Unwelcome Polished Homecoming
March 10, 05 by Chaim Even-Zohar
Data released by the United States government shows that polished diamond imports in 2004 totaled $13.9 billion, representing an increase of 14.1% over the $12.2 billion imported in 2003. This increase was achieved, however, at a reduced volume of carats, which declined by 3.3% to 18.4 million carats. This further confirms the trend that increases in the diamond trade represent mostly an inflationary growth of wholesale prices, rather than an absolute growth of the market. The average per carat import value rose from $636 p/c to $754 p/c, a hefty rise of some 18.6%. It confirms what we have written previously that retailer mark-ups on polished diamonds and on diamond jewelry have declined and have reduced retail margins in the range of 15%-20% which underscores that the consumer is basically not paying more for diamonds.
Moreover, one needs to be cautious not to draw conclusions on those higher trade imports in respect to U.S. domestic consumption. First of all, exports (including re-exports) of diamonds from the United States have risen by 31.9% from $5.0 billion in 2003 to $6.6 billion in 2004. In terms of carats, these exports grew by 17.9% from 18.5 million carats in 2003 to 21.8 million carats in 2004.
So the “net polished imports”, i.e. the polished that remained available for U.S. local consumption, went up by a mere 1.5%. Thus, in real terms (when we take 2004 figures at 2003 values), the polished available for the U.S. domestic market went down considerably.
Secondly, there is still a considerable polished overhang. It may well be possible that there have been inventory reductions; this needs to be further verified and will have bearing on final retail sales. Inventory reductions, however, can also refer to return shipments to the cutting centers – which is never a good sign.
This makes it imperative to analyze the “polished exports”. In 2004, 42.0% and 19.4% of U.S. polished exports were destined for Israel and Belgium respectively. It would be more correct to view these movements as return shipments, as shifting inventories back to the original exporter. In the larger goods (diamonds above 0.5 carats) U.S. “exports” to Israel at $1.8 billion were 63.2% higher than in 2003. That represents a massive “homecoming” of goods which were not sold in the U.S. market. But what is more significant - it points to negative expectations; if one believes that the goods may well be sold next year, or next season, why send them back?
Just to avoid anyone drawing the erroneous conclusion that the shortfall of available polished to the U.S. market might be triggered by an increase in domestic manufacturing, there should be no such illusions. Imports of gem quality rough into the United States went up by 6.5% from $706.9 million to $753.0 million in value terms; measured in carats these imports fell by an enormous decline of 25% from 1.48 million carats in 2003 to 1.11 million in 2004. Manufacturers cut and polish carats, not dollars – a 25% decline in carats triggers a corresponding reduction in actual cutting activity. The decline in U.S. domestic manufacturing may, to some extent, be attributable to the reduced number of New York sightholders in 2004, though, in terms of value, manufacturers seem to have secured considerable amounts of rough from the secondary market.
Though we have strong reservations about the (dubious) validity of the official rough diamond import statistics, it is worth noting that U.S. rough diamond imports from the United Kingdom, by value, plunged by 71.0% to $17.7 million (and by carats they were down 96%). We find it difficult to accept these figures, but, nevertheless, they represent the official rough imports figures of the United States of America.
De Beers sources estimate that worldwide diamond jewelry sales (by value) increased by 6%-7% in 2004, which is seen as the best performance since the Millennium year. These are probably also the kind of figures we might expect to be given for the United States. We are rather skeptical and are honestly worried that we may indulge ourselves in wishful thinking. In real terms, we view the diamond jewelry consumer markets as stagnating; we see a “growth” mostly on the wholesale price level, particularly because of the steep price increases of rough that we have seen in the past two years, totaling somewhere between 20%-30%, depending on the category. These increases have certainly not filtered down to the consumer level.
Clarifying the Rough Picture
For years we have argued that the gem quality rough imports statistics of the U.S. government hardly resemble reality. In 2004 (see the tables), it is claimed that South Africa exported $508 million worth of diamonds to the United States, about 9.8% above the level of $462 million of last year. There is no way in the world these figures could even remotely be correct, as South Africa simply “doesn’t have” such a surplus of rough available for exports.
Now there is also Kimberley. According to the Kimberley Certification Scheme figures, in 2003 the U.S. imported only $51 million from South Africa. It seems that virtually all rough imports from the European Community ($422 million in 2003) are recorded as coming from South Africa for governmental purposes…. Indeed, in the Department of Commerce data for 2004, there are no rough diamond imports from Europe (except a trickle from the U.K.)
These discrepancies should really worry the industry, as it raises questions about the true movements of rough diamonds. The “good news” is, however, that the total amounts recorded through the Kimberley Process are quite similar to the totals of the government. However, as both the U.S. Customs and the Kimberley Process are supposedly governmental programs, there is no real justification for these data gaps.
We always have a problem analyzing U.S. trade statistics – not because they aren’t complete, but we don’t consider them to be as reliable as government data ought to be. We do stress that, in our view, these data at best reflect general trends and it is better not to draw conclusions without first securing corroborative additional supporting data. The figures we do see, however, are no reason for joy – to put it mildly.
Have a nice weekend.