For the diamond industry itself, the year closed with
welcome signs of stability thatfueled optimism for 2012. Among those signs
were the satisfactory growth in holiday sales in the all-important U.S. market
and the still-growing demand from Asia and other emerging nations. The industry
remains confident about its own position within the luxury category and about
consumer interest in and desire for its goods. On initial reports of a positive
Christmas season, some diamantaires were even suggesting that U.S. consumers
have, in fact, revitalized their spending culture. A more comprehensive post-season
holiday sales analysis will confirm whether this is true.
Early feedback indicated that jewelry outperformed other
product sectors in year-end sales, boosted by aggressive marketing by the major
diamond jewelry retailers. But, while jewelry sales by value have been edging
toward prerecession levels, the volume of sales has been less impressive
because the trade is working with smaller inventories and budget-wary consumers
are opting for smaller sizes and lower-quality goods. Rather, growth has been
boosted by price inflation, with the consumer price index (CPI) for jewelry
rising 11 percent from January through November, despite a slight easing of
prices in November (see chart on opposite page, top).
Wholesale Steady
Overall, wholesale diamond buying at the close of the year
was steady and cautious, with transactions made mainly to fill existing orders
and to replenish depleted categories when popular items, such as SI clarity
stones, became scarce. Wholesale and retail buyers avoided building up inventory
as they generally had sufficient stock to last through the end of 2011,
following their aggressive buying in the first half of the year.
Most in the industry were satisfied, and somewhat relieved,
that there was relative stability in the market at the end of the year, as
reflected in the RapNet Diamond Index (RAPI™) during December (see chart at
right, bottom), albeit with a slight downtrend. On the whole, polished
suppliers held firm on their prices, with the attitude that serious buyers
would close deals if they needed the goods for Christmas or the Chinese New
Year.
The RAPI for 1-carat diamonds fell .8 percent during the
period December 1 to December 27, while RAPI for .50-carat stones dropped by .2
percent and the RAPI for 3-carat diamonds rose by .3 percent. The RAPI for
.30-carat stones showed greater weakness, dropping by 3.5 percent during the
period, because of the stronger price pressure on smaller stones.
The Bigger Picture
In terms of the bigger picture — the global economic
environment in which the diamond industry must operate — confidence is shakier.
Remnants of the uncertainty that has enveloped the worldwide economy since July
remain, including the fact that polished prices fell by more than 10 percent in
the second half of 2011, as reflected by RAPI. Buyers in China and Hong Kong
continued to hold back on their purchases for the Chinese New Year, which is
January 23. They, too, had bought aggressively at the start of 2011 and,
cautious about the global economy, appeared to be delaying their final year-end
purchases.
Similarly, in India, caution reigned and the usual
post-Diwali wedding season buzz was a bit lacking for the trade and retailers
alike. Tight liquidity was exacerbated by the weakening of the rupee, which
depreciated by 12 percent in the second half of 2011 (see chart on page 20),
adding to overhead, operating and inventory costs for the local trade and
retail sector.
The rupee slid from the stability it exhibited in the first
six months of the year, declining from an exchange rate of one rupee to $0.0227
at the beginning of August to $0.0189 on December 27, 2011 (see chart at left).
The Associated Chambers of Commerce and Industry of India (ASSOCHAM) warned
that the rupee could depreciate a further 5 percent to reach levels of $0.0181
by March 2012 if the global economy continues to be weak. “Such wild
fluctuations within a short span of time are unsettling and are leaving an
imprint on the rest of the economy,” said D.S. Rawat, secretary general of
ASSOCHAM. “The depreciating rupee will add further pressure on overall domestic
inflation.”
These and other factors have impacted consumer spending, as
well as India’s polished diamond trade. Polished exports fell 27 percent year
on year to $1.18 billion in November and polished imports declined by 20
percent to $803 million, according to data published by the Gem & Jewellery
Export Promotion Council (GJEPC). Other centers showed a more positive trend,
with Belgium’s polished exports, for example, up 32 percent to $1.23 billion
during November and its imports increasing by 29 percent to $1.16 billion.
Rough Still Weak
Rough trading in India also has slowed. Diamdel noted that
while demand for rough at its November-December online tenders strengthened
from buyers in Antwerp and Asia Pacific, and held steady from buyers in Tel
Aviv, demand continued to decline from buyers in India. Neil Ventura, Diamdel’s
chief executive officer (CEO), reported that while the company has reduced its
presentations at recent auction cycles to align with prevailing demand, the
company noted an improvement in demand and prices during the latest
November-December cycle.
However, the decline in rough trading and prices in the
second half of 2011 continues to impact the mining sector. ALROSA noted that
diamond demand weakened from the third quarter due to the traditional slowdown
in business activity between August and October, an unstable world economy, a
decline in liquidity and, as a consequence, a reduction of the speculative
component in the market. Still, while the company supplied fewer goods to the
market, its sales by value surged during the third quarter (see chart at right)
because it sold only to long-term clients and shelved its auction channel in
response to the turn of the market.
As ALROSA continued to achieve record prices, it proved to
be the exception. Petra Diamonds warned that its revenues in the second half of
calendar 2011 would fall $23 million below expectations due to the decline in
rough prices between July and mid-December. “In the short term, global economic
uncertainty may continue to cause some volatility in rough diamond pricing, but
it should be noted that demand from Asia and other emerging markets is
continuing to grow strongly and is lessening reliance on the major U.S. market,”
Petra stated.
Most would agree with that assessment. But many also are
questioning whether global economic weaknesses will impact growth markets like
China and India. Already both countries have noted an anticipated slowdown in
the pace of growth in the near future, given their reliance on export markets
with weak outlooks, most notably in Europe.
While the industry navigates the current economic reality,
many are looking to the first quarter for further signs of stability, bolstered
by the traditional postseason restocking. But they also are being realistic
that the old rules don’t necessarily apply anymore. Wholesalers and retailers
are increasingly minimizing their risk exposure by keeping inventories low. As
uncertainty about the global economic environment envelops the diamond
industry, the outlook for 2012 remains as cautious as ever.
Article from the Rapaport Magazine - January 2012. To subscribe click here.