By Avi Krawitz, Nov. 2, 2016.
Diamond manufacturers should consider current price trends in order to truly capitalize on the rise in trading expected in the first quarter.
Some find it hard to believe on the eve of the Christmas shopping season, but the fourth quarter is traditionally a slower period for the diamond trade. However, it’s worth stressing it’s a shopping, not a trading period. No well-run, efficient jewelry retailer will leave it until November-December to fill the majority of their stock for the season.
Rather, the diamond trade looks to Christmas, and the Chinese New Year for that matter, for an indication of what’s to come. After all, a good retail season should spur retailers to replenish inventory in the months thereafter. Assuming that jewelry retailers have a strong season, they should subsequently start buying loose diamonds from the trade in the first quarter.
In fact, the first quarter has proved to be the busiest trading period in the past four years of market decline. This year, for example, polished prices firmed with the RapNet Diamond Index (RAPI™) for 1-carat diamonds up 1.4 percent in the first three months of the year. RAPI subsequently declined by 0.7 percent and 2.7 percent in the second and third quarters respectively.
It appears the polished trade, especially manufacturers, spend much of the second half of the year gearing for that beginning-of-the-year boost.
But forecasting inventory can be tricky and adjusting stock is more complicated given recent market volatility. That’s especially true given the time lag between buying rough and manufacturing and supplying the resulting polished. Rough bought this past third quarter, when demand was relatively buoyant, is likely being earmarked for polished supply come January.
By that count, the trade appears to have a positive outlook for the beginning of 2017 as inventory levels continue to rise.
Consider that India’s rough imports soared 54 percent to $4.2 billion during the third quarter, which was a record level for the three months ending September 30. Meanwhile, RapNet inventory jumped 23 percent by volume and 9 percent by value from the beginning of the year through October.
Will Rough Follow Polished?
However, polished trading is expected to remain sluggish in November and December as larger U.S. holiday orders have been filled and dealers have shifted to accommodate specific requirements from their retail customers.
Manufacturers need to consider their potential profit margins as current price trends will impact their profitability in the first quarter. Indeed, margins tightened in October as polished prices softened amid slow trading and RAPI for 1-carat diamonds fell 2.3 percent during the month. Meanwhile, rough prices firmed in October following strong third-quarter rough demand.
Consider too that manufacturers tend to buy rough a bit more aggressively in November as they ramp up production following the Diwali break. Therefore, profit margins are expected to come under additional pressure in the final two months of the year.
In order to ensure positive trading translates to healthy profit margins in the first quarter, the industry might consider refraining from exuberant rough buying in the coming months. That way, a steady shopping season can be complimented with stronger and more sustainable trading in 2017.