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Articles from DIAMOND JEWELLERY (938 Articles), DIAMONDS BY CUT - BRILLIANT (ROUND) (286 Articles), (PAID ONLY) DIAMONDS LOOSE - FANCY COLOR (133 Articles)










The diamond industry is facing ongoing challenges
The diamond industry is facing ongoing challenges

Diamond industry recovery still shaky

Reports of a diamond industry recovery may be premature with the trade still facing many pertinent challenges. Nick Lord reports.
In the end, it’s starting to look like the storm that never arrived for Australian diamond suppliers. After the torrid events of the Global Financial Crisis (GFC) threatened to tip the industry on its ear for good, a resurgence in demand for the most discretionary of all luxury products, coupled with a surprisingly strong performance by the Australian dollar against the poorly performing “greenback”, has seen diamond prices remain low, stoking consumer demand and allowing diamond wholesalers to continue selling.

It could’ve been a lot worse.

Historically, industry “mothership” De Beers would avert demand shortages and the plummeting prices that accompany them, by buying-up excess stock. This time around, such a strategy just wasn’t possible because of the laws that prevent De Beers from engaging in such behaviour. Besides, the company’s influence has weakened to the point that it probably isn’t powerful enough in this day-and-age to maintain the level of diamond stockpiling it once had anyway.

This means that the GFC is the first real industry-wide economic crisis in the anti-stockpiling age, and the response of the market has been interesting indeed.

Without the option to influence demand, the industry has chosen to affect the one variable over which it still has control: supply. De Beers brought its mines in Africa and Canada almost to a standstill with production for 2009’s first quarter at just 10 per cent of the same period in 2008. Locally, Rio Tinto followed suit, closing its Argyle mine completely during 2009 Q1; however, the effect was minimal and polished diamond prices dropped anyway, falling from a peak of 128.91 in August 2008 to 108.4 in April 2009, according to the IDEX Online Polished Diamond Price Index.

Since then, prices have remained depressed with the IDEX figures for November 2009 showing them to be 10.1 per cent below the same month in 2008 after bottoming-out in August 2009 at 15.7 per cent below August 2008.

While IDEX predicts a modest diamond jewellery recovery in 2010 in line with slow upward movements in US demand, consumer prices currently remain as flat as old lemonade.

In a rather strange case of price independence, rough diamonds are behaving in stark contrast to their polished counterparts.

Consistent price rises since May 2009 point to a recovery for rough stock, despite prices still being a long way behind where they were at market high just under two years ago.

Driving these price hikes is De Beers’ marketing and distribution arm Diamond Trading Company (DTC), Australia’s Rio Tinto and BHP Billiton, Russia’s Alrosa and other producers in a move that will surely end up squeezing margins in a time of already straining conditions unless polished prices also start climbing.

Unsurprisingly, many in the market believe rough prices to be out-of-step with polished prices and not representative of the current consumer demand levels for diamond jewellery, yet there is widespread acceptance that the disparity comes because retail jewellers are reluctant to increase prices in the face of weakened consumer demand.

“In the current situation, if no one ‘blinks first’, both sides will lose: jewellers’ margins will be squeezed and they will eventually go out of business. Suppliers’ sales will drop, as jewellers cease placing orders for higher-priced goods, and they will go out of business. It will be only a matter of time before polished prices begin to climb, putting more pressure on suppliers to raise prices,” wrote Ken Gassman on IDEX Online.

To some degree, the demand for diamonds is partially inelastic, meaning it is less responsive to changes in price than many other luxury goods, because of the gemstone’s irreplaceable status as the central ingredient in engagement jewellery. Irrespective of the state of the economy, people continue to get engaged, and they continue to buy engagement rings as a result. Globally, however, the stones in those rings are shrinking, pushing up demand for small goods (diamonds under 1 carat).

It’s the Australian industry that seems to be coping best of all with these changes because local jewellers are enjoying the luxury of cheaper diamonds, courtesy of the rising Australian dollar (mentioned earlier).

Cheaper prices then help to keep stone sizes higher in engagement rings, but also to promote the ongoing self-purchase market – a segment that always takes a fairly substantial hit when consumers curtail their spending.

“In real terms, taking movements in currency and inflation into account, diamonds are the cheapest they’ve been in three years,” says Travis Trewarne, managing director of five-store Victorian mini-chain, Trewarne Fine Jewellery. “In the last 12 months alone, there has been a 20 per cent drop in rough prices on top of a strengthening of the $AUD by over 30 per cent.”

Interestingly, Trewarne believes most consumers have not yet realised just how cheap diamonds are, implying that the full effect of low prices upon demand might not be fully felt until sometime in 2010 – something that would be great news for retailers across the country if it proves correct.

“The general consumer hasn’t yet worked out that this is a great time to buy diamonds,” he says. “As a value proposition, diamonds represent good value at the moment when compared to other products because prices are well down, especially against something like gold, which has more than doubled in price over the last two years.”

To truly maximise sales over the next year, Trewarne believes the industry needs to find ways to let consumers know that now is the right time to buy diamonds.

“If industry associations like the JAA and the Diamond Guild can get a media presence and push the message that the diamond value proposition is currently exceptional then it would certainly give the public more incentive to buy,” he says. “Already, we’re receiving some inquiries for stones over 2-carat from people who can see there are enormous saving to be had.”

One diamontaire doing just that has been Precious Metals’ Garry Holloway, who was seen spruiking the virtues of the diamond industry as a potential investment vehicle on Foxtel’s Sky Business News during November last year.

Discussing the global drop in diamond prices during the GFC, Holloway said the time was now ripe for purchasing diamonds because, “they didn’t fall as much as other commodities, and didn’t fall as much as the stock market, but they haven’t rebounded”.

Citing the current position of the Australian dollar and a future in which demand is expected to continue to outstrip supply, Holloway said, “This is the first time in my 33 years of buying and selling diamonds that I have ever suggested to people that now is the time that you could really invest in diamonds and make money.”

Given that the media was largely responsible for the shroud of doom and gloom that descended over the Australian economy during the GFC, an attitude that perhaps unnecessarily stifled sales, the importance of relaying positive messages to the consumer cannot be understated.

 “A lot of the economic downturn has been media-driven, and people have been conservative about purchasing luxury goods perhaps needlessly,” Trewarne says.

“Victoria never went into a recession and it’s only when people realise things aren’t as bad as what they’ve been told, that they’ll be willing to return (to the stores).”

Of these missing shoppers, two main groups are of most concern: retirees who rely heavily upon investments for their disposable income; and, young consumers who aren’t that interested in gemstones.

While the return of the retirees is most likely linked to a share market recovery, the battle to instill diamonds as preferred gifts in the next generation of consumers is considered by global suppliers to be such a challenge going forward, that it has led to the formation of the International Diamond Board (IDB).

A working group featuring the major diamond producers, the board aims to step-up generic diamond marketing campaigns that feature messages that speak directly to the youth market, such as assurances of ethical consumption and production.

“Discussions about how to promote diamonds and diamond jewellery in the consumer markets have been ongoing in a variety of forums and platforms since De Beers announced it would no longer play the role of the industry’s custodian,” said World Federation of Diamond Bourses president Avi Paz in July 2009. “The establishment of the IDB is a significant step toward the creation of a new entity that will be supported by all major players.”

It’s true that Australia has emerged from the GFC in better shape than most leading western economies. Resultantly, the domestic diamond market remains in a healthy state as consumers enjoy increased value in the form of lower prices. Ravenous demand in emerging countries such as China and India should help to return prices to past highs but the real challenges for Australian retailers and suppliers will be how demand here is affected when polished prices begin that steady climb once again.

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