As the curtain for the Year of the Horse is unveiled at the end of January, there is broad agreement that the once runaway growth enjoyed by the hard-luxury (i.e. watches and jewellery) industry is probably behind us but, underpinned by an economic recovery that appears to be gathering pace in the developed countries, including long-comatose Japan, while China continues to give hard landing a miss, the outlook is not all doom and gloom – despite the wobbly, even tempestuous, state of many an emerging market’s economy and finance. Consumer appetite, not least for fine jewellery, will in greater likelihood continue to hold up quite well and cautious optimism is still warranted.
Thus, in the face of a recent setback in diamond prices, many pundits continue to look for robust sales of precious-stone jewellery during 2014. The London-based Financial Times quoted Stephen Lussier, executive director at De Beers, as saying that prices were for the most part stable last year and that De Beers saw sales rise by circa 5 percent in North America and China, where Western-style engagement rings were the all-important driver of growth (the two regions combined generate more than half of all diamond jewellery sales worldwide).
Lussier sees supply that is “limited and increasingly hampered by problems, [while] demand – particularly from emerging economies – continues to grow and grow.” According to The Financial Times, “Patti Wong, chariman of Sotheby’s Asia, agrees ‘The top end of the market is stronger than ever, as evidenced by our November sale of the Pink Star diamond in Geneva, which went for a record-breaking US$83 million.’” Wong adds that if things unfold as envisioned, “the focus in 2014 will continue to be on big stones of 10-plus carats with real quality and rarity”, while coloured diamonds and especially pink, blue and yellow stones will continue to hold their sway over buyers in, for instance, the BRIC (Brazil, Russia, India and China) markets.
Caveats – We can always use some
It is, all in all, an encouraging scenario for diamond sales in 2014. Nevertheless, at the risk of being viewed as a party-pooper, killjoy, fly in the ointment and whatnot, this scribbler hastens to add that while optimism for this year (and perhaps even longer) is warranted to a degree, it must be measured and tempered by some considerations of changing realities in the everyday real world. In the first place, as I have alluded to above, not a few emerging economies and markets are facing what is probably their gravest and most formidable challenges since the Asian financial crisis of 1997-9. Secondly, there is a conspicuous question mark hanging over Chinese consumer demand for fine jewellery, including that made of diamonds.
The principal reason is that the official suppression of bribery and corruption as well as dissuasion and discouragement of conspicuous consumption and ostentatious gift-giving – all coming down from on high (Zhongnanhai) – has continued unabated for well over a year and is, if anything, broadening and deepening. One must interject at this point that this is all to the long-run good of the country while possibly deleterious in the interregnum to commercial interests, including fine jewellery made of diamond. But as people are wont to say: “Nothing ventured, nothing gained”. Furthermore, not all is lost in this connection if industry practitioners remain vigilant of changes in consumer predilections and the concomitant sectorial shifts. Our motherland overtook Japan in 2011 to become the second-largest diamond-absorbing country – after the United States; that year witnessed retail sales of diamond jewellery in China soar 18 percent, to US$9.2 billion. It cannot be gainsaid that the Chinese consumers’ fascination with luxury goods in general has grown exponentially along with their pockets. The Mainland market was initially fanned by a wealthy elite on the lookout for the best diamonds available. As the economy expanded, a new wave of consumers emerged, opening the market to lower-quality stones that constituted (and still do) the mainstay of US and European demand.
According to the Chinese Academy of Social Sciences, some 230 million people migrated to urban cities between 2000 and 2011, the biggest urbanisation in human history. These city dwellers’ average disposable income rose 13 percent in 2013 to 2,047 yuan a month. Sales of discretionary goods in China will grow by a compound annual rate of 13 percent between 2010 and 2020, as shoppers in the world’s biggest economy after the US become richer. Now, as Anish Aggarwal, a partner at Antwerp, Belgium-based industry consulting firm Gemdax, told Bloomberg: “the cultural taboo of having to buy the finest diamond is broken. Really high quality was the sacred thing. You needed to buy fine diamonds; there was a snob effect. That has just disappeared.”
That said, while Chinese consumers have set their sights lower, they have not stooped to the lowest quality used in jewellery, sometimes labelled Wal-Mart diamonds, given that American consumers find them mostly in the superstore. Approximately 30 percent of Chinese sales in 2012 were SI (slightly included or blemished) diamonds, the favoured clarity of the US buyer, up from just 5 percent some five years ago, according to producer De Beers. China is now an SI market that is increasingly similar to America and, as Aggarwal as observed, “Five years ago, that would have been unthinkable. The whole landscape in how diamonds are sold to consumers in China has changed.”
Yes, keep your eyes on China but lose sight not of Japan
The moral of the foregoing observations is twofold, namely (a) that China is a market that industry practitioners ignore at their own peril; and (b) that the mass-market for stones, where prices are rising faster around the world than for top-quality jewels affordable only to the superrich, is the place to be. And while the Chinese market is important in its own right, there is a re-emerging market that is beckoning to diamond jewellers.
And that is – you guessed it – Japan. Under the curative and rejuvenating influence of fiscal activism and stimulus, quantitative and qualitative easing in monetary policy and expectant structural reforms – together the trio constitutes what has come to be dubbed Abenomics (after its progenitor, incumbent prime minister Shinzo Abe) – the Japanese economy has regained at least a semblance of energy and vigour, with the nation’s consumers apparently nudging back into the driving seat of the economic locomotive.
Thus, as The Wall Street Journal reported on 3 January, “Grab bags of diamonds and electronics flew off the shelves during Japan’s New Year sales, as the nation’s continuing economic recovery whetted consumer appetite for spending…The bags are a New Year’s tradition in Japan. Retailers stuff products in boxes or paper bags and sell them at a generous discount…Department store Mitsukoshi’s Nihonbahi branch in Tokyo offered some 105,000 yen grab bags with diamond pendants and earrings.”
It is early days yet at this juncture to say if Japan’s incipient economic recovery will be sustainable. A lot rides on the fortunes of the man and/or woman in the street – Mr and Mrs Watanabe as they have been dubbed. There is good news. And there is bad news. As reported by WSJ, “According to Japan’s largest business lobby, Keidanren, winter bonuses at 159 large companies rose 3.5 percent on year to 806,007 yen, the highest since 2008. Yet companies are still hesitant about raising overall pay.” As well, “a plan to raise the nation’s sales tax to 8 percent from 5 percent in April could fuel a surge in spending before the higher rate kicks in, followed by a precipitous plunge in spending, as happened the last time the tax was increased in 1997.”
For Abe and company, however, the Rubicon has been crossed and I am reasonably hopeful at this point that he and his government can pull things off, such that Japan will become a market – in addition to its developed-country peers and China – to be reckoned with by diamond jewellers based in Hong Kong and, for that matter, elsewhere on the globe.
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