Market Trends. July-August 2007

Middle of July was marked by acceptance of questionnaires (so-called profiles) from pretenders to joining the programme of Diamond Trading Company – Supplier of Choice-2. Filling-out a profile was almost an impossible task for many of them. Preceding communications from the DTC website stated that many traditionally present site holders that had to fill out the profiles, did not participate in the trading. Certain site holders complained to journalists that they had to make 5 or 6 flights for filling out the questionnaire.

DTC stated in advance that in its requirements to potential site holders it will pay attention primarily to generation of “added value” and efficient sales of products rather than operations in the downstream sector and active involvement in marketing activities.

Another contractual period will commence on 31 March 2008. Companies, which will cease to be site holders, will be entitled to participate in the three nearest sites while they are in search for alternative sources of supply.

Within the same period, all successful bidders will undergo a close inspection by a third party controller and ombudsman of DTC. DTC warns that any company, with respect to which it becomes known that it presented false information that might influence its choice as a site holder, may be deprived of that status.

It has been already noted that prices for DTC boxes are now set at a significant premium. Site holders expect that prices of most products will remain high in the nearest months.

However, there was a company, which stated that it had no intention to remain a site holder. It is Premier Diamond Cutting Ltd. registered in Bangkok, producing jewelleries with diamonds and precious stones. Premier was the only DTC site holder in Thailand. The Company obtained its first site 25 years ago.

Its press release states that “Due to changes in DTC operations caused by reduced supply of diamonds in increasing demand, Premier takes measures to look for new sources of raw diamonds”.

It is difficult to say what circumstances influenced taking such decision by the Company. Anyway, it appeared to be rather loud and was noticed by professional websites.

Premier Diamond restricted itself with cloudy promises. Unlike it, Pallinghurst Resources is actively looking for raw diamond suppliers for cut diamond manufacturing.

The Company established by Brian Gilbertson declared that it may purchase diamonds from Russian ALROSA and sell cut diamonds under recently purchased brand Faberge.

Pallinghurst is also discussing with BHP Billiton the possibility of purchasing diamonds from the Ekati mine. However, some sources in the diamond market believe that Gilbertson’s company will prefer purchasing raw diamonds from Russia as “it may strengthen perception of Faberge brand as a part of Russian destiny”.

“What really attracts in Canadian or Russian diamonds is that they have absolutely nothing to do with conflict diamonds, which are in general an African problem”, a source in the diamond market says.

Quite a different thing in Russian diamonds attracts Armenia. During the month in question (expecting the visit of ALROSA President S. Vybornov), that country was aggressively promoting its diamond-cutting industry.

The country’s Ministry of Trade and Economic Development stated that the value of diamonds cut by the Armenian diamond industry amounted to 72 m. dollars in the first half of this year, which is 48 % less than the last year. According to the Principal of the Jewellery Department of the Ministry Gagik Mkrtchyan, the production value of the Armenian diamond industry reduced by 17 % in 2006 and amounted to 268 m. dollars.

The continuing decrease in production of diamond-cutting enterprises of the country resulted in the sector’s losing the status of the principal exporter of the Armenian economy and it is now responsible for not more than one per cent of the gross industrial output.

According to the Armenian press, the difficult condition of the Armenian diamond sector may be the cause of a significant job cuts at the largest diamond-cutting enterprise of Armenia – Shogakn belonging to Lev Levayev.

As the first cause, Mkrtchyan pointed at the weakness of international market. 60 % of products of Armenian diamond-cutters are exported to the USA.

2006 saw a slight reduction in the world’s diamond mining. This is evidenced by the statistics collected by the Kimberley Process. The Kimberley Process member countries stated that 173.5 m. carats were mined during the year, which is 0.6 % less than in 2005. At the same time, the value of diamonds mined in 2006 appeared to be 3.7 % higher. It was equal to 11.53 bn. Dollars. The average price of a carat increased by 4.4 % - to 68.22 dollars a carat.

Analysts predict a further growing of prices for gold and raw diamonds. This cannot but affect the growth of prices for jewelleries. James Allan, an expert in the diamond industry, believes that prices for raw diamonds may increase by 5 % after two-year stagnation in 2008.

Speaking at a mining conference organised by Capital Resources in Botswana, Allan stated that the ore grade deterioration in De Beers’ Jwaneng mine in Botswana had been one of the main reasons for such stagnation.

The expert expects jewellery prices to increase in a longer term, as the supply will fail to meet the demand. The raw diamonds output is expected to increase by 1 % a year. However, retail demand for jewelleries increases by 6 % a year. The analysts says that this mismatch will result in continuing price increase.

Information on the prices of certain purchases shows that this fact does not confuse consumers of luxury goods. During the period in question, two companies declared that they had achieved records. The largest US online jewellery retailer Blue Nile reported on selling a diamond ring for 1.5 m. dollars. The Company management stated that it was the most expensive purchase of the kind in the history of Internet.

The record of Jamesallen.com web store is much more modest, but it is another evidence of the current trend. The Company reported on sale of a diamond ring for 412,000 dollars. It is the most expensive purchase for all nine years of existence of the Company. Reportedly, the emerald cut diamond ring of 10.5 carats is one of the most expensive rings of the entire period of existence of online trade.

Jewelleries together with furniture are the most popular variety of products made to order for well-to-do Americans. This is evidenced by results of the latest inquiry of the Luxury Institute, New York. It notes that well-to-do women buy such jewelleries for themselves two times more often than as a gift. At the same time, men buy jewelleries as a gift more often than for the personal use (38 % and 29 % of respondents respectively).

The Swiss watchmakers industry also notes a big growth of sales in the first half of 2007 on the fifteen main markets.

The United States remained an attractive target market for Swiss watches. The Swiss significantly improved their positions in Hong Kong. A minor decrease in performance was noted in Taiwan and the data for Japan appeared to be one of the worst as evidenced by a continuing damping of demand in the Japanese market. Italy and France had medium results with a noticeable retard in Germany. The Swiss Watchmakers Federation thinks that China and Russia are worth special mentioning – there was the most noticeable growth there in the first half of 2007. the aggregate value of purchases in the Russian market increased by as many as 118.8 % as compared with the first half of 2006.

Development of the Russian jewellery market suggests that its volume will exceed 4 bn. Dollars in 2008. The most noticeable growth is expected in major Russian industry centres, such Yekaterinburg, Orel, Rostov, Saratov, Yakutsk and Vladivostok. This the estimation of Rajesh Gandhi, President of Choron Diamond, international diamond cutting and jewellery company.

Gandhi said to Jewellernet that the annual growth of Russian jewellery industry amounts to 20 to 30 %. A half of sales are accounted for noble metals and the second half are jewelleries with precious and semiprecious stones. He noted that interest of Russian consumers in jewelleries is growing every year and illustrated his words by a 5 % increase in the amount of sales in the jewellery sector per capita in 2006.

“In spite of diversity of the Russian jewellery market, the potential of the medium price spectrum has not been realised in full yet”, Gandhi said. “Profitability of jewelleries in the range of 500 to 1,500 dollars amounts to 25 %. Given the gradually increasing incomes of the populations, it is the most promising sector”.

In 2006, the aggregate value of goods sold in the Russian jewellery market was 3.8 bn. Dollars, of which 1.8 bn. Dollars are accounted for jewelleries with diamonds.

The research conducted by Choron Diamond proved that the most popular adornments among Russian women were rings, chains and ear-rings. They are worn by 97, 91 and 88 per cent of Russian women respectively. Only 12 % of Russian women buy brooches and 11 % purchase necklaces.

42 % of men covered by the research prefer chains, while other traditional jewelleries for men (cufflinks and tie-pins) are in ill odour.

While the Russian jewellery market is developing naturally, a number of other countries make active efforts to establish or develop it. We have already mentioned the initiative of the Indian Government. In the middle of July, South Korea adopted a resolution on cancellation of the luxury jewellery tax from the next year. The declared goal is encouragement of the local jewellery sector development.

It is noted that a special-purpose low-interest loan system will be introduce to facilitate businessmen in purchase of precious stones. In addition, a special purpose jewellery sector development centre will be established. Currently, a 20 % tax is imposed on jewelleries of over 2,180 dollars.

The Ministry of Finance and Economy of South Korea noted that jewellery will create jobs and goods with high added value.

Governments of African diamond-mining countries also concern themselves about creation of a high added value.

Late in July, De Beers stated that it continued structural changes in its operations in South African countries for the purpose of meeting the aspiration of local governments to develop their own diamond cutting sectors.

DTC Botswana (DTCB) is expected to carry out its full scale operations from the beginning of 2008. The Company’s mission is to achieve an annual volume of raw diamonds sales for cutting in Botswana amounting to $550 million.

Under the new business agreement with Namibia effective until 2013 and providing for establishment of Namibia DTC (NDTC), the first sales to customers are expected in this October. It is expected that the sales to local companies shall amount to 300 m. dollars a year by 2009.

De Beers stated that discussions in the RSA had a beneficial effect on expert estimates during establishment of the Governmental Diamond Trader, which will provide local cutting companies with raw diamonds.
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