Expectations and Concerns Ahead of the Vegas Shows

The Las Vegas jewelry trade shows will take place starting next week. After a series of disappointing trade fairs in Hong Kong and Basel, the industry is looking for signs of recovery at the American event—the biggest trade show of its kind, in the biggest and most important jewelry market. 

This is not to say that traders, retailers or anyone else in the sector is optimistic about the show, or that the level of business expected to take place there will indicate a recovery. On the contrary, expectations are low. However, there is hope for signs of improvement. 

An improvement of the American retail sector will serve as a positive sign for the enormous operation behind it – jewelry makers, polished diamond wholesalers and manufacturers, rough diamond traders and miners – that the light at the end of tunnel can finally be seen. There is no doubt in anyone’s mind that there will be an improvement; the only question is when.

The show is, among other things, an opportunity for retailers to meet wholesalers, for miners to meet diamond manufacturers and jewelry makers, for the downstream to meet the mid-stream and upstream parts of the diamond pipeline, and more. It is an opportunity to exchange ideas, voice opinions and get a better understanding of what is on the minds of other members of the industry. 

Demand, Availability and Prices

The purpose of trade shows is primarily to strike deals and buy, sell and place orders. In the hope that retailers will renew their orders and replenish their inventories, it must be asked – what will they order in terms of type, color and clarity of goods? What does the mid-stream of the diamond pipeline have to supply?

Today, the items mostly sold in the U.S. market are jewelry set with pique goods (I1-I2 clarity), SI and some VS clarity. These goods generate a large volume as measured in carats. But this is not the case in the value for manufacturers,  which burdens their bottom line: income. 

There is talk in the market about a rise in demand among retailers, mostly from the U.S. Reports of rising jewelry exports from India to the U.S. Indian jewelry manufacturers, where they say they are seeing strong demand, back this. 

A worrying trend from the perspective of the diamond pipeline is that while demand for jewelry in general is growing, demand for diamond jewelry in particular is not. It is possibly even decreasing. It will be interesting to see at the Las Vegas shows if the rise in demand for jewelry is for diamond jewelry or non-diamond jewelry. It will also be interesting if there are renewed attempts by jewelry makers to increase the diamond content in their designs, and if retailers are interested in buying them. That will be an important milestone for the diamond industry. Currently, specialty jewelers are seeing their sales declining.

A Missed Market

By definition, diamond jewelry is a jewelry item set with one or more diamonds, even if other gems are set in it. The rising price of diamonds, as well as the lack of marketing, has likely been a contributing factor to the decline in sales at specialty retailers. 

A large sector among American consumers was never exposed to De Beers’ generic marketing campaigns. This is a growing sector of people in their mid-twenties who were teens when the “A diamond is forever” marketing effort was shelved. Without exposure to marketing, there is not much to prompt them to go to the store and buy a diamond.

Inventory Freshness

On the supply side, things are a little different. The extended vacation at the Indian polishing plants has ended, and they are back to work. Vacations were extended because of the low demand for polished. Manufacturers, who prefer keeping their workforce rather than losing it, chose to send employees on longer vacations as one way of reducing costs. 

To improve cash flow, manufacturers in India kept their plants busy with smaller and lower cost goods, while doing their best to sell off their existing inventory. One of the negative outcomes created by this situation is that of selection. Having a constant stream of fresh goods is very important in the manufacturing sector. The best items – those with better proportions or those that have the inclusion hidden in the side, for example – are preferred by buyers. They’ll pick the better goods out of the selection and leave behind the lesser goods – those with a dark inclusion by the table or suffer from fluorescence, for example.

This results in a growing proportion of less desirable goods in manufacturers’ inventories. After selling off the better goods at a small additional discount that hurts profitability, the remaining goods are not generating much of an interest or income, resulting in a further decline in attractiveness. This hurts manufacturers.

Shortage or No Shortage?

This is generating a certain shortage. Shortages are good for suppliers, but to replenish these goods is not simple. For that, they first of all need a bigger demand to justify it economically. Then, there is the issue of the cost and price.

Look for example at 1-carat Round SI diamonds. The discount on these goods has increased from 25% to 30% (this varies depending on color, make, etc.). Now that the selling price has been lowered, it’s tough to bring it back to the previous price level even if demand improves. This raises the question: even if there is a growing demand, and even if there are less of these goods in inventories, are we really looking at a shortage? After all, if it was good demand and there was a real shortage – prices could rise back. The fact is that they are not. 

^{Source: @2015 Mercury Diamond} 

Under a regular business environment, a manufacturer buys, say, $10 million worth of goods, sells them and faces demand for $11 million. That is what happens in a healthy market where there is growth in demand. Today, if this manufacturer buys $10 million worth of goods, he sells only $9 million of it and the rest is added to his stock, which is an unhealthy situation. 

If inventory levels are not decreasing, that means they are replenishing it at the rate of sales. However, if every output has a range of qualities and only the top goods are picked, then the overall quality and value of the remaining inventory is only decreasing. You tell me if that is a good sign.

Rough Price Changes Out of Sync with Inventory

As the Indian manufacturing sector is back to work, a certain rise in demand for rough is seen in the market. The demand is at reasonable prices and purchasing is rational, not emotional. The demand is driven by a requirement to meet minimal needs to maintain the factories, including covering monthly costs, and keeping their obligations to long-term supply contracts with the miners. Nothing to rock the boat. 

The diamond miners have responded to the decline in demand, and an apparent decline in prices was reported by their clients. De Beers lowered prices on average by 3-4%, but not evenly. Most of the price decreases were in the 2.5-15 carat range of goods, which after polishing results in 1-3 carat goods. There is a certain demand for these goods, provided that they are sold for the new, lower prices. 

For smaller rough, weighing 2-carats or less, which result in 0.05-0.75 carats in polished – the price decline was minimal. This is odd considering that the pipeline inventories are full to the brim with 0.25-0.60 carat goods. Expect prices of these items to decrease or returned. The smaller size goods such as the melees may stay in demand, largely to keep the factories busy.

It’s important to note that after deducting the price increases, a number of boxes were sold for cash without any meaningful premiums, and the rest were sold at cost on long credit terms. 

Alrosa's overall price reduction of approximately 6% was effectively 4% due to change in assortments, buyers reported. Alrosa is primarily a supplier of rough that yields semi-rounds and square shape polished such as Ovals and Emerald-shaped diamonds, which means that this has a lesser impact on rounds. 

The Open Market and Tenders

Traders are reporting on a certain decline in participation in tenders and, as a result, winning bidders say their purchases are at reasonable prices. Bidding is specific and targeted, focusing on goods in demand.

It seems that there is a growing inventory of diamonds at “old” prices. Those that did not update their prices are finding it difficult to sell the goods. This is an issue seen in both rough and polished. 

One of the issues in the current market has to do with inventory value and asking prices. Because the value of the rough diamond inventories is high, there is a slowdown in purchases of these goods. This raises an expectation that this would lead to a decrease in price. At the same time, the expected shortage created by the slowdown in buying may cause prices to rise. 

Conclusion

Maybe times are changing. Right now traders seem un-phased by possible shortages as manufacturers are mostly focused on keeping their operations running, as noted above, and therefore buying is minimal.

This follows another change in market culture, one of “minimal commitment to the sources.” To achieve it, manufacturers maneuver between contracted supplies from large miners, open market purchases, tenders and even buying polished at lower prices to avoid buying and polishing expensive rough. 

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