rapaport research report july 2011

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Quiet in PerspectiveJuly 2011 Research Report

Copyright 2011 by Martin Rapaport www.diamonds.net/report Page | 1

Executive Summary

Polished: Sellers Market Softens

The RapNet Diamond Index (RNDI) for 1.00-carat diamonds fell 0.5 percent to 108.34

in July. The RNDI increased 33.3 percent in the first seven months of 2011. Sellers market softens as U.S. wholesalers take summer vacations and Far East buyers

avoid large inventory purchases. Indian trade disrupted by multiple explosions in Mumbai diamond district but picks up

again in preparation for August Mumbai show. Strong 1H 2011 activity in trading centers of Belgium, India and Israel, signaling

significant growth over last year.

Rough: Price Hikes Continue

DTC raises prices on average 10 percent at large July sight.

Average prices rose 35 percent in the first half of the year and were about 53 percenthigher than one year ago.

Mining company sales boosted by price hikes as production and supply kept low. Similarly, trading values high in first half but volumes decline. De Beers 1H production rose 0.7 percent to 15.5 million carats. ALROSA production increased 8 percent to 19 million carats while its volume sold fell 23

percent to 19.1 million carats.

Retail: Stable Growth

U.S. jewelry sales relatively stable while global growth is driven by China and India.

Caution continued through U.S. debt debate. Bridal sector continues to drive diamond jewelry sales. U.S. consumer price index (CPI) rose 1 percent in June.

Conclusion

The diamond market was relatively quiet through July which was reflected in the price stabilityseen in the polished segment. The summer months are traditionally slower trading periods asmany U.S. wholesalers take their summer vacations, while dealers in Belgium and Israel taketheirs in August.

In contrast, rough buying was still strong in July and prices continued to climb. However, the

volume of rough brought to the market by both the mining companies and rough dealersappears to be in line with 2010 levels.

The July quiet should not be viewed as an indication that the market has turned. There remainsa positive forecast that the uptrends seen in the first half of the year will continue after a periodof stability in July and August. As in the past two years, the August India International JewelleryShow (IIJS), followed by the September Hong Kong show are expected to signal a return tobuoyant polished trading and provide a strong outlook for Chinas October Golden Weekcelebration, Indias Diwali season, and the U.S. Christmas buying season.


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The Polished Market

The polished market was relatively quiet as wholesalers in the U.S. took their traditional summerbreak and as retail inventories in the U.S. and the Far East were sufficiently large following thetrade show season in May and June. As a result, buyers displayed some resistance to sellershigh asking prices.

Trading in India came to a temporary standstill following the triple explosions that hit Mumbaisdiamond district on July 13, but returned to normal levels toward the end of the month asdealers and manufacturers prepared for IIJS. However, even before the explosions, polishedtrading was relatively slow as there was some caution regarding the prevalent high askingprices from sellers. Similarly, in Belgium and Israel, the sellers market which was apparent inthe second quarter, turned softer as buyers in the Far East focused on filling existing orders andavoided making large inventory purchases during the summer months.

The RNDI for 1.00-carat polished diamonds fell 0.5 percent to 108.34 in July, while the RNDI for0.50-carat stones declined by 0.8 percent to 39.09, and the RNDI for 3.00-carat diamonds rose0.6 percent to 392.97 (see Figure 1). The RapNet Composite Index increased by 0.2 percent to

180.14.

Figure1The RapNet Diamond Index is based on the best asking price in hundred $/ct. for the top 25 quality round diamonds (D-H, IF-VS2,RapSpec-1) offered for sale on the RapNet Rapaport Diamond Trading Network.

The stability in July signaled a slowdown in the pace of trade seen so far in 2011. The RNDI for1.00-carat diamonds rose 33.3 percent in the first seven months of the year (see Figure 2,column entitled Jan July 2011) and was up 35.4 percent from one year ago (see Figure 2,column titled Y2Y Changes at July 31).


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July Jan - July 2011 Y2Y Changes at July 31

RNDI (1 cts) -0.5% 33.3% 35.4%

0.5 cts -0.8% 36.0% 38.7%

3 cts 0.6% 32.2% 29.2%

RapNet Composite Index 0.2% 32.7% 31.1%

RapNet Diamond Index (RNDI)

Figure 2

The RapNet Diamond Index is based on the best asking price in hundred $/ct. for the top 25 quality round diamonds (D-H, IF-VS2,RapSpec-1) offered for sale on the RapNet Rapaport Diamond Trading Network.

The increases which took effect in the first half of the year were driven by growth in the retailmarket in the Far East and India, relative improvement in the U.S. retail environment and strongtrading among dealers in the main centers of Belgium, India and Israel.

Indias gross polished exports rose 45 percent year on year to $15.66 billion in the first half of2011, while imports jumped 91 percent to $12.77 billion. Belgiums gross polished exports grew37 percent to $7.34 billion, while imports rose 37 percent to $6.89 billion. Israels gross polished

exports increased 40 percent to $9 billion with imports up 51 percent to $2.92 billion (see Figure3).

Figure 3

Sources: India - Gem & Jewellery Export Promotion Council (GJEPC); Belgium - Antwerp World Diamond Centre (AWDC); Israel -Diamond Controller's office at the Ministry of Industry, Trade & Labor.

There was a significant upswing in demand for high quality, small diamonds, with demandspurred by luxury companies using these diamonds in products such as watches. There wasalso good demand for dossier goods, 0.30-carat to 1.99-carat, G-I, VS-SI stones, while reportscontinued of shortage of SI clarity stones in July.


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The Rough Market

Rough prices continued to rise in July with De Beers Diamond Trading Company (DTC)increasing prices by an average 10 percent at its sight mid-month. The DTC hike followedsimilar increases by ALROSA and BHP Billiton. The DTC July sight was valued at an estimatedvalue of $850 million, as rough demand remained strong during the month despite the quiet inthe polished market.

Dealers and manufacturers bought rough as they are set to begin preparations for the end-of-year Diwali and Christmas seasons and as they anticipate further price increases in the fourthquarter. Reports indicate that dealers rough inventories continue to grow.

De Beers reported that DTC prices rose an average 35 percent in the first half of 2011 aspolished and rough price trends followed similar paths during the period (see Figure 4).

Figure 4

Rapaport Rough Diamond Index is based on Rapaport estimates. The RapNet Diamond Index is based on the best asking price inhundred$/ct.for the top 25 quality round diamonds (D-H, IF-VS2, RapSpec-1) offered for sale on the RapNet Rapaport DiamondTrading Network.

Rapaport estimates that DTC prices have risen by about 53 percent from July 2010, whichwould be in line with the increases experienced at other mining companies. The increases weremore profound at the higher price per carat value mines (see Figure 5).

Company Asset 1H 2010 1H 2011 % Change

ALROSA All Mines 80$ 113$ 41%

Gem Diamonds Letseng 1,728$ 3,052$ 77%

Gem Diamonds Ellendale Yellows 2,588$ 4,045$ 56%

Gem Diamonds Ellendale Commercial 144$ 195$ 35%

Petra Diamonds Cullinan 117$ 178$ 53%

Petra Diamonds Koffiefontein 467$ 756$ 62%

Rough Diamond Prices Per Select Mine / Company (U.S. $ / Ct.)

Figure 5

Data as reported by ALROSA, Gem Diamonds and Petra Diamonds respectively.


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The price hikes boosted mining company sales as displayed in the first half financials reportedby De Beers, ALROSA, Petra Diamonds and Gem Diamonds. De Beers rough sales through theDTC, including DTC sales to Diamdel, rose 33 percent to $3.5 billion and ALROSAs salesincreased about 9 percent to $2.16 billion (see Figure 6).

Figure 6

Based on data reported by De Beers and ALROSA respectively.

Production and the volume of rough supplied to the market were relatively stable during the halfyear, if slightly below the same period in 2010 (see Figure 7). ALROSAs production rose 8percent to 19 million carats but the Russian companys volume of sales fell 23 percent to 19.1

million carats. De Beers production rose 0.7 percent to 15.5 million carats and the companylowered its production forecast for the year to 35 million carats, from its previous estimate of 38million carats.

Figure 7

Data presented as reported by ALROSA, De Beers, Rio Tinto, BHP Billiton, Diavik Mine (Harry Winston), and Petra Diamonds.


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While production levels remained stable in the first half of the year, the value of imports andexports through the trading centers increased significantly in the first six months (see Figure 8)as prices rose. However, the volume of the imports and exports were generally down.

Figure 8

Sources: India - Gem & Jewellery Export Promotion Council (GJEPC); Belgium - Antwerp World Diamond Centre (AWDC); Israel -Diamond Controller's office at the Ministry of Industry, Trade & Labor.

By volume, Indias rough imports fell 22 percent to 90.3 million carats in the half year, with theaverage price on these goods up 66 percent. Indias rough exports declined 6 percent. Similarly,Belgiums rough imports and exports fell 7 percent and 10 percent respectively, and Israelsimports rose 8 percent while its exports declined 13 percent.

Marange

Approximately 5 million carats of diamonds from Zimbabwes Marange mine valued at about$200 million have entered the market after the Kimberley Process (KP) approved the release ofthese specific goods from Dubai. In addition, while the KP remains at an impasse regarding therest of Marange production, Marange diamonds are continuously being imported by South

Africa.


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The Retail Market

Global diamond jewelry demand continues to be driven by growth in the emerging economies ofChina and India, and stable sales in the U.S. with bridal lines remaining the core of the industry.There has also been a significant rise in diamonds used in watches and other luxury productsby companies catering to the high-end segment of the market.

Jewelry prices rose 1 percent in June, the most recent reporting period, continuing the steadyuptrend evident in the first half of 2011, according to the U.S. Consumer Price Index (CPI) for

jewelry published by the Bureau of Labor Statistics (see Figure 9). Higher prices have buoyedsales which have shown an uptrend so far in 2011, which is expected to continue when theJune and July data is published.

Figure 9

Source: Bureau of Labor Statistics and the U.S. Census Bureau

Chinas National Bureau of Statistics reported that the countrys total retail sales rose 16.8percent year on year to Yuan 85,833 (100 million) in the first half of the year with gold and silver

jewelry sales up 50 percent to 921 (100 million).

Economic Factors

Financial markets cautious as ratings agencies mull downgrading U.S. credit ratingdespite agreement reached by the government to raise debt ceiling.

U.S. real gross domestic product (GDP) grew 1.3 percent in 2Q and 1Q growth revisedto 0.4 percent.

Chinas GDP growth slows to 9.5 percent in 2Q 2001, from 9.7 percent in 1Q. Dow Jones Industrial Average fell 2.2 percent in July. Gold prices rose 9.5 percent to $1,627.20 / 0z (at July 31).


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Visit www.diamonds.net and www.rapnet.com for news and information on diamond prices.

About the Rapaport Group: The Rapaport Group is an international network of companies providingadded value services that support the development of free, fair and competitive global diamond markets.Established in 1978, the Rapaport Diamond Report is the primary source of diamond prices and marketinformation. Group activities include publishing, research and marketing services, internet information and

diamond trading networks, global rough and polished diamond tenders, diamond certification, quality-control, compliance, shipping, and financial services. Major activities of the group include thedevelopment of markets for Fair Trade Diamonds and Jewelry as well as the creation of diamond futuresmarkets.

Copyright 2011 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100, 133 E. WarmSprings Rd., Las Vegas, Nevada, USA. +1.702.893.9400. This Rapaport Research Report is providedsolely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies andcontained in this report should be deemed to be considered personalized industry or market advice. Anyinvestment or purchase decisions should only be made after obtaining expert advice. All opinions andestimates contained in this report constitute Rapaport's considered judgment as of the date of this report,are subject to change without notice and are provided in good faith but without legal responsibility. Thankyou for respecting our intellectual property rights.

rapaport research report july 2011

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