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Tackling Debts & Fears in Today’s Diamond Market

Tackling Debts & Fears in Today’s Diamond Market

The closure of an Indian manufacturer and the large debts it left behind is probably the most important news of this week, followed by the trade show in Hong Kong. 

Tens of Millions in Diamond Debt

The closing manufacturer, who also had an active office in Antwerp, left behind debts estimated in the tens of millions of dollars to banks and rough diamond suppliers, according to market reports.

Massive debts left by a large, failing mid-stream player are always a worry in the diamond industry, and an even bigger concern since the most recent crisis began. Large debts left by a closure means that those owed the money might have difficulty in meeting their own payments, which could cause a chain reaction of failures. 

Such business failures are resonating throughout the diamond industry, and raising further concerns for the future. On top of the general concern that companies may not meet their financial obligations – and affected companies in particular – there is an ongoing concern that the lost money will not be recovered. The fear is that banks will cut their allocations to the diamond industry by the same amount they lost. In the grand scheme of things, where banks lend billions of dollars annually, tens of millions may not be much, but every dollar counts and no one wants to see banks’ support decrease.

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Polished Diamond

Closures and Bankruptcies

In recent weeks, there are continued reports of small and even mid-size companies closing their operations quietly and leaving the business. This is happening mostly in India; however, there were a number of additional closures, including bankruptcies, in Tel Aviv and Antwerp. Some of these recent closures left behind debts to suppliers. 

The recent large ailure in India was not only expected, it also resulted in a response of caution by rough diamond suppliers. This is because the company’s debts to the industry are mainly to rough suppliers. While miners sell only against immediate payment, secondary market suppliers, traders and first-hand buyers sell mostly on credit. 

Credit is the engine that fuels rough diamond sales from the first-hand suppliers to the secondary market. The interest on the credit is where most of the profit exists today in the mid-stream. The recent business closures, and the fears that payments for rough won’t be made, is hurting both past and future credit transactions. 

 

Question of Credit

This raises the question: What will secondary market suppliers do? Some transactions will be in cash (immediate payment). Some credit will continue to be extended, although for shorter periods. There is a good probability that in some instances, traders will simply refuse to buy the rough from miners to avoid altogether the risk of providing credit. Their concern is backed not only by payment ability, but also by the knowledge that a growing number of rough diamond selections cannot be profitably polished. This comes on top of already high inventories. 

From a manufacturer’s standpoint, if the price of the rough is too high, the stocks of the resulting polished is mounting, and there is a financial risk in selling to other manufacturers – why should they buy the rough in the first place? This concern may result in a growing rate of returns to the main miners unless they reduce supply proactively.

 

Hong Kong

The June Hong Kong Jewellery & Gem Fair that took place last week opened with a generally low mood on the part of diamond wholesalers. The fair included over 2,200 exhibitors from 45 countries and regions. Tens of thousands of visitors attended during what is considered a downturn period in the region.

The June addition of this important show is usually a slow one, and this year it was especially slow. Traders reported less business compared to the June show of last year, although it was not a total catastrophe.

Demands from mainland China are below expectations. Business in Hong Kong itself is a mixture of lower spending by mainland Chinese visitors, and a rise in expenditure by stock market investors that cashed out and sought to enjoy their profits.

This dictated much of the business that took place at the Hong Kong Fair. It started slow, with some transactions taking place early on. With these low expectations, a common sentiment was: “We got what we expected and maybe a little better,” according to one of the exhibitors.

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 Hong Kong Jewellery & GEM FAIR

 

Fair Transactions

Most of the large buyers were not around for the show. The presence of the smaller Chinese retailers created quite a number of transactions, although with a lower total value of sales compared to last year. 

Buyers initially offered low prices but exhibitors held prices strong, especially in areas where a shortage has been felt lately, such as 1-carats in the VS-SI qualities. Buyers that placed preorders had to pay the prices wholesalers demanded. The shortage in the 1 carat range is apparently due to lower manufacturing volumes. Also, because it is a compromise between size and price, anything bigger is beyond the budgets of consumers today, and the carat is still a reasonable size for engagement rings.

Overall, prices of 1-carat rounds slightly strengthened during the last two months. The most sought-after items at the show were 1-carat VS and SI qualities in all colors, and 0.10-carats in all qualities and colors and pointers, especially 0.25 carat in VS-SI clarities. 

Very few transactions of large high-value stones were reported. Most of the demand for 2-carat and larger stones were in medium and low colors and qualities.

Fancy color traders complained that there were too many players offering Fancy yellow diamonds, but they managed to keep prices for Vivid and Intense yellow at a high level. It has become difficult to move Fancy yellows of all qualities and shades if the stones are not perfect. 

Many exhibitors expressed their discontent from shows in general, and commented that they probably can have the same sales volume or better at their offices. It is not clear if this is a long-term conclusion or only a sentiment that rises from the current weak market. Time will tell if they refrain from participating in future shows, or even skip the coming shows, but fight for a booth when the market improves.

 

Caution in the Rough Market

After the limited returns during the last De Beers Sight, which was a large one for this period, and in light of the recent business failures in main diamond centers, the rough market continues to act cautiously. Purchases at tenders are very focused and at reasonable prices – all to ensure that manufacturing remains profitable and concentrated on goods in real demand. 

As polished diamond prices appear to have settled, the current lower prices reflect a lower value for held inventories polished from high cost rough. Manufacturers are learning to accept that the erosion of capital due to the decline in prices is here to stay for a while. They are making the necessary adjustments in managing costs, overhead and prices. 

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Rough Diamond

 

Shifting Demands for Polished

Demand in the wholesale polished market is low yet steady. Some items are declining in demand, and some items are seeing a sporadic rise in interest. The so-called American goods – Rounds, HIJ color, and SI-I clarity goods weighing one carat and below, are in continued yet sluggish demand. The trend of shifting demand toward the lower end of this group of diamonds is continuing and expected to be a lasting trend.

Prices are mostly stable since the Las Vegas show ended. They are expected to largely remain at current levels until the holiday season purchases begin.

Demand in the Far East, India and Arab Gulf – and to a certain extent in the U.S. as well – is showing a mixed trend. On one hand, the demand for higher-end goods is steady and in some places even strengthening, while on the other hand demand for what were typical goods is moving toward lower-cost items.

 

Highlights of Presidents Meeting

The Presidents of Diamond Bourses around the world held a meeting in Israel last week together with the International Diamond Manufacturers Association (IDMA) to discuss the issues at hand: eroding margins, generic marketing, disclosures and lab-grown goods. 

Regarding eroding margins, the most pressing issue, there is little that manufacturers can do today. Miners set rough diamond prices, and retailers accept or reject polished diamond prices, leaving manufacturers with an ongoing dilemma. One practical course of action is to express support for the generic marketing initiative the producers association is about to lead – which they did. Although, they did lament De Beers’ decision to use the winning slogan “a diamond is forever” for its own retail initiative Forevermark, rather than allow the continued use of it for generic marketing.

The issue of disclosure and lab-grown goods touched on both continued reports of mixing lab-grown with natural diamonds as well as the mystery treatment that temporarily improved diamonds’ color. 

The issue of lab-grown diamonds is not going to go away, and is expected to become a growing niche in the consumer market. Many steps can be taken to deal with this. One is to create a kind of Kimberley Process tracking system for lab-grown goods, which was suggested here.

 

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International Diamond Manufactures Association

 

Impact of a Strong U.S. Dollar

In Japan, the sharp depreciation of the yen against the dollar hurt jewelry and diamond jewelry demand in the second half of 2014, and continues to linger until this day. The hike in the consumption tax, which drove some purchases ahead of the change, is now contributing to the hesitation on the part of Japanese consumers to buy luxury products.

For the dollar-dominated diamond industry, the strong dollar means perhaps easier business in the U.S., but serves as a negative force in other markets. If the dollar remains strong, diamonds and diamond jewelry will continue to be higher priced in local currencies and hinder purchases. If, on the other hand, the exchange rate of the dollar will soften, demand for diamonds and diamond jewelry may benefit. 

 

U.S. Jewelry Retail Sales Keep Declining

Jewelry retail sales in the American market continued to decline in April, the seventh consecutive month of year over year declines. Specialty jewelers saw sales of $2.22 billion, a 2.4% decline. Jewelry sales by all retailers declined 1.4% year over year, and watch sales fell by 2.7% in April. 

The U.S. government Jewelry Consumer Price Index (JCPI), which reflects changes in retail selling prices, declined 1% in April compared to March. Year over year, the index fell 3.2%, the 19th consecutive month of index declines. One reason for the decline is the shift to lower cost diamonds. At the same time, it is obvious that retailers are lowering prices together with the lower price of gold, while forcing a reduction in the price of diamonds - all in an effort to appeal to consumers on a price basis. 

One might argue that diamond jewelry should be sold by retailers on the basis of prestige, brand and design, and not based on which retailer  is cheaper. However, the need to attract people into stores is an important driving force, and price proves to be an effective tool in such efforts.

 

The views expressed here are solely those of the author in his private capacity. None of the information made available here shall constitute in any manner an offer or invitation or promotion to buy or to sell diamonds. No one should act upon any opinion or information in this website (including with respect to diamonds values) without consulting a professional qualified adviser.

 

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