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Hanging in the Balance

13 april 2012

The diamond industry ended the first quarter of 2012 with a sense of relief, Avi Krawitz of Rapaport writes in his analysis posted on www.diamonds.net. Trading has ‎been steady but cautious and prices in March were relatively firm. While business has not ‎been booming, it could have been worse. The preceding third and fourth quarter of 2011 ‎certainly were. ‎

The diamond market mirrored trends in the global economy, in much the same way it did ‎in 2011. Cautious stability set in largely due to the absence of any major economic event ‎that might have tilted the balance. Or, perhaps the market caution was a symptom of the ‎real possibility that such a calamity might still occur.

The European crisis is still spreading from Greece to Spain to Portugal and there are ‎indications that the pace of growth in India and China will slow this year. In contrast, rising ‎consumer confidence in the U.S. and bullish financial markets, which beat analyst ‎projections for the quarter, helped inject some positive diamond market sentiment. ‎

Even with the apparently upbeat news from the U.S., global jewelry retail growth is ‎subdued, at least in volume, if not also by value. Certainly, any growth reported has been ‎spurred by jewelry price increases that took effect over the past year. Consumers are ‎shifting to lower price points and are prepared to compromise on size and quality to meet ‎their budgets.‎

Overall, diamond prices have held steady in the first quarter, particularly since the Hong ‎Kong show in mid-February and continuing through the end of March. The RapNet ‎Diamond Index (RAPI) for 1.00-carat certified diamonds fell 2.7 percent to 94.36 during ‎the quarter, as published this week in the Rapaport Research Report, “Slow Yet Stable.” ‎The sharpest declines occurred in February. ‎

A number of factors influenced prices during the period. ‎

Polished inventories were still relatively large for most of the quarter. Excess inventory ‎and over-accumulation of diamonds at retail during the first half of 2011 meant that it ‎took a bit longer than the Christmas and Chinese New Year periods to diminish them. ‎Once depleted, wholesalers and retailers have been hesitant to replenish stock in any ‎significant way. Buying has been focused on order-based requests and speculation has ‎been notably absent from trading.‎

Significantly, India’s trading landscape has changed as the government introduced a 2 ‎percent import duty on polished diamonds. Diamantaires in the world’s largest cutting ‎center have curbed their round-tripping of diamonds and India’s foreign trade of polished ‎has slumped. Proposals to introduce further duties on jewelry items sparked a strike ‎among jewelry retailers. Liquidity has tightened as a result and confidence is down. ‎Furthermore, domestic diamond trading has been affected by the rupee’s volatility, while ‎consumers are still adjusting to higher gold prices by opting for lighter weight jewelry. ‎

Almost paradoxically, Indian diamond manufacturers have increased their rough buying ‎in March spurring improvements in the rough sector. Still, rough supply from the major ‎mining companies, particularly De Beers, was restrained during the quarter. Even as De ‎Beers has forecasted continued retail jewelry growth in 2012, its lower production ‎strategy signaled its own market caution during the quarter. With lower supply, rough ‎prices have been steady and even firmed up since the March sight. ‎

The quarter also saw the influx of Zimbabwe’s Marange goods to the market in a ‎significant way after the Kimberley Process validated the Marange mines toward the end ‎of 2011. While these goods initially proved to be more profitable for manufacturers, ‎mainly in India, their prices have increased more recently. Furthermore, rough suppliers ‎appear unperturbed that the Marange diamonds could result in a general oversupply of ‎rough and influence softer prices in the wider market. They reason that the Marange ‎production is mostly suitable for the lower segment of the market and will therefore only ‎impact that sector.‎

Manufacturing levels are stable, but below capacity, reflecting the conservative approach ‎to building inventory. After all, despite encouraging reports of growth, global retail ‎demand remains modest. ‎

These trends are expected to continue in the second quarter of 2012, even as the spring ‎and summer wedding seasons hold some promise for the bridal retail sector. Many ‎expect general caution and stability to continue for most of the year until the market is ‎projected to pick up in a more significant way in the fourth quarter.‎

The question to restock and by how much will therefore continue to be governed by ‎economic conditions. One can assume that such decision making will be conservative ‎and restrained by uncertainty. Trade buyers do not want to get into an excess-inventory ‎position lest prices drop and their stock is devalued. ‎

Thus the second quarter should pan out in much the same way as the first. And for now ‎that should be enough. Relative to previous downturns, the modest performance of the ‎first quarter was indeed a welcome relief. But even with the sigh of satisfaction about the ‎start of the year, trading is still hanging in the balance in Q2.