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Diamonds Pricing Reform

Diamonds Pricing Reform

When considering a diamond’s value, people usually think of the 4Cs – Cut, Color, Clarity and Carat. Over the past year we have stressed time and again the importance of irregularities in determining the value of a diamond. I feel it is time to consider another aspect of irregularities. A balanced assessment of irregularities must be made in the purchase of rough diamonds and wholesale of polished diamonds, and above all when assessing inventories. 

The prevailing practice in polished diamond pricing is to consider only what can be seen in a diamond through standard 10X magnification. However, most gemological labs list additional information discovered under magnifications greater than 10X in the comments section on a diamond certificate. This is additional information of which labs want consumers to be aware, otherwise known as a diamond’s irregularities.

Usually, irregularities have effects on the reflectiveness or shape of a polished diamond and can detract from its beauty. In some cases, such as for the shape or fluorescence of low color diamonds, irregularities are likely to enhance the diamond’s beauty. That is why Mercury Diamond©, under my guidance, developed a comprehensive table of premiums and discounts for irregularities.

In previous articles I emphasized the importance of irregularities and their impact on the price of polished diamonds. That is, how diamonds with identical 4Cs but different irregularities may have different prices and exhibit different price trends over time. 

With this understood, the question arises: Who gets the better diamonds? Who gets the mid-range diamonds and who gets the lower-end diamonds that have the same 4Cs? When buying rough diamonds, it is difficult to predict which irregularities are hidden inside. It is the responsibility of the industry midstream – the gatekeepers of the diamond trade – to look for the primary irregularities when buying rough: fluorescence, graining, potential for a triple X, an inclusion at the center of the stone or very close to where the polished diamond’s point will be, the right shape for fancy cut, etc. Above all, the rough diamond buyer, the gatekeeper, must assess whether there is enough potential profit in the entire parcel of rough to discount all irregularities and offer the polished output at the right market price, while remaining profitable after the entire output is sold! 

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This cannot be stressed enough. I fear that rough buyers do not sufficiently consider these elements. During difficult times, they sell the better output and are stuck with the lower-value goods, which reduces the overall value of their inventories. Therefore, when purchasing a parcel of rough diamonds, all irregularities must be taken into account and the parcel must be priced accordingly. Only this can ensure the profitability of the entire parcel after its entire output of polished is sold.

Rough diamonds are a natural substance and their behavior under the polishing process is not always predictable. Therefore, even when polishing a well-sorted parcel of rough, different irregularities may appear in the final product. Of course, all irregularities must be priced correctly with premiums or discounts within their 4Cs.

Let's consider an inventory of manufactured goods over a given period of time. A large volume of rough is polished and with it a whole range of irregularities. Logic dictates that each polished diamond should be priced according to its characteristics and sold to the end consumer with these irregularities taken into account. Or consumers should at least be given the choice between differently priced irregularities within the same 4Cs, allowing them to choose at what price to make a purchase.

Some brands are known for not compromising on irregularities and are willing to pay more for diamonds just to meet impeccable standards. These brands allow themselves to be picky because they price their diamond jewelry higher – taking into account the added cost, the premiums, associated with purchasing such diamonds.

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Other companies which sell price points – i.e., lower-cost prices – offer goods with the less desirable irregularities. Some specialist stores navigate between irregularities with premiums and irregularities with discounts. The most important question to be asked is whether end consumers are aware of this? Are they aware of this additional layer of pricing beyond the 4Cs?

It is my view that it is compulsory for the diamond industry to make pricing methods beyond the 4Cs clear to the end consumer. Doing so will increase consumers’ knowledge base, bolstering their confidence and changing the perception of polished diamonds. This process will transform the buying behavior of end consumers and increase diamond demand while expanding to reach a new audience of diamond-buying consumers. 

In different countries, polished diamond purchases are made as a choice between different factors: price and clarity, low color and size, fluorescence and shape, and so on. It is assumed that in a normal period, when all over the world polished diamonds are being bought with complete knowledge about price and irregularities, where all choices are clearly open to consumers, then all polished diamonds should be sold.

The question that must be asked is what happened during tough times like 2015, when sales were made in fewer countries that bought different types of diamonds? What happened to diamonds with irregularities that demand a premium? Were they sold for less? What happened to diamonds with irregularities that require a discount? Were they sold at all? Were only the nicer gems sold while the rest sold less or not at all? Most importantly, did end consumers buy their diamonds after being offered a comprehensive explanation of the 4Cs?

This prompts another question that the industry must consider. With a dearth of fresh rough due to the reduction of supply, what do manufacturers’ swollen inventories – and not by choice – look like? How are these inventories valuated? It is likely that in difficult times, when there is a lot of pressure on manufacturers to sell in order to generate cash flow, polished diamonds with “better” irregularities will be sold immediately.

What happens to the rest? How is it valued? According to the 4Cs and the irregularities, they should be priced at a discount based on an internal system developed through private experience.

If this is the case, then the large inventories left in the hands of manufacturers are problematic, especially without access to a supply of fresh and profitable rough diamonds to offset the discount of irregularities both old and new. This is a problem both with respect to current value and in terms of future sales. Who will buy these diamonds, and at what price? How are the remaining diamonds with less desirable irregularities evaluated in the annual balance sheets? According to what inventory value do manufacturers receive bank credit? How is their collateral valuated?

These are questions that the entire diamond industry must ask itself in light of the ongoing crisis in polished diamond sales. This issue continues to underline the importance of having a transactions-based price list, as well as a price list of irregularities with their respective discounts and premiums. Each manufacturer must calculate – beginning with rough diamonds – the irregularities and price according to the ingredients and then account for polished inventory.

How should rough be bought from a producer? Based on a price tag on a sealed plastic bag for which it is impossible to consider any irregularities? Or by examining every single rough stone and determining the price of rough at this stage? Will the return policy of rough be determined only by the overall price of rough in the parcel and based on the previous month, while the pricing of polished is based on the 4Cs? Or will irregularities be considered at this early stage and allow rough diamonds to be rejected because they are temporarily impossible to sell? Is it possible that the producer might have reduced prices without have looked closely at the irregularities, in which case what appeared to be low-cost rough will become expensive polished?

These are all important questions worth serious consideration by all of us in the diamond pipeline, and the earlier we address them, the better we will fare in the long run.

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.

 

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