Take a look at the following table. A quick view shows that the majority of the cells are red. The red cells indicate which polished diamond categories have an increased presence in the wholesale market. Each red cell tells us where inventories increased, and each green cell tells us which polished diamond categories decreased. The increases are in red as a warning, and the declines are green because they are potential (but not necessary) opportunities.
Nearly two thirds (65%) of these categories of round-shape, triple X, non-fluorescent polished diamonds were in increased availability at the end of August, and in just 16% of the categories we see a decline in presence of the volume of goods in the market. Nearly a fifth (19%) of them are unchanged. This is very revealing. It tells us that inventories are increasing, and that manufacturing is outpacing demand.
There are a few ways to interpret these findings from our ongoing monitoring of the market. One, these are goods that accumulated during the summer time when most of the wholesale sector of the diamond pipeline, and most retailers, are on vacation. The problem with this explanation is that if the market is on vacation, who is manufacturing all these goods? True, many Indian companies continued to operate during August, but this does not fully explain the rise in volume. Another possible explanation is that we are seeing goods that are being prepared to be set in jewelry, to be offered during the holiday sales period in November and December. This is very possible, and takes into account limited August manufacturing, but again, the volumes are too high, and most of these goods would have been shipped to jewelry makers, rather than simply be allowed to linger as stock.
A third explanation is large returns. Before going on vacation, many retailers may have returned memo goods. These are not just polished diamonds coming from small chains and independent jewelry retailers, but significant quantities that were returned from large retail chains clearing their own inventories of unsold diamond jewelry. We have heard of large returns from a number of sizable retailers, which is an issue because we are talking about diamonds that were polished a while ago. These goods did not pay for themselves, and they are joining fresh goods. This raises another issue related to returned goods – often, returned goods are not the cream of the crop. On the contrary, they are what is left after the best goods are bought. Economically this is problematic because every parcel will have a range of goods. If the best goods are taken out, the average value of the parcel of “leftovers” is lower, and represents a de-facto loss.
There is, of course, a fourth, more disturbing explanation: over-manufacturing. We know that the midstream stream sector of the diamond pipeline suffers from manufacturing overcapacity. I have written about this issue in the past, noting that this overcapacity is driving many manufacturers to buy more rough than they need. This means that the output outstrips what they need to fulfill existing and expected orders. The result is an increase in inventory.
So, which one of these is the best explanation for the rise in inventory? In all likelihood, no single factor is causing this problem, but rather a combination of all four of them. Some goods accumulated during the slow summer vacation time, some were made in advance to fulfill orders from jewelry manufacturers that are making diamond jewelry for the November-December holiday period, and many are returns from retailers. But more than anything, these are goods manufactured by bullish companies that suffer from overcapacity at their factories, mainly in India, and that are bringing goods to the market that are being shelved for the time being.
Polished Diamond Price Index
Among the many outcomes of this rise in inventory is that prices of polished diamonds are declining. This is an ongoing process that has lasted for more than 30 months. The Mercury Diamond Global Tracker™ (MDGT™) declined 11.9% since May 2009, underscoring the continued softness of the polished diamond market. On a month-over-month basis, polished diamond prices declined 0.3% during the month of July compared to June, and 0.8% year-over-year. With this kind of manufacturing versus demand ratio, it is reasonable to expect that polished diamond prices will continue to be effected.
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.