In a departure from other shows over the past year and more, the September show in Hong Kong saw a decent amount of business, and many exhibiting diamond firms reported a rise in transactions compared to previous shows. There is a good reason for the change, and it does not necessarily serve as a positive sign for the diamond industry.
Buyers purchased polished diamonds including dossiers, specifically rounds, 0.30-0.90 carats, and one carat rounds in VS-SI qualities. There was a decent level of transactions for larger goods, including mid-range 3-carat diamonds, as well as much larger goods, at around 10 carats. All other sizes and clarities were in very low demand, including melee and most fancy shapes.
Goods smaller than 0.30 carats are suffering from a continued decline in demand and price, a trend that has not yet ended. The rough that yields these goods is also suffering from price declines.
The items in demand have a characteristic in common: their prices have been declining for many months, as the following graph shows. What does that say about demand? First, that demand for these items has declined. Second, only now, after the prices reached a certain level, are they back in demand.
As the graphs above show, 0.30 carat diamonds declined by 15% on average in 2015 compared to 2014, increased after the holiday sales, and since then their prices increased, but sales stagnated - until last month, when prices declined again. For half carats, the changes have been 13% between 2014, and a 0.6% decline in August. For 0.70 carats, the decline was 8.4% in 2015; for 0.90 carats, 7.8%, and then 0.3% in August. For 1 carats, the trend was a 16% decline in average prices between 2014 and 2015, and 3 carats fell 21% and then another 5% in the last nine months.
We can also see this trend developing in a couple of other areas. For example, pear and oval shape diamonds weighing 1.00-2.99 carats, D-H color, SI1 and better qualities. After an extended period of decline, only lately have their prices started to stabilize. Three carats and larger in higher qualities suffered from a drastic drop in price, and their prices have also recently started to climb, but mostly against a severe shortage in availability.
Hong Kong Demand
A characteristic shared by most goods in demand at the show is that because their prices have declined to such an extent, they are now fit for smaller budgets. That is, even after the widespread price declines, consumers are still mostly interested in items that fit certain price points, creating an almost overriding demand for those types of polished diamonds. Therefore, the pickup in demand in Hong Kong signifies that prices are finally at the right level. At this lower price, consumers are beginning to buy, and that is an important message to everyone in the industry.
The problem is that I am not sure that these transactions are profitable. If I am correct, prices of rough diamonds need to be lowered. Some may argue that the price reduction should be by perhaps as much as 30% in order to allow the rough to be polished and sold profitably – and within consumers’ budgets.
This assessment is not just my own. Many traders who made sales at the Hong Kong show at the new, lower prices expressed concern over this situation, stating that the prices they achieved for the polished diamonds are not enough to buy rough diamonds needed to replenish their stocks. If manufacturers can’t replace the goods they have sold by using the income they generated to purchase new goods, the result is a dire economic problem.
This is the new reality of the diamond industry at large, from mining to retail. With hardly any generic marketing for polished diamonds in the main consumer markets in the past few years, today’s consumers are showing a decreasing interest in large spending on diamond jewelry.
Last week I said that the specific demand for polished diamonds should dictate the demand for rough diamonds, and therefore, buying run-of-mine (full mine production) does not make sense. My conclusion from the transactions that took place last week and taking place this week is that there is consumer demand for polished diamonds – at the right price. If the price is acceptable to consumers, it will be possible to sell run-of-mine rough diamonds.
The claim laid out here is that it is consumers who dictate the prices of polished diamonds, and, therefore, the prices of rough. If demand from retailers is low at exhibitions, average prices begin to decline. But what if demand for rough is dictated by drivers other than pure consumer demand, such as the need to maintain large factories? What is the logic then?
Demand for ¾ - 3 carat rough diamonds is huge in both quantity and price. The problem is not the price, but the quantity, because in a couple of months the polished diamonds manufactured from this huge supply of rough diamonds will flood the market. The result will be the same as what we saw for the polished diamonds smaller than 0.30 carats: manufacturers bought very large quantities of the rough suitable for small goods, and there is now an overabundance of these goods, resulting in very low prices and large inventories that are not moving. When the current rough reaches the market as polished diamonds, prices will fall further.
If current prices to the final consumer are low enough to generate demand, then a balance between the quantity of offered merchandise and the quantity of rough diamond purchases needs to be created. Only then can we stabilize prices.
Demand for larger stones, and recent transactions of such stones, are somewhat artificial. Every manufacturer knows that you cannot buy raw materials to profitably produce and sell diamonds at the current price. Many of the recent transactions were of diamonds purchased from distressed companies, which sold them for below-market prices to generate cash flow. This does not reflect a rebound in consumer demand. Instead, it simply reflects the other drivers that exist in the market.
The conclusion is that diamond prices are still too high for the general public.
Fancy shape diamonds rise in demand when prices of rounds are too high. If you consider my transaction list price, you will find that 5-carat emerald-shaped D/FL is priced at $62,200, a large drop from 2009. However, even at that price, such a diamond can be sold only once or twice a year.
We must find a balance between prices of rough diamonds and their quantity. Without doing so, and without disabling all the drivers, a snowball effect will be created, which will lead to access production and continuous price declines.
Considering that even very lower priced fancy shapes, the “safe harbor” of diamonds, are not selling very well, perhaps we need to reconsider some old assumptions to make full run-of-mine economic. With consumers interested in lower price point items, maybe we need to reevaluate the difference between mining costs and the asking price for rough diamonds by the mining companies.
If we want to sell diamonds successfully, it is our responsibility to offer prices for rough diamonds that will allow us to offer a reasonably priced polished product to consumers, while leaving ourselves a profit for our work. To reach that point, it is very important to stop all the additional drivers, and limit the amount of future rough diamond buying.
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.