Industry Analysis: Retailers, Diamond Dealers Still Tangling Over Prices

The following article appears courtesy of GIA Insider

Intellectual property: Gemological Institute of America

Author: Russel Shor, Senior Industry Analyst

 

Retail jewelers, beset by high gold prices, are still wrangling with diamond dealers over rising polished prices. Demand for polished goods remains below 2007 levels, and prices are being pushed in part by lofty rough prices. Some dealers claim that price increases also are being driven by predicted shortages, particularly in higher quality diamonds, that will follow a true revival of demand.
 
Inventories remain low, and with the peak selling season six months away, retailers and diamond manufacturers/wholesalers are resetting boundaries on prices and memo and payment terms. Industry banks are pressuring manufacturers to continue resetting, with fewer goods on memo and more cash upfront.
 
DIAMONDS: Mixed signals are coming out of Russia, the world’s second-largest diamond producer. Alrosa, the country’s diamond mining and marketing operation, has stated that it plans to sell its full production of more than $2 billion into the market this year, and has signed long-term sales agreements with several large Indian firms and a consortium of Israeli manufacturers. Yet Gokhran, the state repository for precious metals and gemstones, recently announced it was budgeting another $1 billion to buy rough from Alrosa — ostensibly for stockpiling.
 
Gokhran purchased about $1 billion of rough from Alrosa last year to keep Russia’s large production from overwhelming the market during the worst of the economic crisis.
 
At the same time, the De Beers Diamond Trading Company extended its 30-month rough-supply contract with its clients by one year. The DTC said the extension would provide “both sightholders and non-sightholders with the time they need to focus on recovery.”
 
The DTC supplies 66 sightholders in London, 15 in South Africa, 15 in Botswana, 11 in Namibia and three in Canada. A number of firms take goods from more than one location.
 
De Beers also suspended mining operations from January to April, which caused its rough sales to plunge some 90% through the first half of 2009.
 
AUCTIONS: Sotheby’s April 7 Hong Kong Magnificent Jewels sale reaped an extraordinary $52.4 million, with large diamonds repeatedly exceeding their pre-sale estimates. Also extraordinary was that private buyers, who usually account for only three or four of the top pieces, took nine of the top ten.
 
Leading the way was a necklace featuring 50 diamonds (all with separate GIA reports) totaling 107.43 ct. It sold to a private buyer in Hong Kong for $6.7 million, more than $1.5 million over the pre-sale estimate.
 
The De Beers Millennium blue diamond — a 5.16 ct Fancy Vivid blue IF — sold for $6.4 million to Moussaieff of London. The $1.24 million per-carat price for the GIA-graded stone was some 20% above estimate.
 
A top jadeite necklace brought $5.5 million from an Asian buyer, while a 33.31 ct D-IF diamond went to a Southeast Asian buyer for $4.34 million.
 
RETAIL: Retail analysts report that the cautious growth of the past several months has begun accelerating as consumers feel more confident that the weak job market is improving.
 
SpendingPulse said sales of luxury goods climbed 22.7% in March compared to the same month a year ago, making the category one of the best performers.
 
Analysts quoted in The New York Times said that wealthier consumers are driving the increases, as evidenced by strong gains at upscale chains such as Nordstrom, Tiffany, Saks and Neiman Marcus.
  
Michael McNamara, vice president for research and analysis for SpendingPulse, said those big gains actually represent a return to normal patterns.
 
LVMH, the French luxury goods marketer, said first-quarter sales of its jewelry and watch brands, which include Tag Heuer and Zenith, rose 33% compared to the same period a year ago.
 
Chain store sales, the International Council of Shopping Center’s weekly barometer of retail activity, rose 4% during the first week of April compared to the same period of 2009. Michael Niemira, ICSC director of research and chief economist, predicts that March and April sales taken together will best last year’s totals by the same percentage.
 
 
— Russell Shor
    Senior Industry Analyst
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