves. As Terry Burman, chief executive officer (CEO) of Signet Jewelers, explained of his company’s stated goal, “Our primary objective is to strengthen the group’s industry-leading position so as to be able to benefit from the reduced capacity within the specialty jewelry sector and to be well positioned for the eventual consumer recovery.”
Finally, many are seeing increasing opportunity to sell diamonds as an investment product. ALROSA signed a memorandum with the asset management company Leader to create a market for investment diamonds in Russia, which ALROSA President Sergey Vybornov explained as, “an attempt to create a new class of investor who will put money into a new product, the base for which will be ALROSA’s diamond stocks.”
However, the stronger trend has emerged in the fancy color diamond segment, which has shown far less price volatility than white diamonds throughout the crisis. The Codiam Fund was recently established to invest specifically in high-end polished color diamonds, but more telling was a reported spike in the number of private buyers seeking such stones at the Basel show. “They’d rather have their money invested in a fancy color diamond than with J.P. Morgan,” said Eden Rachminov, owner of Rachminov Diamonds 1891, which specializes in fancy color stones.
While the reality is that this recession is deep, and one that will likely see further declines before a real upturn, these opportunities and positive reports should not be taken lightly. Such trends will hopefully continue to fuel the renewed energy seen in the diamond industry.
Article from the Rapaport Magazine - April 2009. To subscribe click here.