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18 march 2009

Recently, British jeweler Laurence Graff sold a diamond for $5 million and bought a Jean-Michel Basquiat painting for $4.5 million. Putting it in the market language, he “swapped” assets selling one and buying another. This transaction is yet one more pepper corn to the already acrid cuisine of speculations around the diamond market: after all, the “eternal value” was disposed of by a person named the “king of jewelers” and he sold not at all a small diamond, although just a year and something ago he was persuading others that for him “a diamond can never be too big.” And again, he swapped it for something, which cannot be rated as an "eternal" asset – Jean-Michel Basquiat is known as a graffiti painter later renamed into a neo-expressionist. In other time this move could be interpreted just as craving for art, but nowadays such moves send echoes to the market where Laurence Graff is not at all the least player.

Such actions make other diamond marketers wary. What is it – a signal it’s high time or there’s time to wait and see? Such “signals” are unlikely to cheer up anyone. Everyone is looking forward to other signals. In this sense the Rapaport Agency recently assumed the role of an anticyclone thinning out heavy clouds over the diamond market. It reported that diamond business in Hong Kong was showing an upward trend.

According to Rapaport, while the recent drop in the list prices of SI goods may have been prompted by the rapidly deteriorating diamond markets in other countries, in Hong Kong, SI goods were moving well. Those who were buying these goods, the agency said, were, of course, not happy that their purchases had gone down in value because of market conditions on the other side of the world.

Analyzing the situation on the world market the agency points out that the diamond trade in India at the moment is having big problems — consumer demand has slowed and there is a dire liquidity crunch. Indian dealers and manufacturers continue to be offering goods to the local market at big discounts. The Indian rupee also has weakened significantly, so when goods that are priced in rupees are offered at big discounts in the Hong Kong market, the losses are in some way offset by the exchange gain.

Dealers and retailers are the first line of clients in the diamond industry and they are the ones who must commit to buying polished diamonds. If they are unsure of the stability in the price of diamonds, the flow of diamonds from manufacturers to consumers is disrupted. This sector of the trade always has been, and always will be, the most important link in the diamond trade. Recent efforts to create vertical integration of the industry have contributed to the present crisis, because there is no buffer to take up production of diamonds during a slowdown period.

How Low Can You Go?

In order to adjust to the present economic slowdown, everyone is looking for diamonds that fit lower price points, whether they are lower in color or in clarity. Higher colors in lower clarities, or higher clarities in lower colors, are becoming more popular. Even stones with the once-disdained fluorescence are more in demand, as these are being sold at good discounts.

Where once size did matter, the market for large diamonds is extremely quiet, as consumers are not likely to put large amounts of cash into a commodity at a time when the economic future is uncertain.

There had been rumors and speculation on the market that the Rapaport price list would fall after the Chinese New Year, and sure enough, on January 30, the fifth day of the Year of the Ox, the list appeared, blanketed by italics, signaling a drop in prices pretty much across the board.

The drop caused considerable consternation among Hong Kong dealers, as it came during what is traditionally a period of business revival after the break for the New Year holidays, when it is customary for clients to kick off the year with some purchases from their suppliers. Clients who were contemplating buying were taken aback by the drop and quickly retreated, opting to buy later when prices stabilize.

Everyone is waiting to see if diamond prices have finally bottomed out. “Besides the fact that we are already losing in the value of our own inventory,” lamented one local diamond dealer, “we are completely at a loss as to how to evaluate the price of diamonds. We might be able to buy well, as there are enough distressed sellers in the market, looking to cash in their diamonds, but in the blink of an eye, our stones are worth less whenever the list changes.” It is evident that price movements in the list have an immediate impact on the market price of diamonds whenever there is a change.

Crisis of Confidence

Despite the efforts of world governments to repair the damage of the economic crisis, the continuous poor results companies are posting and the increase in the number of jobs lost in the past two months have shattered the confidence of consumers. In response to the doom-and-gloom economic news, consumers are holding onto cash, in case they, too, are made redundant and have to live off their savings until things improve.

One possible incentive to buy, however, is that Hong Kong consumers love bargains. If diamond prices remain stable, there will certainly be buyers interested in diamonds who feel that current prices are now cheap enough. The peak buying period in the local regions will probably extend into June, after which things should slow down for the summer again.

Industry players are hoping for a period of price stability and, if demand does improve, at least for some items, perhaps even some bold numbers indicating price increases on a future list. Everyone in the industry agrees it is important to show some confidence in prices. Look at gold, for example, which reached a peak in 2008, slumped in response to the economic tsunami and then strengthened again. People continue to put money into gold. Why can’t we do the same for diamonds?

The Marketplace

• K-M colors from VVS to SI in a wide range of sizes are beginning to look attractive to consumers.

• High colors in high clarities are very slow and larger stones in these ranges are extremely slow.

• Demand for H-I, VVS goods for Mainland China continues to be strong.

• Demand is strong for SI clarities in all colors.

This is the picturesque sketch from Hong Kong drawn by Rapaport and released under an intriguing title - "Have prices bottomed out?" It’s unlikely of course that the picture painted by Rapoport will make Laurence Graff “swap” his assets once again parting with the picture painted by Michel Basquiat. But you may feel quite certain about one thing – the news from the Fragrant Haven (“Hong Kong” in Chinese) is maybe the first glad tidings for the diamond market, which will cause some investors to shift their gaze from poor Mr. Graff who probably has just a soft spot for graffiti.

Yekaterina Davydova, Rough&Polished Asian Bureau Editor in Beijing