Gem market shift: Rappaport

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COLORED GEMSTONE

Shifting Sapphire Market

By Deborah Yonick

RAPAPORT… Sapphire, particularly blue, is the best-selling gem in the marketplace, most notably in the Western market. But recent changes in supply and demand are transforming the sapphire business, particularly declining production at the world’s most popular sapphire mines and greater demand from emerging consumer markets like China, India and Brazil.

“The United States and Japan were the biggest consumer markets for sapphire, but the economic situation in both countries has slowed demand,” says Ron Rahmanan of Sara Gem Corp., New York City. “Yet prices have risen more than 50 percent, while availability of raw material is 40 percent less than it was a year ago.”

With untreated sapphire in short supply, there are more heated and beryllium-diffusion-treated stones making their way onto the market and their prices, too, are increasing as they become more accepted.

Declining Production

Rahmanan tells of how he used to buy parcels of 2-carat to 4-carat, high-quality blue sapphires that contained at least 70 to 100 pieces. Now, the biggest lots he sees have at most 15 to 20 pieces of poorer-quality goods at much higher prices.

Sapphire production in the past few years has declined at the better-known mines, with no new major sources discovered that could offset those reductions, reports Stuart Robertson, analyst for The GemGuide, Glenville, Illinois. In particular, he cites the current scarcity in the marketplace of fine, blue sapphire from Burma, along with a major decline in Madagascar sapphire production in the past decade.

Kashmir, the most coveted species of blue sapphire because of its rich color, has become almost impossible to buy due to high prices and low availability. In its place, notes Rahmanan, Burma sapphire has become the “new Kashmir,” and its prices have risen up to 100 percent on fine, large pieces since early 2008. The higher prices also reflect the fact that Burmese sapphire production has declined because the government diverted attention from gem to uranium mining, a more profitable endeavor as emerging markets like India and China are chasing resources.

Also affecting the global supply of sapphire is the fact that gemstone production in Madagascar — which supplied the majority of the world’s sapphire for the past 15 years — has taken a real nosedive, reports Rahmanan. Most miners have moved out of the area since the former government stopped exporting rough gems in 2008 in hopes foreign gem buyers would open cutting factories in Madagascar. Unfortunately, the global economic slowdown and political turmoil in the island nation kept investors at bay. Despite a lift on the export ban a year ago, miners are reluctant to return to sapphire production.

In Sri Lanka, the government stopped issuing mining licenses to most miners and put a hold on many old contracts, citing environmental concerns. As a result, operational costs are higher, which miners are passing on in higher premiums for the sapphires they do produce, says Rahmanan.

Overall, most of Rahmanan’s sapphire suppliers are doing little mining because of the high cost of energy and resources like water, with most of their production in lower-quality stones, whose selling price does not cover rising operational expenses.

Among sapphire sources, Australia is considered a bright spot in supply. According to Robertson, this source is best known for producing commercial-grade material used in mass-manufactured jewelry. “I visited the Hong Kong office of Sino Resources Mining Co. to examine its initial Australian sapphire production,” he says. “The material was pleasant looking, while also fitting the lower price points of today’s price-conscious consumers.”

Yellow Rising

Rahmanan notes that only three years ago, fancy color sapphires were “out of fashion and oversupplied in the U.S.,” causing prices to decline by 30 percent to 40 percent. “Now, they are popular in Brazil and China and prices are rising directly because of these new consumers.”

While blue sapphire remains a leading seller for Pala International, Bill Larson, president of the Fallbrook, California, gem house, has seen recent growth in yellow sapphires, especially untreated. “I attribute the gain to India, as yellow is a favorable color in its culture.”

The price of yellow sapphire, Rahmanan says, has more than tripled in the past few years. “Our stock is at its lowest in 25 years. Untreated goods are so expensive — $1,500 a carat.” Larson notes that the popularity of pink sapphire — fueled by celebrity demand and trending fashion colors — peaked about ten years ago. But he reports consistent, strong demand for untreated, purer pink, nonpurplish color sapphires.

U.S. Disadvantage

The GemGuide tracking shows price increases in sapphire of 20 percent to 30 percent since the start of 2011, which Robertson attributes to a weak U.S. dollar and rising labor costs in key cutting centers like China. On a buying trip in September 2011, Rahmanan saw a large production of 1-carat to 2-carat calibrated sapphires that his supplier collected over a period of six months. “The price was 35 percent higher than I paid less than a year ago. My offer of 15 percent less than the asking price for a 30-day payment was rejected. The parcel sold to a Chinese buyer for the original price. How can we compete?” Compared to 2010, Rahmanan says the price for blue sapphire is up 35 percent, yellow sapphire is up 50 percent and other fancy color sapphire is up 10 percent to 15 percent.

A challenge for U.S. dealers is that jewelers aren’t buying many goods outright, comments Gina Taylor of Taylor Gem Corp., Lincoln, California. She says jeweler requests are specific — i.e., pale sapphire colors that emulate fancy color diamonds. “There are few jewelers making jewelry anymore, so they’re not stocking up like they used to” on raw materials such as gemstones.

Protecting Margins

Despite market challenges, buyers of better sapphire should be able to continue to reap greater profit margins.  As proof, New York–based wholesaler Jeffrey Bilgore cites the widening price differential between sapphires and diamonds. “For the cost of a 3-carat, VVS diamond, a consumer could have an 8-carat to 10-carat unheated blue sapphire. That’s a great value!”

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