Trade Resources Industry Views How to Survive as The Diamond Trade Shrinks

How to Survive as The Diamond Trade Shrinks

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The diamond trade remains under pressure, and further contraction of the market is expected this year. Apart from being squeezed by high rough costs and declining polished prices, dealers lament there are too many players chasing the same orders.

Simply put, the market is saturated with polished suppliers, and consequently with goods for which there is insufficient demand.

Manufacturers and dealers are caught between the mining and retail sectors. They carry the burden of supporting industry inventory levels, as the supply of rough diamonds is projected to rise this year, while jewelry retailers continue to consolidate and make do with less stock.

Consider that 1,669 jewelry businesses shut down in the United States in 2016, according to the Jewelers Board of Trade, and that the retail growth in China slowed in the past two years from its previous aggressive expansion.

Consumer taste, meanwhile, is also evolving as middle-income customers gravitate toward lower price points amid global economic caution. The range of polished diamonds that are in demand has therefore narrowed.

Consequently, there are consistent reports of polished shortages in select categories that are in demand and an oversupply of diamonds that are less desirable. That’s certainly the case now, as new polished is being processed.

Inventory levels are projected to rise, as large volumes of polished are expected to enter the market in the coming months given that rough buying jumped in January.

It seems the market is still struggling to find its equilibrium.

In fact, the midstream has already contracted in the past 18 months, according to Praveenshankar Pandya, chairman of the Gem and Jewellery Export Promotion Council (GJEPC). He estimates that India’s diamond-manufacturing sector diminished by about 15 percent as a result of the downturn in the second half of 2015.

Back then, manufacturers stopped buying rough after aggressive rough trading the previous year resulted in inflated polished inventory and unsustainably high rough prices. Smaller manufacturers, many of whom rely on rough supply and outsourced work from sightholders, were hit the hardest as activity slumped, forcing them to close their operations, Pandya explained.

While overall profitability improved somewhat after the market stabilized in 2016, the smaller factories came under further pressure when the Indian government introduced its demonetization policy immediately after Diwali in November, he added.

Many workers who went on vacation during the festival delayed their return as liquidity was squeezed amid the crackdown on cash transactions, since demonetization eliminated some 86 percent of rupee notes in circulation. About 5 percent to 7 percent of those smaller factory units have yet to resume their operations, Pandya claimed.

Some units are expected to return soon as the country acclimates to its new reality and businesses, as well as individuals, get their respective houses in order – largely opening bank accounts to facilitate a shift to electronic payments.

Activity is already starting to stabilize, even though it will take at least another six months for trading to recover fully from the consequences of demonetization. Rough demand jumped in January, with De Beers recording its largest sight in 30 months, according to Rapaport records.

That led to renewed concerns that the rough market is overheating again, after achieving some balance and better profit margins last year. Rough prices rose as more than $1 billion of new rough entered the market without an accompanying increase in polished demand. Demand is expected to be more subdued at next week’s De Beers sight, or at least it’s hoped to.

The mining companies, meanwhile, appear quite bullish about the rough market, as global production is forecast to increase by 5 percent to 10 percent this year, according to Rapaport estimates.

That begs the question of whether there is sufficient demand to fill the additional supply. Or more importantly, whether there is sufficient profitability in the rough goods to sustain the vast number of players in the midstream.

Ultimately, economic factors will determine whether the market is saturated with suppliers or not, Ernie Blom, president of the World Federation of Diamond Bourses (WFDB), stressed at a press briefing after the group’s annual meeting in Mumbai last week.

That means businesses that have the right focus will survive, and those that don’t will inevitably drop out.

To survive, the WFDB urged its more than 30,000 members to ensure they meet the financial compliance standards and transparency required of them by banks, regulators and others. The point was driven home at the group’s Diamond Financing seminar during last week’s meeting. But equally, Blom pointed out that companies must focus on profitability rather than turnover when operating in the rough market.

“Profitability is a problem because we tend to chase after sales, but to survive, one has to only buy rough that is profitable,” he urged.

Andrey Zharkov, CEO of ALROSA, was only half-joking when he encouraged Israeli diamantaires not to buy too many of his company’s diamonds, for fear the market might repeat its 2015 downturn.

After all, the industry made significant progress last year by restraining rough supply and as prices were reduced, resulting in improved profit margins for manufacturers. That was partly undone in January, and concerns are mounting that the trade may be returning to its old habits of chasing turnover rather than profit.

As polished trading remains reserved, all eyes will be on next week’s De Beers sight to assess the manufacturing sector’s prospects for profitability in the year ahead. Continued excessive rough buying, as was evident in January, will further erode manufacturing margins and ultimately accelerate a contraction of the market.

Inevitably, it will be the companies that remain conservative in the rough market — buying only the goods they can manufacture and sell at a profit — that will survive.

Source: http://www.diamonds.net/News/NewsItem.aspx?ArticleID=58582
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