Industry Analysis

Tucson, Centurion Upbeat, But Caution Remains

SAFDICO Diamond Manufacturing in South Africa
Diamond manufacturers are making profits again after more than two years of struggling with high-priced rough and depressed polished prices. SAFDICO in South Africa specializes is larger diamonds, which were less affected by the rough-polished price squeeze. Photo by Russell Shor/GIA

Business at the February Centurion show in Scottsdale, Arizona, geared mainly to higher end independent retailers, was generally good according to attendee reports. The exceptions were retailers from states where the economies depend on the oil business. Demand for gemstones at Tucson reportedly was decent and in line with expectations, so the mood was generally good, according to exhibitors.

The outlook remains cautious, however, as major jewelry retailers are forecasting little to no sales growth for 2016 in the U.S. and a slight decline in other major consumer centers.

U.S. retail jewelry sales were up about 2% from 2015, according to the U.S. Bureau of Economic Analysis. Sales of retail jewelry at specialty stores, i.e. retail jewelers, were up 3.6% year-on-year, probably reflecting stronger business at the higher end. In addition, year-on-year revenue comparisons are compromised by the fact that diamonds and gold were significantly lower in price in 2015 than the previous year.

The e-commerce diamond retailer Blue Nile, for example, reported its worst year ever: sales down 5% from the holiday season, mainly because its core engagement ring business was down 8%. The company did note, however, that unit prices were lower and profit margins actually rose slightly on the year. The company also reported fewer sales over $25,000, which may reflect the difficulties of oil-dependent regions or a trend back to brick-and-mortar for high-ticket pieces.   
The decent sell-through in the U.S. market absorbed a lot of excess inventory and helped revitalize diamond manufacturing, which nearly came to a halt at the end of 2015. Bankers and diamond analysts have cautioned that manufacturers may be resuming the speculative buying that caused a bubble several years ago, however, bank credit remains extremely tight, which will restrict such buying on a long-term basis.

Diamond manufacturers have apparently found De Beers’ price reduction sufficient to make a profit. Prices came down an average of 7% at the January sight and the side deals made at the same time, but many categories of goods were discounted 12% to 15%. The sight was about $450 million, with side deals adding about $90 million to the total.

What was extraordinary about this sight was that, for the first time in its history, the company announced its monthly sales volume. This is apparently the first step in what De Beers claims will be a “major restructuring of its global sightholder system” for the sight term that will begin next year.

De Beers' second sight of the year is this week.
The company’s rough sales fell 40% to 20.6 million carats in 2015, while production fell 12% to 28.7 million carats. The deepest production cuts, 16%, were in Botswana’s operations, which supplies about two-thirds of the company’s output.
Alrosa, the Russian diamond producer, reportedly doubled the quantities of rough diamonds from its December sales to match De Beers’ total. Alrosa apparently did not lower prices in January like De Beers, but the company had been selling comparable goods for a few percentage points less at its offerings over the past two years. Alrosa has continued to mine diamonds at the same rate, but has stockpiled some $3 billion worth with the central government stockpile, Gokhran.
Although De Beers and Alrosa gave clients the right to defer their purchases (up to 50% for De Beers and 70% for Alrosa), indications are that few clients did so.

Globally, LVMH, the luxury group that operates the De Beers stores and Bulgari, as well as the prestige watch brands Hublot and TAG Heuer, reported that its watch and jewelry sales rose 19% in 2015, led by Bulgari and TAG Heuer.

Russell Shor is senior industry analyst at GIA in Carlsbad.