Primary Suppliers Exclusive: Market Insights

Produce Polished According to Demand

By Avi Krawitz, Oct. 5, 2016.

The diamond industry has demonstrated improved supply-side discipline in 2016, but inventory levels still need to come down to ensure a sustainable, profitable business moving forward.

Diamond manufacturers and dealers are struggling to realign their inventory to lower levels of demand. Having carried the burden of the industry’s excess inventory since the 2008 financial crisis, and arguably well before that, the sector is now playing catch up.

It is stuck between the rough market where, barring a few exceptions such as the second half of 2015, demand has been consistently upbeat over the years, and jewelry retailers who are managing with less stock than before.

The midstream aggressively built up inventory in the past decade to accommodate China’s rapid expansion. While the 2008 financial crisis forced companies to rethink how they do business, the midstream soon embarked on a speculative cycle that pushed polished prices and inventory levels to peak in August 2011.  

Overcapacity

Polished prices have been on a downtrend ever since because there are simply too many goods in the market. There are also too many dealers scrambling after a narrower portion of the “right” diamonds that are in demand.

That was all too evident at the Hong Kong Jewellery & Gem Fair this September. As one exhibitor told me, “the market still hasn’t addressed the overcapacity issue and there is less Far East demand to suck it all up.”

The major Hong Kong-based jewelers are not buying the same volumes as before as sales have slumped and because they’re still holding inventory they bought to fill the many stores opened across Greater China in the past decade. As economic growth slowed in the past two years, they required less diamonds from the trade, having curbed their expansion programs. 

Meanwhile, the U.S. retail sector continues to consolidate with the number of jewelry business closures rising 20 percent in 2015, according to the Jewelers Board of Trade (JBT). And while the U.S. majors such as Signet Jewelers continue to grow, their inventory requirements are relatively stable.

The Path to Profits

To their credit, manufacturers curtailed rough buying and polished production in the second half of 2015. That left the miners with excess rough inventory even as De Beers and ALROSA “helped the market by producing according to lower levels of demand in 2015.”

That excess mining inventory was reduced to normalized levels in 2016 as rough trading was stronger than expected. That means inventory has steadily shifted from the miners to manufacturers again.

Polished suppliers at the Hong Kong show argued their inventory is in a healthier place than a year ago. They also noted manufacturing is ramping up before factories close for the Diwali break in November. The rough market remained buoyant in September and polished inventory is expected to rise in the coming months.

Whether that will pressure prices in the fourth quarter remains to be seen. At this stage of the year retailers have made their holiday orders and polished trading is expected to stabilize but hardly boom in the coming months. After all, the holiday season is more about consumer than dealer demand. And the hope is that a good season will translate to stronger dealer trading in the first quarter.

The industry has demonstrated better supply-side discipline in 2016. But manufacturers must still consider their inventory and aim to produce polished to match demand. Doing so would address the overcapacity issue in the industry and ensure a sustainable, profitable business moving forward.