New York: A clear improvement in the diamond trade at the end of last year has petered out since the start of 2017 due to disappointing US economic growth and consumer spending in Q1 which has weighed on end-demand, as well as lower consumption in Hong Kong and Macau has also negatively affected demand for diamond jewellery according to company reports from main jewellers in the region, said ABN AMRO Bank in a report.).
In addition, Chinese retail sales were weaker in January and February, though there was a recovery in March, said the bank, a major financier to the diamond and jewellery industry.
"Antwerp diamond trade data show that the improvement in rough trade has already peaked while polished trade never recovered in the first place. These data also show that Antwerp diamond exports to China (also because of a gap in the data), Hong Kong and the US have been very weak.
"The only bright spot has been exports to India which highlight a pick-up in activity in Indian diamond manufacturing. India is the global diamond manufacturing hub. In terms of end-demand India only accounts for around 7 percent of global demand. However, Indian diamond export data paint a less convincing picture. Moreover, the announcement of the higher Goods & Service Tax (GST) in India has resulted in concerns that it will ruin small traders and manufacturers. As of July 1, GST on polished diamonds will be 3 percent, on diamond trading 18 percent, and on rough diamonds 0.25 percent.
"As is the case for the Antwerp diamond trade, the UAE polished diamond trade has also deteriorated. The Israel diamond trade has improved considerably but the question remains for how long, as the improvement has already been substantial.
"As mentioned above US consumer spending (largest diamond market) has been disappointing. Moreover, in recent years, Chinese jewellery consumption of the various precious metals has declined substantially. The anti-corruption measures are probably an important reason for the decrease in demand. However, Chinese gold jewellery demand improved somewhat in Q1 2017, but this was when Chinese economic growth was strong.
"The latest Swiss trade data for May show that there is some pick-up in momentum in watch exports especially to the largest destinations Hong Kong and the US. There have also been signs of improvement in demand in the UK, Japan, Italy and France. Overall, end-demand does not seem to be picking up for now. Swiss watch exports to China are still soft.
"The US is by far the largest market for diamond jewellery accounting for more than 40 percent of the market. Weaker-than-expected US consumer spending in Q1 has weighed on demand for jewellery, including set with diamonds. In general, an increase in US real GDP goes hand in hand with an increase in real personal consumption in jewellery and watches. Households’ net worth continues to rise in the US based on higher house prices and stocks. Moreover, the US labor market is tight, which will provide some job security. Therefore, we think that US consumer spending will rise and the savings rate will decline. An increase in households’ net worth generally fuels demand for jewellery, so we expect higher US demand for jewellery, including set with diamonds.
"We think that end-demand in the US will probably pick up because of the strong US economy in 2017 and an increase in households’ net worth. This should provide support to polished diamond prices going forward and prices should continue to bottom out. However, the upside will probably be dampened by weak demand from China.
"Our China economist expects that Chinese economic growth has peaked in Q1 and that it will gradually slow down going forward. It is likely that this will weigh on private consumption and jewellery demand. The anti-corruption measures will probably continue to weigh on Chinese jewellery spending as well. In the years ahead, it is likely that the growing of the middle class will result in higher overall jewellery demand, including diamonds, but this will take time.
"The production guidance from De Beers for 2017 is 31-33 million carats compared to the 2016 production of 27.3 million carats. Alrosa has indicated that it will increase production by 5 percent in 2017 to 39.2 million carats by the end of 2017. Moreover, Rio Tinto has indicated that it will ramp up production to 19 to 24 million carats this year from close to 18 million carats in 2016. A substantial proportion of these diamonds come from the Argyle mine which is the largest source for brown, champagne-colored diamonds. This would mean that for both De Beers and Alrosa, production in carats would be back at 2015 levels and Rio Tinto’s diamond production would be the highest since 2008. Global diamond production for 2016 was around 128 million carats. For 2017 we expect production to increase to 140 million carats, or an increase of 9 percent. This sharp increase is based on the production guidance of the large mining companies and on the assumption that the share of the other mining companies will remain at around 33 percent of global annual mine production but no sell-off in rough diamond prices.
"In a fully competitive market environment, this increase in global diamond production should result in downward pressure on rough diamond prices. However, the oligopolistic structure of the industry is likely to prevent rough diamond prices from dropping substantially. Instead, the mining companies will find different ways to avoid lowering their prices substantially like for instance keeping the surplus diamonds in inventory until end-demand strengthens. In fact, so far this year prices at the De Beers’ sights have increased.
"There have been reports that at four out five sights so far this year prices for certain diamonds have risen and/or there was an adjustment of the assortment in goods. Furthermore, end of March, De Beers announced that it will lower sightholders’ allocations of rough diamonds as it fulfills its commitment to support diamond manufacturing in Namibia. It is likely that these diamonds will make their way to the global market via another channel. However, sightholders will probably be confronted with lower supply creating a sense of shortage for certain diamonds. Demand at De Beers’ sights was very strong at the start of the year but has fallen since then. This could be the result of inventory already in place to meet modest demand or that industry players are cautious about the outlook for end-demand and therefore being hesitant to buy rough," the report concludes.
