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. 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.