Industry Analysis

January Outlook: Rough Diamond Supplies Up, Prices Down

Russell Shor
January 25, 2016
Holiday retail diamond jewelry sales in the U.S. were spotty, but in positive territory overall, according to preliminary reports. Demand appeared to be sufficient to clear some of the inventory backlog that plagued the diamond trading centers the previous year. Photo by Eric Welch/GIA, courtesy Finell’s Jewelers

De Beers ramped up its sales of rough diamonds to $540 million at its Jan. 18-22 sight and reportedly cut prices an average of 7%. The company cut sales to the lowest level in decades during the final quarter of 2015, while the trade grappled with softening prices and excess inventories.

Fortunately, a respectable, if not exciting, holiday season helped reduce excess diamond inventories sitting in world diamond manufacturing centers. As the holidays drew near, dealers in the U.S. began to cite shortages of some goods – specifically light sizes (a few points under landmark carat weight i.e., 0.45-0.49 carats) and medium colors and clarities.
 
Preliminary reports indicate that U.S. retail jewelry sales will be slightly up for the year by dollar volume. Sales volume will likely be 4% to 5% higher than the dollar figure compared to 2014, because prices for gold and diamonds declined 10% to15% during the year. These price declines enabled the major chains to engage in aggressive discounting during the season, without seriously compromising their bottom line.
 
Signet Group reported its same store sale rose a strong 4.9%, for the eight-week season, with its Kay Jewelers division showing a 7% increase and its Jared stores up 9%. The company’s Zale division rose 2.3%.  

Aggressive discounting by its competition in a restrained consumer market caused Tiffany & Co.’s, same-store holiday sales to fall by 8% in North America. (Tiffany rarely runs discount promotions.) A strong U.S. dollar also contributed to the decline as tourist traffic, which accounts for a substantial percentage of the company’s New York sales, was down.

Overall, Tiffany’s same-store sales were down 5%, though it maintained strong profit margins. A company statement said it expected no significant improvement this year.
 
Centurion’s 2015 holiday season survey of luxury independents around the U.S. found generally positive, but mixed, results: 19.6% of respondents said their holiday sales grew significantly − more than 10% − over last year’s holiday. But an equal number saw declines of more than 10% over last year. In total, 58% of respondents were at least even or somewhat ahead of last year’s holiday sales figures, while 42% experienced a drop in holiday sales.

Most of those who reported declines, however, blamed the absence of a few key sales in 2015, which spiked their numbers in 2014. The trend was toward larger numbers of lower ticket sales. Additionally, many do business in areas where oil and gas industries dominate their economies.

CHINA’S RETAIL OUTLOOK

The outlook for retail sales for Chinese New Year (Feb. 8) is looking gloomy as the country’s stock market appears to be headed for a severe slump.

The region’s largest jewelry retailer, Chow Tai Fook, based in Hong Kong, reported that same-store-sales dropped 11% year-on-year in the third fiscal quarter that ended Dec. 31. Sales in Hong Kong and Macau dropped 20%, while income from the mainland was off 6%. Another Hong Kong-based jewelry chain, Luk Fook, reported that same-store-earnings plunged 26% in Hong Kong during the third quarter of 2015, compared to the previous year, with its mainland stores showing a decline of 10%. The company said sales of gem-set jewelry declined 27% in Hong Kong, but rose 2% in the mainland.

Some analysts have suspected for a year or more that the government may have been trying to hide the fact that the country is in recession, not just experiencing slower growth. One indicator is that Chinese retail sales, including jewelry, have been in negative territory for some time. This is unlikely to improve because the Renminbi Yuan has resumed its decline against the U.S. dollar, making diamonds and gold more costly in local currency.  
 
While China’s slumping stock market has caused markets in the U.S. and Europe to decline in its wake, economists believe it is a short term reaction to the situation and not a reflection of economic conditions outside of the country.

Diamond Rough

On the diamond supply side, all eyes are focused on De Beers’ January sight. Its parent company, Anglo American, has taken a huge financial hit and as its biggest earner, De Beers is under heavy pressure to bring in revenue. The recovery of the diamond market, however, while real, remains very fragile. A large sight (if clients do not refuse the goods) or token price reductions that do not allow manufacturers to make a profit, could compromise the upturn or start a price/supply conflict with Alrosa and Rio Tinto, both of which have pressures of their own.
 
De Beers did announce it would close its Snap Lake mine in northern Canada, which produced about 1.2 million carats last year. The mine ran into major cost overruns and has been unprofitable from the outset.  
 
At the same time, dissident shareholders of Dominion Diamond Company (owner of Ekati and partner in Diavik) have called on management to resign for failing to plot a growth strategy beyond its existing mines. The dissident group, which holds a 5% stake in the company, is also demanding representation on the board of directors. Two board members resigned from the company on Jan 5. It is unclear whether or not they were related to the shareholder action.
 
Colored stone demand has been improving, but many primary dealers continue to hold out for prices that the trade deems unrealistically high. This dampened sales at the fall Hong Kong show, where it was obvious that Chinese buyers were no longer in the market in a big way. Many dealers have not yet absorbed that message.

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