Reading the signs at JCK Las Vegas

The JCK Las Vegas show was the center of attention for the diamond industry, with all looking for signs of recovery or indications that the current state of the industry will continue. The short answer is that the message from Las Vegas was mixed.

 The trade show kicked off on an active note, with diamond wholesalers saying that they feel optimistic. While it seemed that attendance was down compared to past years, those who did attend were there to do business—which is most important. 

Buyers arrived at the trade fair with a sense of confidence. On the flip side were wholesalers who reduced their prices over the past few months. Having decided that they reached rock bottom, these wholesalers held steadfast to the new low prices and did not let them slip any further. 

Las Vegas Trade

Polished diamond transactions were for typical American goods: 2 carats and below, SI-I clarity goods with some VS2s. 

Melees and Stars, which continued to be polished throughout the current crisis in the diamond industry, did not sell well at all. Pointers and sales of 1 carat Rounds varied by manufacturer – some did better than others. It boiled down to the willingness of the manufacturer to stick by current market discounts or exercise additional flexibility to generate cash flow. 

Cushions and other fancy shapes were in good demand. Larger goods, of 2 carats and up in all shapes, sold pretty well and some deals of very large stones (10-, 15-, 20-carats, etc.) were recorded. It seems that the prices in this area have reached stability. Rounds in this size category are not doing as well in the market, maybe because of their higher total price. The current U.S. economy does not provide enough confidence to generate sales of this magnitude.

The good news was that 3-5 carat Rounds, in G-H colors and VS2-SI2 clarities, were in demand. The renewed interest in these items is no doubt a positive development. 

^{Image: JCK Las Vegas}

Asia’s Influence on U.S. Interest

In the past, these items were in demand in the U.S., selling at around 35% below the benchmark prices. However, that demand dwindled recently as interest in them grew in the Far East. In early 2014, Asian buyers paid a premium for these goods and as the price increased to 25% below the benchmark, demand for it in the U.S. market decreased. The increase in prices in Asia also led to an increase in the price of the rough from which these items are polished.

As demand in Asia declined, along with the enforcement of anti-corruption laws in China, prices cooled and U.S. interest is now returning. Once again the U.S. market wants to pay -35%. However, the price of the rough did not cool along with it, creating a problem for manufacturers. 

Considering current prices of rough diamonds, a few questions arise. Can manufacturers polish and sell a parcel of these stones and sell them at a 35% discount? Or will he only be able to sell the top of this output – those with the best measurements – at -35% and the rest will remain in inventory?

It is important to remember that the U.S. market always bought these goods, and the items sold at the show were the “regular” items. Overall, there was no sense that the quantity of orders went beyond the typical level. The business at Las Vegas was maybe a confirmation of orders, a sort of window shopping for a new supplier with better goods, prices or credit terms. 

Discounts and Demand

The 3-5 carat Rounds, in G-H colors and VS2-SI2 clarities, sold at a discount of 35% at the show. If demand was strong, prices would have risen, reducing the discount to, say, 32%. That did not happen, even when there was a shortage in the item. Demand is such that discounts remained largely unchanged.

Business in the jewelry sections of the Las Vegas shows went well, especially at the Couture show. In general, demand for finished jewelry, and even more so for higher end and branded jewelry, was good.

The show did not send out a message that demand is rising enough to generate increased prices. Yet, sales were made, generating an inflow of cash to the pipeline, which is not being spent casually.  

Looking to Hong Kong

Now that Las Vegas is behind us, people seem to be already focused on the upcoming Hong Kong show later this month. Some more good news has already started coming from the Far East. It seems that it took them quite a long time to realize that their currencies are weaker than before and will stay that way. Now that they have finally accepted reality, they have started ordering and buying again. This phenomenon may help the market in Hong Kong in the near future, and have a positive impact on the Hong Kong show.

It will be interesting to see if the level of activity at the Hong Kong show will be felt for the typical Asian market goods. If so, that is a signal that the global market is making a comeback. If not, the diamond industry should continue to act with caution. 

About Trade Show Business

The diamond industry is an intensive business. It takes place every day. It works around the clock, throughout the year. It cannot be reduced to one trade fair or another, and the majority of business should take place at offices and in stores. Unfortunately, shows have become an important bellwether for the wellbeing of the diamond industry. But it shouldn’t be like that. Shows should not be a sign that business in offices and stores is not running as usual. That is an unhealthy state of affairs.

Why the Optimism?

So what was the source of the optimism at the show? Was it the belief that prices have hit the lowest possible low? If sales are made at the new prices, will rough diamond prices at the upcoming rough cycle be low enough to support continued manufacturing at these low polished prices?

It should be noted that once the Asian premiums subsided and the old prices returned, the goods were again attractive to the U.S. market, proving that it is a steady market that can buy big volumes. If that is the case, all that remains is to source the rough that generates the American goods at a price that allows polishing it profitably for sales at prices the U.S. market is willing to pay.

Was the optimism coming from those that priced their American goods according to the ability and willingness of the American market to pay? Were the disappointments among those who held on to the old prices with the Asian premiums that no longer exist? Are they waiting for the Hong Kong show to generate sales for these items? Or are they holding on to the old prices because they don’t expect prices of rough to come down enough to be profitable?

Were sales of Melee, in heavy use in watches, impacted by the devaluation of the Swiss Franc? The devaluation pushed up prices of Swiss watches, which may have negatively impacted demand. Can the price of rough that is polished into +10cts Rounds be reduced to revitalize sales?

Were the confident buyers those who believe that business is back on track because of the mood at the show? Has the market asked itself if it will generate $22 billion in annual polished sales, or are we facing a future with only $17 billion in sales? Most importantly, has the industry been thinking collectively and arriving at insights that will benefit the entire diamond pipeline?

Rough Prices or Manufacturing Efficacies?

According to De Beers CEO Philippe Mellier, who spoke at the JCK trade show, the U.S. market is performing well despite the many challenges for the industry. According to him, global diamond jewelry demand in 2014 reached a record $81bn, and the U.S. posted the strongest growth: +7% over 2014. 

When asked about his controversial statement comparing Sightholders to car dealers, and that it was not up to De Beers to look after the profitability of its customers, he said the company cares for its clients and listens to them. But De Beers' responsibility is not to optimize the manufacturing process of its clients.

Upcoming Rough Cycle

Several Sightholders and brokers of De Beers estimate the upcoming Sight at $600-650 million including ex-plan. That is a large Sight and many expect that if prices of 4 to 8 Grainers, Melees and smaller goods will remain the same, many boxes could be refused.

Alrosa

At Alrosa, there was a surprisingly low attendance. According to participants, there were only about 20 customers. The Russian company is expected to offer some $350 million worth of rough. 

Alrosa is looking for new customers for their industrial and boart goods. They are in the process of trying to automatize the assorting process. It is difficult to do so because competing miners are not willing to share their technology with them. 

They are also trying to improve standard assortments, and are considering aggregation of different mines. The issue there is that there are different tax rates between provinces and the provincial decision makers struggle in coming to an agreement.

Dominion

Dominion is adding tenders in India to its regular contract sales. The first one will take place August 1st. They say that the new free rough import/export zone opening July 1st at the Bharat Diamond Bourse made this possible. 

In the next phase of the rough free zone, non-miners would be able trade rough as well. Rough traders believe that phase 2 will be far more complicated for the Indian government to digest.

The cost of renting the facility is $15,000 per week, more expensive than the AWDC facility, but it is tax free and 95% of Dominion’s customers are in India. The tender bidding process will be online and the facility will be used for viewing. Total supply from Dominion is expected at $100 million.

Together with Rio Tinto, which is expected to supply ~$45 million worth of rough, rough supplies to the market will total some $1.1-$1.15 billion. On top of this supply are tenders from mid-size miners. 

This is a very large supply for a sector suffering from difficult demand and high inventories. Does this serve the industry well? It’s worth some thought. 

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 and legal counsel.