The Chinese Platinum Jewellery Market

A short guide to jewellery demand

Net demand for platinum in the jewellery industry can be thought of as composed of three separate components: on the positive side, there are manufacturing volumes for jewellery and any increases in stocks of unprocessed or semi-processed metal anywhere within the jewellery industry. Together, these equate to gross jewellery demand for platinum. On the negative side, of the equation is the return of metal from unsold retail stocks or from previously owned jewellery. The picture is complicated by the possibility of imports and exports (although these are relatively insignificant in comparison to domestic Chinese production for domestic sale) and by the recycling of metal within a jewellery manufacturer (accounted for by treating a manufacturer as a so-called black box and measuring only metal entering and leaving that ‘box’ as affecting demand).

In order to understand the trends in net demand in the jewellery market, therefore, it is ‘only ‘necessary to understand any and all factors that can affect manufacturing demand, anything that can alter sentiment and behaviour in terms of metal stocking or destocking within the jewellery industry, and the driving forces behind recycling within the Chinese market.

Manufacturing volumes

Changes in manufacturing volumes can be viewed from three different perspectives: consumer pull, manufacturer push and supply chain issues, all of which have a bearing on metal demand.

Global demand for jewellery fell from 2005 to 2008 under pressure from rising metal prices. However, 2009 showed a remarkable resurgence in net demand in China and Japan.

Consumer pull

Consumer pull is the most important of these three factors in a normal year. A simplistic view of this market based on this perspective would suggest that a low platinum metal price directly generates additional demand by improving the affordability of platinum jewellery.

Although there is some truth in this model, unfortunately, such conventional wisdom appears to have only a limited relevance in this case.

Plain platinum jewellery (ie without any precious or semi- precious stones)is typically priced in Chinese Yuan per gram across most of China, and keen competition price exists in an individual city. While this does respond to movements in the international price of platinum, it can show a considerable time-lag. Many retailers were slow to reduce prices in the early part of 2009 as they averaged down metal prices on existing stock. Thus, although the metal price had fallen, consumer prices were relatively slow to follow. In some cities, retail prices were therefore still falling even as the platinum price rose in the second half of 2009.

Thus the ‘Economics 101’ argument mentioned above does have some validity when looking at retail prices rather than metal prices: the falling retail price certainly allowed platinum jewellery to compete more effectively against other products that could capture a share of the consumer’s disposable income, boosting demand.

Platinum jewellery can return back into the manufacturing chain when part exchanged for new jewellery or when sold back in booths such as this.

More importantly, though, the retail price of gold moves in very close correlation to the international price of that metal. The gap between the retail prices of these two metals (platinum and gold) therefore narrowed significantly in many cities in China throughout the year. Although gold has a strong emotional and historical connection for many Chinese people, it is sometimes considered more old-fashioned (something that is particularly true for 24 carat yellow gold). Qualitative research by Platinum Guild International (PGI) suggests that platinum has a cachet and an appeal to younger consumers and can be an aspirational purchase. Thus, although the gold market remains much larger than the platinum jewellery market in China, consumer demand for the white metal benefited from this narrow price differential, with platinum becoming relatively more attractive to some consumers as the prices of these two metals approached one another. One clear example could be found by examining the metal of choice for gem-set (diamond-containing) jewellery. Visits to a number of Chinese cities in early 2008 revealed that white gold alloys were gaining an increasing share of the space available in shop counter displays in order to maintain the affordability of these gem-set products as the platinum price rose. However, the fall in the prices of platinum and of diamonds later in the year improved consumer affordability, ensuring that retailers had returned to platinum as the metal of choice by early 2009– both in response to latent consumer interest and in order to maintain profit margins at the retailer. However, there were other factors driving the Chinese consumer’s behaviour. The buoyancy of the Chinese domestic economy during 2009 maintained disposable incomes at high levels in most cities. The ready flow of credit to commercial organisations has been an endless source of interest to Western commentators, but other factors seem to have been more important in fuelling this spending spree on platinum. The strong performance of the Shanghai Stock Exchange may have reinforced the feel-good factor amongst much of the populace, encouraging spending on non-essential items. What feels like a nascent housing price bubble in cities such as Shanghai also seems to have boosted people’s perception of their own personal wealth and thereby contributed additional consumer demand for platinum jewellery amongst other goods.

More surprisingly, the rising platinum price itself was arguably beneficial in driving sales. All precious metal jewellery sold in China brings with it a degree of status and also acts as a ‘store -of -value’. The steady increase in the underlying metal price during 2009 was noticed by some consumers despite the more lethargic movements in the retail price and doubtless contributed a degree of additional consumer demand. As a side note, in the longer term, it will be interesting to see whether the precipitous fall in the platinum price of late 2008 has any effect on the perception of platinum as a “store-of-value”, but this seems not to have been a dominant factor during 2009.

Finally, calendar effects should not be ignored. While it is not trivial to attempt to explain the impact of the Chinese calendar on the number of weddings held in a year in a short article, the huge number of weddings taking place on 9 September 2009 (ref 2, 3) does indicate its relevance. Added to this, the 60th anniversary of the founding of the People’s Republic of China and the fact that Valentine’s Day fell on a Saturday also both appear to have boosted sales of platinum and of other precious metal jewellery. All of this extra consumer demand drove greatly increased volumes at the manufacturing level.

Manufacturing volumes: manufacturer push and supply chain issues

Several years of rising metal prices had driven a slow reduction in stocks of finished jewellery at the retail and wholesale level, and late 2008 and early 2009 provided a good opportunity to rebuild these to previous levels. With consumer interest high, retailers went further and actually expanded their stock levels, confident that they could still turn them over on an acceptable timescale. With sales strong and the economy growing, independent jewellers built new stores in cities where they already operated and also expanded into smaller, less wealthy locations too, generating more sales and taking more stock in the process.

In department stores, where much Chinese jewellery is sold to consumers, the store charges a percentage of turnover as commission from the individual concession- holders. A high gold price and good levels of sales of most jewellery encouraged these larger stores to devote more floor space to jewellery too. It is questionable how much effect this action had on sales of platinum, but it did contribute to the increased levels of stock being held throughout the industry.

High consumer demand also proved beneficial at the manufacturer level. After the relatively weak first three quarters of 2008, the rapid onrush of new demand from retailers drove increased levels of staffing and higher throughput. Many manufacturers became constrained by capacity, ie they could have sold more jewellery than they were able to produce. With manufacturers’ profit margins typically related to the number of grams that a piece weighs, manufacturing of platinum jewellery became yet more attractive than manufacturing gold or palladium jewellery (due to the higher density of platinum compared to these other two metals, a greater weight of jewellery can be produced in platinum than in gold or palladium by the same number of employees, leading to higher profitability), adding a final touch of strength to manufacturing demand for platinum, perhaps at the expense of gold and palladium.

Purchasing of platinum on the Shanghai Gold Exchange -- where much of the metal used in the Chinese jewellery industry is sourced -- increased in the second half of 2008 and remained strong throughout 2009 in response to lower metal prices.

Changes in stock levels

Having noted that changes in the weight of finished pieces at wholesalers and retailers throughout China are already accounted for in manufacturing demand, the question remains as to what factors can impact upon other stock levels. Just as at the retail level, manufacturers responded to several years of rising platinum prices by minimising the amount of metal they owned in raw or finished form or as metal in process in their factories. By the time metal prices reached their peak in mid-2008, these stocks had probably come close to a practical minimum level and, as the price fell, manufacturers bought heavily to rebuild stock levels, adding several hundred thousand ounces to platinum demand in the final quarter of that year and the first half of 2009.

It might be thought that the picture since that date has changed to one of destocking as manufacturers battled to keep stock levels steady in local currency terms against the tide of a rising price. There is indeed some evidence that this is the case at a few manufacturers, but it seems likely that it was outweighed overall by the relatively common Chinese response of buying into (or gambling on) a rising price as noted in a recent article in this journal (ref 4).

Unsurprisingly, the improved profitability of the jewellery manufacturers mentioned above also led to new companies entering this space, adding to inventory late in the year. Some of the larger retailers and wholesalers also built stocks of raw metal both at low prices and as the price rose, in effect hedging their later metal requirements.