Friday, March 9, 2012

Challenges Facing the Australian Diamond Industry

2012 diamond debut
The diamond market of 2012 is not replicating that of 2011, when prices soared for more than half of the year. Instead, this year’s market is off to a lukewarm start following a correction that began unfolding in Q4 of 2011. These conditions are widely expected to remain, at least through the first quarter.

Emerging nations – especially India and China – are widely regarded as essential growth markets for diamonds, and are expected to be drivers for strong industry performance going forward. Yet there is some concern about a slowdown in these economies.

Almost all of Australia’s diamonds are exported, with the majority of Argyle production going to India. The Indian diamond market, is not especially robust. Last year, while the prices were up, the value of India’s diamond imports increased, however, the volume decreased, with Q4 showing severe weakness.

India has been grappling with inflation and a weak rupee, which has resulted in USD-priced goods becoming much more expensive. The rupee is recovering, but the Indian government is also looking for cash. One means of getting it is through the new two percent tax on polished diamond imports announced last month.

How this tax will impact the market remains to be seen. During the first eleven months of 2011, India’s polished imports rose to $18.8 billion.

Since India is a manufacturing hub, much of what flows in heads back out to other other markets.

Asian buyers appear laid back recently. Chinese sales were steady for last month’s new year festivities. However, concerns about a potential economic slowdown are believed to be behind cooling sentiments among suppliers and consumers there.

Likewise, the US is the largest diamond consumer. Demand was satisfactory for the December holiday season, but with festivities gone, enthusiasm for diamond purchases appears to have also simmered down.

The Luxury Consumption Index shows that luxury consumer confidence slid in January, and average spending was also reportedly down in Q4.

The Eurozone crisis has weakened the appetite for diamonds in that region.

Lately discussions about the diamond market are accompanied by the word “caution.” The shakey demand picture illustrates a good reason why.

“Diamonds are a luxury product,” IBISWorld says, and “demand tends to fall disproportionately heavily during times of economic downturn and rise sharply when economic conditions and consumer confidence improve. Investors should factor this into their decisions.”

Diamond outlook
With increased production and rising prices, IBISWorld foresees a profitable turnaround for Australia’s industry. Diamond and gemstone mining sits at the top of its list of growth industries, and is expected to rake in nearly $600 million this year.

Rio Tinto warns of significant risks related to the Eurozone crisis, the threat of contagion to developing nations – especially China – and the potential for financial crisis. However, the company also expects a revival in the diamond market as excess stocks are cleared, noting that medium run consumer demand looks positive.

Diamond Earrings

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