Last week’s international diamond show in Hong Kong was an opportunity to gauge the market’s mood, its reaction to the high level of rough diamond supply and the demand for polished diamonds, and even try to find the profitability between the two.
The frame of mind at the show was cautious with, on the one hand, optimism over demands for polished that started in January and, on the other hand, the current crisis which means that even the most recent demands do not reflect a resurrection to a normal market.
Exhibitors reported business in a few specific areas, mainly 0.60 carat rounds and smaller as well as 1 and 2 carats, in G colors and better, VS-SI clarities. Additional demand was seen for pear shapes. Prices, it seems, were fairly low, especially for specific items.
The buyers seemed to be mostly jewelry makers and a few retailers, mainly from China, as the type of goods sold clearly indicates, as well as many traders from India and the South Asia region.
Throughout the past difficult year, traders continued to sell, though at a lower volume. They often lost on those transactions, however they valued the cash flow enough to continue with that practice.
The question that must be asked today is how profitable, if at all, were the recent transactions during the Hong Kong show?
As detailed here last week's article, demands in the global market for smaller round goods, mainly below half carat, in better colors and for I clarity 1 carats. We also showed that the inventory for many of these goods have remained unchanged or even increased while inventory levels of other items in lesser demand declined. Finally, when comparing the price of goods in demand at the Hong Kong show to the cost of rough that makes them, profitability is marginal.
So what is happening in the market? For the smaller goods below half carat, the dossier goods, the cost of rough (from 0.10 carats to four grainers) is reasonable. Manufacturers are buying this rough and selling the polished output at a profit.
The next size up, 0.60-0.70 carats are marginally profitable despite also being in demand.
1 and 2 carat rounds may be profitable, depending on the price paid for the rough. Firsthand buyers, which bought directly from the lowest cost miner today, are able to manufacture and sell these goods at a profit. However, the rough used to polish 1 and 2 carat rounds – in particular 2.5-4 carat Commercial and Select Makeable – were sold for high premiums in the secondary market, sometimes double digit premiums. The manufacturers that overpaid for these goods may recover their costs.
The larger goods, 3+ carats, were not profitable based on their selling prices at the show. Manufacturers are buying rough and polishing it mainly to generate cash flow, not large profits. The cost of this polished output is such that many manufacturers preferred to simply buy polished from other manufacturers, often below their own cost prices. To turn a profit at the Hong Kong show, they had to buy these goods at exceptionally low prices in the first place.
For the smallest goods, melee, there is no reported increase in demand, hardly any sales and the cost of rough and manufacturing is sunk for now pending a pick-up in demand, whenever that may be.
Recent Events Lead to Change?
The combination of reduced volume supply in the second half of 2015, coupled with the price reductions, may have started to prove effective as it was the goal of the exercise. At the same time, we can see that in order to generate transactions, prices of polished diamonds need to be lower than their 2014-2105 levels (due to high rough diamond prices), proving that demand exists, but at reduced prices. Low prices of polished diamonds require low rough prices as well. At this point in time, that would signal that further price softening is possibly called for. Considering this, does it warrant the appetite for rough that we have seen since the start of the year?
We are looking at a market in limbo. Some manufacturers may see some profit if they bought the right rough at a reasonable cost, with as little financing as possible. That usually requires being firsthand buyers with a good ear for real demand and a cautious approach to inventory management.
Those who bought rough at higher prices, purchased goods across the board (run of mine) or simply the wrong rough, will discover that it is not the way to generate a return on their capital. They will probably draw further on their credit and financing, finding it difficult to cover costs and therefore sell for less – only further exasperating the situation.
After De Beers sold another large supply of rough to the market, $610 million, for a total of $1.155 billion, and ALROSA sold nearly another $1 billion, the total supply to the market seems greater than the retail market’s current needs - much higher in terms of volume and much more diverse in terms of the type of goods.
What makes for a successful show?
Selling diamonds at a trade show is often a focused effort that requires having the right goods for the buyers that attend a show – by size, shape, color and clarity range. Making the effort of coming to a show – with its cost of flying, hotels, shipping, insurance, marketing and the booth – as well as the time out of the office and the pre-show work are all a consideration and there must be clear benefits.
Goods brought to a show could comprise ~20% of your inventory. Assume you sold only 10% of that offering at the show. Is that a success? What about the prices achieved?
To justify the effort, sales must exceed what could have been sold out of the office without going to the show – either greater volume or higher prices, or both. Ideally, you should attract additional customers too. Not only new clients, but a new class of clients – traders, jewelry makers, brands, retailers?
Once the show is over, an exhibitor should ask himself these questions to understand if the show was a success. Did I bring the right goods to the show? Why didn’t some of the goods sell – were they priced too high or incorrectly for the show? Is staff training needed?
Healthy trade is based on daily sales out of the office, not trade shows. Selling at a show is not the basis of trade and can only serve as an aid.
From what I hear from participants, achieved prices were low, mostly to Chinese and Indian traders, and they did not exceed what the prices that could have been achieved through sales from their offices. Did the volume justify the effort of exhibiting?
Many of the larger goods were offered at lower prices. If you try to reverse engineer these prices to rough through the Mercury Diamond™ Transaction Prices, you will reach what are, in my opinion, unreasonable rough diamond prices.
I’m not alone with this feeling. Many traders were surprised by the low prices for the 3+ carat polished sold at the show. They suspect that these goods are simply recycled by traders who bought them some years ago. If these goods were languishing in the safes all this time, are they being sold now at lower prices just to generate cash flow?
If not sold to consumers until now, were they priced too high? Maybe consumers are not interested in those goods, which raises the question, why would a trader want to buy them in that case? Even if sold, how could a trader afford to purchase new rough to polish new 3+ carat goods, considering the price disparity?
Each exhibitor should evaluate the show: have the achieved prices, volume of sales, the proportion it represented of the inventory and buyers justified the effort? Or could the same sales be made directly from their office, sparing the additional costs and effort of going to the show? In a more specific context, is the recent rush to buy rough diamonds justified, considering the polished demands seen at the show?
The recent improvement in demand, which may reflect only a restocking phase and not an improvement in consumer demand, should not be mistaken for a turnaround in the business. The issues of over financing and the resulting excess capacity of capital are still here. The lack of marketing still needs to be addressed. The focus on servicing credit facilities instead of consumers is still here. The need for greater transparency must be addressed. Many other issues that we have highlighted in the past year require the industry’s attention. Without it, we might find ourselves back in the same place again and again – until they are properly considered.
The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser.
Diamond industrialist Ehud Arye Laniado is a man passionate about diamonds. From his early 20s in Africa and later in Belgium honing his expertise in forecasting the value of polished diamonds by examining rough diamonds by hand, till today four decades later, as chairman of his international diamond businesses spanning mining, exploration, rough and polished diamond valuation, trading, manufacturing, retail and consultancy services, Laniado has mastered both the miniscule details of evaluating and pricing individual rough diamonds and the entire structure of the diamond industry. Today, his global operations are at the forefront of the industry, recognised in diamond capitals from Mumbai to Tel Aviv and Hong Kong to New York.