A look ahead

Avi Krawitz

Mike Roman, th e late former chairman of Jewelers of America (JA), once told Martin ‎Rapaport, “Don’t worry about diamonds. The industry will be okay, as long as there are ‎three things: Christmas, sex, and guilt.” The good news is that each year he has proven correct, and his premise holds true for ‎‎2013, if not more so.

The bad news is that the year ahead is not expected to be one of ‎significant growth for the diamond industry. ‎

After all, many of the issues responsible for the challenging market in 2012 will continue ‎to have an impact, most notably as economic uncertainty shifts from west to east and ‎back again. At the same time, many of the deals that were penned last year, and the ‎strategies that have been evolving even before that, will influence trading in 2013.‎

Prospects for the year are therefore interesting, regardless of how diamond prices will ‎trend in 2013. While many are encouraged by the stability seen in December that was ‎driven by the U.S. holiday season, (see Rapaport Research Report published on ‎January 3, 2013), Christmas is over. Diamond buying remains conservative as retailers ‎maintain low inventory and consumer confidence diminishing the closer they edge over ‎the “fiscal cliff.”‎

The industry now turns to the Chinese New Year on February 10 to keep up the ‎momentum, which Roman may have added as a fourth factor, had it been as relevant in ‎his time as it is today. ‎

The prospects for the season are encouraging. If 2012 was a year in which steady U.S. ‎demand compensated for slower growth in China and India, early economic forecasts ‎suggest the pendulum may swing back again slightly this year. With a new government ‎taking power, the outlook for China has improved, after a slowdown in growth and ‎confidence in 2012. The industry is banking on a relatively strong Chinese New Year to ‎set a more positive tone for 2013. ‎

But there’s no escaping the weak global economic environment and consumer ‎sentiment, in the U.S. and elsewhere, which is likely to continue to exert influence during ‎the year. ‎

Polished suppliers and manufacturers are therefore in a catch-22 as they are currently ‎enjoying reasonable profit margins in a relatively weak market. Their current polished ‎supply was cut from cheaper rough bought after prices dropped around August. There ‎will likely be an influx of lower-cost polished goods into the market in the coming months. ‎But they also sense their margins may be short lived. With limited production and supply ‎from De Beers and ALROSA respectively, rough prices are anticipated to rise in the first ‎quarter.‎

The question for diamond cutters is two-fold as they ramp up their manufacturing ‎operations: given the state of the economy and weak consumer demand, will the new ‎polished coming to market, cut from cheaper rough, enable lower diamond prices, or will ‎they manage to maintain their margins in anticipation of higher rough prices? ‎

From the rough supply side, it seems that De Beers expects sightholders to take the ‎rough in the coming months that was rejected before the company cut prices in the third ‎quarter of 2012, in addition to their regular supply — as the company stipulated at the ‎time. The same has been expressed by ALROSA, which also faced rejections from its ‎clients in the latter half of 2012. ‎

Such policy could set off an unhealthy bubble phase in the rough market, especially as ‎sightholders submit their intentions to offer (ITO) for the next supply cycle beginning on ‎April 1. It will be left to sightholders and ALROSA clients to reject over-priced rough and ‎to banks to avoid giving credit that enables purchases at unsustainably high rough price ‎levels. ‎

[two_third]The market will be eyeing how much rough is supplied and how it is sold, especially as ‎new players emerge on the supply side in 2013. Botswana’s state-owned Okavango ‎Diamond Company is scheduled to launch sales in the first half, but it is still unknown ‎how it will sell the more than 2.5 million carats per year of Debswana production.

Similarly, Harry Winston will significantly increase its production when the company ‎completes its purchase of the Ekati mine from BHP Billiton, making it Canada’s largest ‎diamond producer. It is likewise unclear whether Harry Winston will continue with BHP’s ‎spot tender model for selling the Ekati goods or mix them with its Diavik production and ‎sales. Rio Tinto will likely reveal its intentions after initiating a review of the diamond ‎business last year.[/two_third]


“Such policy could set off an unhealthy bubble phase in the rough market…”

Among the majors, ALROSA should complete its long-term contracts and will likely sell ‎more to its contracted clients than ever before, while teasing the market with a possible ‎share sale. ‎

De Beers meanwhile will complete the move of its Diamond Trading Company (DTC) ‎rough sales division from London to Gaborone, while phasing out the DTC and Diamdel ‎brands. Sightholders, and/or their brokers, are bracing to see more of Gaborone as De ‎Beers launches its “London” sights there around November.

De Beers is also expected to ‎appoint a new chairman and reveal more of its corporate restructuring.

The company ‎said in October that it has begun a long-term effort to realign its corporate identity and ‎culture in order to view the market as consumer, rather than supply, driven. Hopefully it ‎will better explain what that means and the impact it will have on its supply, its prices, and ‎its market assessments.  ‎

Businesses throughout the diamond pipeline are similarly weighing the consumer mood at ‎the start of 2013. Diamantaires and jewelers will recognize that the value of their ‎diamonds means more than the volume of their sales as they strategize to ensure ‎sustainable profits regardless of how the year progresses. They take solace in the fact ‎that there’s still a Christmas, (and a Chinese New Year and Diwali). There’s still sex and ‎possibly most importantly, there’s still guilt. The outlook for growth may not be strong, but ‎more people than ever continue to buy diamonds. Ultimately, the industry will be okay in ‎‎2013.

Source Rapaport