Polished diamond prices dropped 1.7% in August, 2017 compared to the prior year, according to the Mercury Diamond Global Tracker™ (MDGT™), an index of polished diamond transaction prices. The sharp decline follows a period of milder price declines during the past few months, and rising concerns about the financial wellbeing of the diamond industry’s midstream. Polished diamond prices have been continuously declining for the past 33 months on a year-over-year basis. The last time the index showed an upward year-over-year trend was in November 2014.
Prices Are Declining Overall
During the 33-month period of declining polished diamond prices, the MDGT™ index fell 12.8% to 114.8, underscoring the ongoing weakness of the polished diamond market. On a month-over-month basis, polished diamond prices declined 1% during August compared to the month of July.
MDGT™ is based on the transaction prices of diamonds weighing 1-30 carats, collected and used for the Mercury Diamond™ Price List. It provides wholesale polished diamond prices based on transaction prices in the wholesale market, and is aimed at serving the wholesale market first and foremost.
The year-over-year rate of decline during August is a worrying trend. The rate of price declines since April moderated, and averaged just 0.5% on a monthly basis. The change in direction signals an end to that trend, and deep change in the diamond industry, which will likely mean an increased need to generate cash flow. In the past year, the rate of decline was often in excess of 2%, and at times as much as 3.7-4%.
According to our research, the decline in polished diamond prices stems from an oversupply of goods. Factories continued to manufacture more polished diamonds despite a decline in demand for them. This resulted in a rise in polished diamond stockpiles. With overhead costs steady, and income from polished diamond sales decreasing, cash flow is the first victim. From a manufacturing perspective, this is dangerous prospect, which explains why prices were lowered so dramatically. Sales must be generated quickly in order to restore cash flow.
The polished price decline trend started in December 2014, and has been running continuously since then. Overall polished diamond prices peaked in July 2011, and declined until October of that year. They recovered, and then declined again for a number of months, until June 2014. Starting in August 2014, overall polished diamond prices softened steadily.
Although on a month-over-month basis MDGT™ rose several times during the past two years, most recently during March, the month-over-month decline in August is not an exception, but rather has become the norm in recent years. Price changes are more volatile on a month-over-month basis, which reflects seasonal changes neutralized in year-over-year comparisons. This volatility has been growing since the start of the year, as the graph above shows.
One Star Performer
The MDGT™ index is composed of the price performances of many different diamonds, of many different size ranges. Overall, prices were down for all size ranges except one – thirds. Round diamonds weighing 0.30-0.39 carats increased in price during August, bucking the overall trend. Month-over-month, they had a 1.4% price increase, while all other size ranges decreased on average by 1%. The interest in these goods is seasonal. Jewelry manufacturers are already working on the items that will be offered at stores during the November-December holiday season, driving demand for this size of diamond. Why is the demand so pronounced with thirds? Among other reasons, this is due to a trend among US consumers to prefer smaller diamonds, and gentler, less flashy jewelry designs. This comes at the expense of half-carat and larger diamonds.
Prices of one-carat diamonds fell 0.1 percent during the month, a slower rate of decline than the 3.9% price drop they experienced during July. Two-carat rounds suffered the most extreme decline in price, sinking by 2.1% month-over-month.
On a year-over-year basis, every size range declined in price, many in the mid-single digits. The most notable price declines continue to be halves, three quarters, 1, 1.50, 3, and 5 carats, whose year-over-year price decline is 5% or more. Halves and three quarters have lost nearly 10% of their wholesale value compared to last year, underscoring the shift in consumer tastes to smaller goods.
The continued long-term weakness in polished diamond prices is an ongoing issue, and the large drop in prices during August is concerning. In late August and early September, we saw a drop in demand for rough diamonds. Buyers of rough turned down high-priced goods, even from contract suppliers, and sought to buy the goods from other sources, such as tenders, at lower prices. This is a positive indication that the diamond industry is responding to the changes in the market. In addition, a cyclical rise in demand in the coming months is expected, and hopefully the influx of cash coupled with a lowering of polished diamonds inventory could potentially lead to a recovery in polished diamond prices, at least in the short term.
About MDGT™ and the Mercury Diamond™ Price List
We have developed a system that collects transaction prices from a wide range of manufacturers, traders and retailers. These many monthly transactions are augmented by constant research in the market, which backs, double checks, verifies and completes the transaction data. The system covers more than 18,000 polished diamond categories across the 4Cs, including polished diamonds weighing up to 30 carats with clarities ranging from Flawless to I3 in colors from D to P and in the various shapes.
The price list provides a price for a top stone without any irregularities. There is a separate table of irregularities, which provides the necessary discount or premium to find the exact current price of any particular diamond.
This polished diamond pricing system was reviewed and validated by one of the Big 4 accounting firms, and that firm continues to audit the price list monthly. The pricing system is in the process of obtaining a patent in the United States. Traders will not only find the current transaction price of each diamond; by applying their manufacturing costs, they can also “reverse engineer” to calculate the cost of rough diamonds.
Currently, we publish the price list monthly, on the tenth of every month. It is also available in the form of a ticker. Take a look at this important alternative, which has the potential to contribute to an important change in the market. Please download the list and test it. We provide it to you with the hope that you will consider using it regularly.
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.