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World Gold Council members commit to TCFD reporting

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Vladimir Dyukarev, former COO of ALROSA passes away

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The third J-1 Jewellery Congress to be held in Moscow on September 26-28

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Yesterday

Rapaport Market Report

26 october 2009

ALROSA continues to stun with its monthly sales figures, www.diamonds.net says. The company reported that it sold $355 million worth of diamonds in October, $255 million of which was sold to the market. Issues with selling to state depository Gokhran aside, ALROSA sold more during the month than De Beers, and has significantly increased its monthly sales from last year, since resuming its marketing activities in July. Data gathered from its monthly statements indicate that the company has sold about $855 million to the market from July through October, at an average $214 million a month, surpassing its 2008 average of $194.7 million a month. The figures include rough and polished sales, although the majority is applied to rough. These figures seem high and appear somewhat unlikely, given current market conditions, particularly because ALROSA goods are considered expensive at the present time. Of greater concern, however, is the stock held by Gokhran, which, by our estimates, comprise around $1 billion worth of rough stockpiles from this year alone. Apart from its auctions of special size diamonds, Gokhran’s marketing program is a significant unknown factor in the market - one that could still exert an influence in 2010.

Gem Diamonds has come a long way since the heady days of its initial public offering (IPO) in 2007, thanks to its aggressive acquisition strategy, which facilitated the addition of the prize Letseng mine in Lesotho and the Ellendale mine in Australia to its portfolio. Other purchases have not proved as lucrative, however, and Letseng remains the mainstay of the company. Apart from Letseng and the E9 pipe at Ellendale, all Gem Diamonds’ other operations remain on care and maintenance. The company is also selling its projects in the Democratic Republic of the Congo (DRC) and the Central African Republic (CAR).

A few points stand out of Gem’s recent third quarter trade statement. First, the company is debt-free and has $88 million in cash on its balance sheet, which is quite unique among diamond miners at the moment. Second, Gem is resuming its beneficiation activities “to take advantage of value opportunities.”

Finally, the company reported that Letseng has continued to produce high-value diamonds, including 15 stones that sold for more than $20,000 per carat during the quarter. Letseng, considered the world’s richest diamond mine by carat value, saw the average price of its output rise to $1,710 per carat during the three months, compared to $1,408 per carat for the full nine months of the year to date. While the company was the industry’s big spender for a short time, one can expect it to be more conservative moving forward, at least until the rough markets have fully recovered, and even then, to continue to centralize both its mining and beneficiation strategies around Letseng.

India’s diamond trade appears to be showing some life, at least from a statistical point of view, as the country posted its first increase in polished exports this year during September. While that rise was most likely stimulated by exports for the Hong Kong Gem & Jewellery Fair, the data is still encouraging. The quarterly figures show that the decline of polished exports in the third quarter improved to single digits (see table below) and that export levels were significantly higher than the first- and second-quarter levels. It’s also worth noting that by volume, polished exports rose 3 percent in the third quarter from a year earlier. Similar trends can be seen in rough imports, although these levels, both by value and volume, remain well below 2008 levels.

Bain & Company raised its expectations for luxury goods sales in 2009, but offered a bleak outlook for the jewelry industry. “Jewelry, watches and other luxury items will be hardest hit in 2009, with a forecast decline of 18 percent,” the consulting firm predicted. The company reasoned that consumers will choose to defer their jewelry purchases in favor of more casual items, while the phenomenon of “luxury shame,” which causes consumers to reduce their purchases of ostentatious items, will strongly apply to jewelry. Bain forecasted that total luxury sales will fall 8 percent from last year, revising a previous April estimate of a 10 percent drop, buoyed by a projected 12 percent growth in China and 20 percent online sales.

The research also noted that 2010 would likely bring positive 1 percent growth to total luxury sales and that a “full recovery” would occur the following year, which is forecasted to reflect 4.2 percent growth. However, with jewelry clearly lagging and not expected to recover within the same time frame, the diamond industry might pay closest attention to the strong focus on branding in Bain’s list of the top ten global luxury trends starting in 2010. One such trend identified by the firm is that “Aspiration will evolve into new relationships with brands as consumers look to fill different emotional needs with their luxury purchasing.” This is certainly a message worth noting, as we hope to see some strong advertising this holiday season.

United States: There has been a growing interest in buying polished in New York, as expectations for the Christmas season rise. While buying interest is apparent in the wholesale sector and even reminiscent of “normal” levels for this time of year, actual trade levels still lag behind. Similarly in retail, the market is improving, but there remains stiff competition to woo customers, who are becoming increasingly smarter with their money and are able to demand good deals. Store owners are also feeling the impact of the strong presence of online jewelry retailers. Demand remains centered around rounds, 0.75 ct., H-I, SI goods, and cushions, 1.50-2.50 ct., F-G, VS-SI stones, while extreme shortages and strong demand is apparent in princess, 1.25-2.00 ct., G-I, SI goods.

Belgium: Traders in Antwerp remain very conscious of opposing trends in rough and polished prices. Rough prices are still considered high and dealers appear frustrated by the relative stability in polished. Nevertheless, trading activity, although a bit quiet due to Diwali, is slowly improving as the fourth quarter develops. There is demand and shortages for rounds, 1.00 ct., D, IF, Triple Ex stones, and strong demand for rounds, 0.50-0.90 ct., D-H, SI1+ and 1.00-2.00 ct., H+, VS+ goods. In fancy shapes, emeralds, princess cuts and pear shapes are selling relatively well.

Israel: Trade has steadied in Ramat Gan as manufacturers and wholesalers gear up for the U.S. holiday season with cautious expectations. However, there is still a growing focus away from the U.S. and toward China and Hong Kong. There is good demand for 1.00 ct., H-G, VVS-SI goods. At the same time, there appears to be a shortage of G+, SI stones. Demand for large stones is improving, but buyers continue to exhibit resistance regarding the price for these goods. Among manufacturers, there is strong interest in buying rough.

India: Manufacturing and wholesale markets were closed this week through the Diwali festival as the focus turned to retail in the local diamond jewelry trade. Retailers reported good diamond jewelry sales through Diwali in line with expectations, beating the 2008 season. However, consumers remain cautious about their spending and appear to be conscious of the recession that continues in other countries. Nevertheless, retailers appeared satisfied and were able to sell off some of the old stock they were unable to move through the downturn, causing manufacturers to expect better local demand. Still, the growth in local demand is not strong enough to compensate for the slump in polished exports and manufacturers remain cautious ahead of the U.S. holiday season.

China: The Shanghai Diamond Exchange (SDE) was still in the process of moving to its new premises this week, resulting in its members being split between the two locations. Many tenants in the new building are still renovating their offices. However, the administrative units including its value-added tax (VAT) invoicing department and Customs House, have completed their transitions. As a result of the move, and, to an extent, India’s Diwali festival, trade in China was somewhat subdued, although demand for goods remains stable.

Hong Kong: The market has improved as we move deeper into the October-November period, which is usually a more active time for the industry. However, the market is still notably down from normal levels and it remains difficult to sell at the desired price. Prices are generally firm, but there are also weak sellers, which cash buyers are able to take advantage of. There is good demand for SI goods, with demand focused on 0.50-1.00 ct., 2.00 ct., and 3.00+ ct. stones, while demand for 1.50 ct. diamonds is a bit slow.