The June Mercury Diamond polished price report has shown that prices of most round diamond size categories declined compared to May. The two size ranges that did rise were 0.50- and 0.70-carats. All other size ranges declined.
The average decline rate of month-over-month of goods weighing 1-carat and above was 0.7%. The average decline rate of month-over-month of smaller diamonds weighing less than half a carat was 0.8%, similar to the decline rate of bigger goods. The price decline was mostly seasonal as polished wholesale prices (PWP), tend to decline during the summer months.
On this backdrop, it is somewhat surprising that wholesale prices of half carats (0.50-0.69-carats) and the size range often referred to as three-quarters (0.70-0.89-carats) were up about half a percent (0.49% and 0.41%, respectively) during the month. What could possibly motivate price increases of such a limited size range when the price of all other sizes decline?
For starters, it is important to point out that the price of half carats increased in June for a third month in a row. In fact, with the exception of March, when prices in the wholesale market fell nearly across the board, prices of half carat round diamonds have been rising since December 2017.
At the same time, (and again, with the exception of March), the rate of price increases have been softening steadily, as the following graph shows.
This data reflects the developments in the wholesale diamond market, but does not explain the reasons for these developments. To try to do so, we need to take a look at changes in demands in the market. For many months we reported that demand for thirds (0.30-0.39-carats) was rising, along with their prices. However, that demand ended when prices were too high. In May and June the price of round third-carats declined by 0.7% and 0.9%, respectively. Still, what caused the wholesale prices of half-carat diamond to increase? It was all about shifting demand, as the following table shows.
The table shows changes in demand in four diamond wholesale markets in July compared to June 2018. What we see is that demand for third-carats has declined, pulled down by GHI color, VS-SI clarity goods. Conversely, demand for half-carats increased, pulled up by D-I color, SI-I1 clarity goods. As demand for thirds waned, buyers shifted their attention to an alternative – half carats.
This is very typical of the diamond industry. A certain item is in high demand, usually by jewelry consumers, which leads to a price hike as demand increases. This upward movement continues until buyers find the prices too high. At that point they start offering their clients other goods, and demand shifts to attractively-priced items.
However, demand is not the sole driver of wholesale polished prices. Availability plays a role too. Is it possible that it availability has brought about the price declines?
When there is a shortage in a certain item in demand, its price is especially high. When there is abundance of goods of a certain category in the market, the ample availability drives price down. This is another contributor to the price shift. In the following table we show changes in availability of goods in the market in June compared to May 2018. The categories in red are categories with increased availability. Those in green show a decline in availability.
Clearly, as demand for thirds has slowed down, availability increased because it takes time to slow down manufacturing of a certain item, usually a couple months, and decrease the rate at which goods are made available. At the same time, we are seeing the start of improved availability of half carats. In fact, price and availability served as an early predictors of a shift in demand, and this is the important conclusion: the manufactures were the ones who dropped the ball.
Manufacturers are always worried about a buildup in inventory. If goods start accumulating, it means that their cash flow will be hurt. Heavy bank borrowing always bears on manufacturers, and that drives them to lower prices to generate sales. With little financial room to maneuver and with scarce financial oxygen to spare, manufactures face a choice between adjusting prices and increasing debt. They prefer the former and act accordingly.
So as availability increased, manufacturers lowered prices, which is why we see that prices of thirds were down. But at that point, prices of thirds were too high anyway, and buyers shifted their demand to the goods that were more accurately priced. In addition, prices of half-carats increased as availability decreased and demand increased, which had its own impact on price – hence the slowdown cited above regarding the rate of price increase among half carats.
The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser.
Diamond industrialist Ehud Arye Laniado is a man passionate about diamonds. From his early 20s in Africa and later in Belgium honing his expertise in forecasting the value of polished diamonds by examining rough diamonds by hand, till today four decades later, as chairman of his international diamond businesses spanning mining, exploration, rough and polished diamond valuation, trading, manufacturing, retail and consultancy services, Laniado has mastered both the miniscule details of evaluating and pricing individual rough diamonds and the entire structure of the diamond industry. Today, his global operations are at the forefront of the industry, recognised in diamond capitals from Mumbai to Tel Aviv and Hong Kong to New York.
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