Industry Analysis

Jewellery Sales Slowed for Holidays: U.S. Department of Commerce

Zoe Diamond
The Zoe Diamond, a 9.75 ct. pear-shaped Fancy Vivid blue diamond, set a record for the highest per-carat price of any gemstone sold at auction. Photo courtesy Sotheby's
The U.S. Department of Commerce made the disappointing holiday sales results official: Total sales for jewellery and watches declined 1.4% by value from the previous November and December. Some of this decline, however, must take into account the decrease in gold and diamond prices that occurred in 2014. In addition, many jewellery manufacturers and retailers in the U.S. have retooled their lines towards less expensive materials to further lower price points as many consumers remain resistant to luxury prices.

The news was expected. Tiffany & Co. reported seasonal sales declines for its North American stores and Signet Corp, which operates Jared, Kay Jewelers and Zales, saw much lower growth this past season. Anecdotally, the U.S. market saw good growth at the high end, while middle market customers traded down.

Blue Nile, the largest e-commerce jeweller, also noted that fourth quarter sales were below its expectations, clocking an increase of 7.9% and yearly sales growth of 5.2%. In 2013, the company saw its seasonal sales rise 7.2%, but recorded a 12.5% increase for the year. They have just announced plans to open their first bricks-and-mortar store in a significant retail centre in the U.S.

AUCTIONS: The two major auction houses had a successful year, again setting many price records for top diamonds, gemstones and signed jewellery pieces last year. Combined, Sotheby’s and Christies’ reported jewellery sales of $1.34 billion (£860 million) in 2014, about 5% more than the record-breaking 2013.

Sotheby’s, which recorded sales of $602 million (£386 million), achieved the highest per-carat price of any gemstone sold at auction at a New York October sale: $3.35 million (£2.15 million) for the 9.75 carat (ct.) Fancy Vivid blue “Zoe Diamond”, which went to a Hong Kong buyer. At the house’s Hong Kong auction in October, the record pre-carat price for a Kashmir sapphire was broken twice; the second time within minutes of the first.

The first sapphire was a 12.0 ct. step cut mounted by Cartier, which drew a final price of $2.32 million (£1.49 million) or $193,975 (£124,532) per carat, beating the record set last year by just over $13,000 (£8,346). A few lots later, however, an Asian collector paid $4.01 million (£2.57 million) for the 17.16 ct. “Imperial Sapphire”. At $236,404 (£151,772) per carat, it easily topped the price mark that had just been set. . A month later in Geneva, Sotheby’s sold the Graff Ruby for $8.6 million (£5.4 million) or $997,727 (£651,000) per carat – a record price both overall and per carat for a ruby.

Also in Hong Kong, Christie’s, which sold $740 million (£475 million) in jewellery last year, auctioned a 2.09 ct. Fancy red heart-shaped diamond, graded by GIA, for $5.09 million (£3.25 million) or $2.44 million (£1.56 million) per carat. It was the highest price ever paid for a red diamond at auction and the second highest per-carat price ever paid for a gemstone.

DIAMONDS: The industry will be carefully watching the 23-27 February De Beers sight. January sights are usually among the largest of the year, but the company’s 19-23 January sight was the smallest in two years – $450 million (£298 million) – and the smallest January sight since the economic crisis. In addition, De Beers reportedly lowered prices by an average of 4% and gave clients the option to defer up to 25% of their allocations to future sights.

Manufacturers claim the price reductions still have not made some goods – notably those polishing to half- to one-carat diamonds and lower colour small stones – profitable to work and estimate that 20% of the sight goods were deferred. Post-Christmas orders have been slow, reflecting high inventory levels in all but the most popular sizes and qualities. The diamond industry is also still coping with liquidity issues stemming from deep credit cutbacks by the banks that finance the industry.

While many manufacturers would like to see even lower prices – rough prices declined by an average of 7% last year – De Beers is treading a thin line. If it reduces prices too quickly, its largest clients will find their inventory values suddenly reduced – along with the available bank credit, which has already been significantly curtailed. Further price reductions would certainly guarantee that clients would defer their full allowance of 25% in the hope of getting cheaper goods down the line.

In times of falling prices and stagnant demand, mining companies usually shift their operations to lower grade portions of their deposits and direct more of their operations towards maintenance.

Accordingly, Dominion Resources, a partner with Rio Tinto in Canada’s Diavik Mine, reported that fourth quarter production had dropped by 25% compared to the year before. The company plans to ramp up production later in the year to bring its yearly output close to its average of 7 million carats per year. Production at Australia’s Argyle Mine fell 43% to 1.813 million carats during the quarter. The company’s 78% share of output at the much smaller Murowa mine in Zimbabwe fell 4% to 101,000 carats.

The one producer that does not appear to be cutting back is Russia’s Alrosa which recently announced record sales for 2014 (just over $5 billion (£3 billion)) and a plan to sell more this year, including two million carats it had kept in inventory. Of course, the move is prompted by Russia’s dire economic straits following sanctions from the U.S. and EU, coupled with falling oil and natural gas prices. The $5 billion-plus in diamond sales will help break the freefall its currency, the rouble, has seen in recent months. Alrosa announced that it produced 36.2 million carats during the year and sold 39 million carats into the market. The inventoried goods were mainly industrials and very low quality goods for the mass jewellery market. This year, it plans to sell 40 million carats. Graff Ruby
The 8.62 ct. Graff Ruby sold at a Sotheby's Geneva auction on 12 November 2014. The sale achieved a record price for a ruby. Photo courtesy Sotheby's

Russell Shor is senior industry analyst at GIA in Carlsbad.