Diamond Prices Decline Amid India Liquidity Crisis

Polished diamond prices softened in December as Indian liquidity dried up due to the government’s demonetisation policy eliminating 500 and 1,000 rupee notes. Trading slowed with dealers taking vacation during the holiday period.

The RapNet Diamond Index (RAPI™) for 1-carat, RapSpec A3+ diamonds fell 1.3% in December. RAPI for 0.30-carat diamonds edged up 0.2%, while RAPI for 0.50-carat stones fell 2.2%. RAPI for 3-carat diamonds slid 1%.

According to the Rapaport Monthly Report – January 2017, sentiment improved despite the slowdown as U.S. consumer confidence rose. Record equity prices and the Federal Reserve’s decision to raise interest rates signal an improving economic outlook. The strong dollar is also expected to increase domestic spending.

Other markets remain cautious. Chinese tourist spending is restrained as government limits capital outflows and the yuan currency depreciated 7% to 6.94/$ in 2016. Expectations are positive for sales in mainland China during the Chinese New Year beginning January 28, while Hong Kong is weak.

Indian jewelry sales slumped and are expected to remain subdued during the first half due to demonetization. Demand fell for lower-quality diamonds typically supplied to India’s domestic market. Indian manufacturing by smaller factories stalled, while larger exporters with proper invoicing were less affected by demonetization.

Rough demand slowed and polished inventory declined with very little new supply available. Dealers were careful not to raise stock levels before the New Year. The number of diamonds listed on RapNet fell 7% in December, but rose 21% throughout 2016.

Polished trading is expected to improve in the first quarter as jewelry retailers replenish stock sold during the holiday shopping season. Rough demand is projected to rise as manufacturers ramp up production to meet short-term polished demand. Miners must resist the temptation to raise rough prices in order to preserve midstream profitability and sustain growth in the long term.

 

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