Hong Kong's Signal to Manufacturers

Hopes and speculation are no substitute to listening to the market. And the market has spoken. After weeks of high hopes for a solid trading event at the Hong Kong Jewellery & Gem Fair, traders returned home without budging much on prices. Sellers didn't give up on their desire for higher prices, buyers insisted on lower prices and many transactions fell through as a result.

Sales people are optimistic by nature. Before every large trade show we see a rise in asking prices for polished diamonds and traders often expressing a positive feeling that "this one is going to be a good one." In the post recession era, especially since before the Las Vegas show in June, there is an added urgency for a good show that comes mainly from manufacturers.

Rough diamond prices recovered very quickly after the 2008-09 crash, outpacing the recovery among polished prices, in fact rising so quickly that it was immediately viewed as speculative.

In April, a trader spoke of “optimistic prices,” prices that reflect the optimistic belief that by the time the rough is polished, the price of polished diamonds will meet the cost and leave a small profit, or at least allow breaking even. At the time, I felt that the break even scenario is not all bad - the turnover allows paying the bills of a polishing facility and its workers.

But by early May, polished diamonds, on average, rose only 5.8 percent since August 2008, or by less than a third of what was lost in the crash. By comparison, the DTC increased prices and its rough regained about half of the loss since that infamous August. Prices at other producers were up even more that month. Keep in mind that prices of rough diamonds continued rising and premiums are well over 10 percent.

Since May, at JCK Las Vegas, IIJS and most recently in Hong Kong, the pressure is only growing for polished prices to rise. Have they?

In June, the IDEX Online polished price index averaged 117.4. In August they inched up half a percent to 117.9. So far this month the index has averaged 118.1, or up just 0.2 points since August. Simply stated, prices of polished diamonds are rising, but at a snails pace. Considering the three-four month lag, manufacturers that offered fresh goods at the Hong Kong show presented goods bought back in April and May.

There is a message here to manufacturers. The "optimistic prices" didn't meet their full hopes. Prices, says a trader, "were a war" at the recent trade fair. The buyers, mostly Indians, couldn't afford the higher prices because they don't have the demands to justify these prices. The sellers couldn't budge because they need to cover their costs.

Next month, Sightholders will attend Diamdel's rough diamond auction. That tender won't be alone, and the temptation to buy more rough, at higher prices and added premiums is strong.

We all hope for a great season - a revival in sales in the U.S. during the Holiday Season and an appetite for diamond jewelry in the wedding season in India. Now, let's be realistic for a moment. What if the season will be less than fantastic? Retailers may be afraid of losing business and refuse higher prices.

In that scenario, higher rough prices are not justified. In fact, to make it this season, prices of rough should soften a little and this can happen only if manufacturers, like their polished clients, buy selectively and prudently.

Hong Kong sent a clear signal to rough diamond buyers – take it easy. To protect margins, the game isn't bank financing. It's far more old-school – buy low and sell high. And if you can't sell high, buy very low.