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Taking Inventory

12 december 2012

It’s December, and diamond markets are eyeing inventory levels across the pipeline, ‎characteristically hopeful that the holiday season will sufficiently trigger stronger buying in ‎‎2013, Avi Krawitz says on www.diamonds.net. Stronger being a relative term as trading has been dulled by caution throughout ‎‎2012.‎

At all levels of the industry – mining, manufacturing, dealing, wholesaling and retailing – ‎businesses are assessing their short-term supply prospects: Are De Beers and ALROSA ‎releasing enough rough? To what extent is Surat ready to ramp up manufacturing? Are ‎manufacturers holding large rough inventory? Do they have sufficient polished? Are ‎there shortages of polished and in which categories? ‎

While many are waiting out December for an answer that reflects the market reality, little ‎is expected to change in the short term. So far, the U.S. retail jewelry selling season has ‎brought few surprises, even as it got off to a reasonable start. The same can be said for ‎China’s October Golden Week and India’s November Diwali festival. But a “not bad” ‎season in a not-so-good year may be a misleading. ‎

It appears that sales have held relatively flat compared to last year, or, at best, grew at ‎low, single-digit percentages. De Beers this week estimated that global polished diamond ‎sales grew 4 percent during 2012, compared to growth of 10 percent in 2011. Japan was ‎the only market that managed to peg growth at roughly the same rate as last year, while ‎growth halved in the U.S. to 4 percent and in China to 11 percent, and, somewhat ‎worryingly, contracted by a percent in India, according to De Beers.‎

At this late stage in the year, the industry has met these depressed levels of growth with a ‎shrug of the shoulders and continued to squeeze what it can out of the final weeks of ‎‎2012. Such acceptance is not a measure of complacency but is reflective of the ‎prolonged downturn that has emerged since mid-2011. The market continues to correct ‎the bubble that grew in the first half of 2011 when diamond prices soared as speculative ‎Indian and Chinese demand resulted in excess inventory. ‎

The RapNet Diamond Index (RAPI) for certified 1-carat diamonds fell 12.5 percent in the ‎first 11 months of 2012 and is down about 22 percent since its peak in July 2011. The ‎index has tried to stabilize in November and December, but buyers still see a downtrend ‎that they are hesitant to buy into. Manufacturers and dealers consistently note that buyers ‎are not building inventory and are working to fill orders with specific and price-sensitive ‎requirements. ‎

It’s no wonder that the major mining companies are carefully managing their supply, ‎trying to maintain their price levels. ‎

De Beers production has focused on waste stripping and maintenance for more than a ‎year now and the company has lowered its supply forecasts. Production fell 20 percent ‎year on year to 19.824 million carats during the first nine ‎months of 2012 and next week’s ‎final sight of the year is expected to be relatively small. Furthermore, De Beers has ‎warned of possible shortfalls through the first quarter of 2013, or, more correctly, ‎indicated that it won’t meet its initial forecasts made a year ago.    ‎

Conversely, ALROSA has maintained relatively stable production, down just 3 percent to ‎‎25.4 million carats during the nine months. But the Russian miner has significantly ‎lowered its supply, with sales by volume declining 21 percent 22.3 million carats in the ‎same period. The value of ALROSA’s diamond inventory between January 1 and ‎September 30 grew 32 percent to $897 million (RUB 27.75 billion). ‎

While De Beers is keeping its diamonds in the ground, ALROSA is hoarding them in its ‎vaults, as their respective sightholders have refused to keep them in their own safes.‎

Reports this week that demand and prices for non-De Beers rough on the dealer market ‎improved may be a knee-jerk reaction to talk of pending shortfalls in rough supply. But ‎shortfalls should not be confused with shortages. It seems the diamond cutting sector, ‎while facing diminished polished demand, is holding sufficient rough after manufacturing ‎was suspended during India’s month-long Diwali festival and wedding season in ‎November. Even more so, as India imported a considerable amount of rough in October, ‎up 3 percent to $1.4 billion. Again, the shortfalls are more likely pinned to retroactive ‎forecasts.‎

Manufacturers continue to search out profitable rather than volume trades in the rough ‎they are buying. That may explain recent firmness at various rough tenders relative to the ‎weak ALROSA and high-priced De Beers contract sales. In general, it may still be better ‎to trade polished than buy rough. But manufacturers insist they’re in the game to ‎manufacture, have their employees to consider and need to keep their factories turning. ‎

Polished suppliers, meanwhile, are challenged to source the right type of goods, rather ‎than by an overall polished shortage. Diamonds that are in consistent demand such as ‎the SI clarity, non-tint GIA-certified stones, and well-made fancy shape diamonds, may ‎prove difficult to find, while better-quality VVS goods are in ample supply. As De Beers ‎noted this week, lower realized prices in 2012 also reflect a slight shift to a lower quality ‎product mix than in previous years. Certainly, retailers are pushing heavy discounts and ‎promotions in a highly competitive and price-sensitive consumer environment this holiday ‎season. ‎

As always, much depends on consumer demand and retailers are happy to maintain their ‎inventory on a needs basis. They also seem to have sufficient stock to satisfy current ‎demand, despite having been conservative buyers of polished diamonds this year. ‎Tiffany & Co., Signet Jewelers, Zale Corporation, Chow Tai Fook and Luk Fook Holdings ‎each reported relatively full inventories at October 2012 that have, in fact, grown from a ‎year ago.   ‎

As a result, no one expects significant restocking in January even as the sales pitch shifts ‎from the U.S. to the Far East for the Chinese New Year in February. Neither is there a ‎deadlock of demand; the diamond market remains relatively active. ‎

Current inventory levels are therefore healthy and set the stage for a decent rebound in ‎the wholesale markets when previous consumer growth levels return. While the diamond ‎and jewelry industry began December with a sense of relief, it is satisfied that for the ‎most part, 2012 was a year of survival. And survive it did. In such an environment, its ‎reduced inventory levels are a measure of success.