The tragic events in Japan this week should have injected some caution back into the diamond market just when the industry was in its most upbeat and confident mood, Avi Krawitz says in an editorial posted on www.diamonds.net.
According to the author, throughout the recovery, diamantaires have been well aware that the industry is vulnerable to both macro-economic and geo-political events that could derail its progress. After all, the tough times that the industry has endured since September 2008 were the result of a global economic crisis, not a diamond industry-specific one.
Therefore, the industry continues to hold its collective breath wondering whether the earthquake, tsunami and radiation scares which have engulfed Japan will ultimately impact their businesses.
Certainly within Japan, sales of luxury goods will be minimized as the nation prioritizes its reconstruction and consumers there focus on fulfilling their basic needs. The potential decline in local luxury sales is also not an insignificant amount. Even if Japan’s influence has diminished over the past decade that the country has been in recession, it is still the third largest consumer market for polished diamonds, behind the U.S. and China. Japan’s polished imports rose 12 percent to $693.6 million in 2010, registering its first annual increase in six years.
RBC Capital Markets analyst Des Kilalea reported that the country accounts for an estimated 11 percent of global diamond jewelry sales. Tiffany & Co., the world’s largest diamond jeweler by value, counts 18 percent of its sales in Japan, as does the Bulgari Group. Harry Winston, LVMH and Richemont are just some of the other luxury brands with a strong presence in the country.
Given their exposure in the Japanese market, luxury companies’ share prices fell following the quake. Investors appeared concerned that this risk would impact future diamond sales. Shares of mid-tier mining companies Petra Diamonds and Gem Diamonds also fell in the aftermath.
Of course it wasn’t only diamond companies that worried investors as the Nikkei fell about 10.5 percent, about $680 billion in value, over the three days after the earthquake struck, while the Dow Jones Industrial Average dropped around 3.7 percent.
However, despite these numbers, the overall impact on global demand for diamonds should be relatively small. The crisis will ultimately further diminish Japan’s already fading influence on the market, while, as Kilalea notes, growth in China and India should more than compensate for the decline in Japanese demand.
Rather, the more pertinent question is what effect Japan’s crisis will have on the global economic recovery. Will Japan prove too much for the world to handle, especially given the long line of international crises that seem to have already piled up in 2011? It is not so easy to forget that political unrest in the Middle East could still result in a prolonged oil crisis, while fears of global inflation and cautious economic trends in Europe and the U.S. are reasons enough for concern.
Analysts at Moody’s Analytics calmed fears by stressing that the world economy will feel the effects of Japan’s disaster mainly through adjustments in the financial markets. “The macroeconomic impact of the earthquake will be felt mainly in Japan itself,” Moody's wrote. Most analysts cut their forecasts for Japan’s economic growth by one or two tenths of a percentage point, which may be enough to return the country to a temporary recession. Regardless of that, Standards & Poor’s projected another year of solid growth for Asia, “even as the economic picture for Japan following the recent earthquake remains less clear.”
That’s not to say that the economic risk is completely insular. Many note that damage to the nuclear power plants, apart from the frightening threat to people, could still cause a long-term disruption to Japan’s electrical grid, resulting in extended disruption to its industrial output, which could indeed have a wider regional and global impact.
The nuclear aspect could also undermine global interest in nuclear power and result in greater dependence on oil in the long run, leading to higher oil prices. The spikes in oil prices over the past month have already had an impact on consumers’ ability to spend and have fueled inflation. As a result, the Reserve Bank of India raised its key interest rates by a quarter percentage point this week. “The sharp increase in oil prices as a result of the turmoil in the Middle East and North Africa is adding uncertainty to the pace of global recovery,” the bank explained. “Further, coming on top of already elevated food and other commodity prices, the spike in oil prices has engendered inflation concerns.”
All these should sound warning bells for the diamond market, especially as it comes at a time when the industry has been riding a wave of strong demand since the Hong Kong show. The level of demand following the show has caused many industry veterans to express their own concern that it may be artificial and overheated. Polished demand, they point out, is to a large extent being driven by end-consumers, but even more so by dealer trading, which ultimately fuels price expectations and speculation.
Never a healthy state for the market, such practices are most dangerous in times of uncertainty, and especially when judgment is clouded by overconfidence. While the economic aftershock of Japan’s earthquake may not necessarily shake the global economy, or the diamond industry for that matter, the rising uncertainty of its repercussions may still have an impact.
