ABN AMRO Analyst: Diamond Market Recovery "Grinds to a halt"

Rough Market
26/06/2017 18:04

In ABN AMRO's lastest iteration of the biannual Diamond Market Outlook, Coordinator FX & Precious Metals Strategy Georgette Boele writes, "The recovery in the diamond trade has grinded to a halt at the start of 2017", as US consumer spending has been disappointing in Q1, lower consumption in Hong Kong and Macau has negatively affected demand (according to company reports from main jewelers in the region) and Chinese retail sales were weaker in January and February. The picture the bank's report paints is much less optimistic than the one that appeared in November 2016, which signalled that the diamond trade had "turned the corner." However, they expect an improvement in US diamond jewelry demand, but expect Chinese jewelry demand to "disappoint" going forward as, "the Chinese economy has peaked."

Citing Antwerp diamond trade data, Boele writes that, "the improvement in rough trade has already peaked", while the bright spot has been exports to India, which highlight a pick-up in activity in Indian diamond manufacturing. Antwerp's polished trade, meanwhile, "never recovered in the first place". A similar scenario is taking place in the UAE where, "polished diamond trade has also deteriorated" to its lowest level in four years. ABN AMRO notes that the Israel diamond trade has "improved considerably", but wonders how long this will last, as it is out of tune with the overall trend. Turning to the buyers themselves, they report that, "Overall, there have been reports that jewelry retailers are cautious in building up too much inventory as consumer demand has been soft.

Looking forward, as already mentioned, weaker-than-expected US consumer spending in Q1 has weighed on demand for jewelry, including diamond jewelry, but all of the economic indicators are there (real GDP, households' net worth and a stable job market) to expect that "US consumer spending will rise and the savings rate will decline. An increase in households’ net worth generally fuels demand for jewelry, so we expect higher US demand for jewelry." They are not so sure about China. The project uptick in US spending should provide support to polished diamond prices going forward, but overall they expect polished prices to continue to bottom out, fuelled by weak demand from China.

Global mine production in 2017 is slated to increase, but she expects that the strategy of miners will not lead to lower 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."