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Opinion - Let's make diamond pricing crystal clear

All in all, it’s been a turbulent and rather unusual year when it comes to the price of diamonds. Those in the trade know this, but when it comes to the question of how diamond pricing actually works, consumers often remain in the dark. And in a market where consumers don’t have reliable tools to assess a diamond’s price, can we really expect them to confidently buy the highest priced diamond jewellery? This past Christmas, the figures show we couldn’t and they didn’t, but more of that later.

I believe that if consumers were more educated about diamond prices and if they had access to information on diamond prices, we’d all be selling more diamonds and more jewellery. If the way diamond prices are determined became openly known and clear to consumers, then the prices themselves would be clear and publicly known. If that were the case, the way the market works to reverse engineer prices - with the price of polished diamonds translating back to impact the price of rough diamonds – the result would be accurate pricing that reflects real changes in value. 

During the past year, as every year, prices of polished and rough diamonds fluctuated. But unlike most past years, the price fluctuations were broad and dramatic. Turbulence is not healthy for the market and it is a function of strong forces pushing and pulling in opposite directions.

Typically, rough diamond prices rise during the first half of the year, peaking in the summer and slowly softening during the last quarter. Each year brings its own set of circumstances, but this description broadly reflects annual trends of rough prices at the largest diamond miner according to value.

Are we now seeing a disconnect between rough prices, polished prices and diamond jewellery? Could it be that there are different causes for these different price behaviours and that rough diamond prices are unrelated to consumer demand? 

In a free market, a correlation between consumer demand and prices is logical. When consumers aren’t buying, prices come down – first the price of the finished product, then its components and finally the raw materials. The opposite chain reaction is expected when there is a rise in demand. 

In the past year we witnessed a different situation to the one we’ve been used to. Rough diamond prices increased in the first quarter, they maintained their high prices and hardly came down at the end of the year. Polished diamond prices, on the other hand, were stable during the first half of the year, but ended the year with an overall decline of 4% to 6%, according to our analysis and trading platforms. 

The result was that in the midstream of the diamond pipeline, among manufacturers, margins eroded because they kept paying high prices for rough diamonds. But they got the same for their polished diamonds, and then a lot less for them.

Could the time have come to re-examine this model? Jewellery retailers offer diamond jewellery, and other items, based on price points. They know that some customers spend under $300 per item, some buy items priced up to $500, while others spend $2,500 per item, and so on. 

A customer walking into a store tries to make an informed decision. Alongside personal taste, brand preference and budget, they also consider value. Over the years, consumers have learned about the 4Cs of diamonds, which describe the basic characteristics of a diamond and in turn, what sets its price. But they still don’t have any real tools to assess a diamond’s price. 

For example, consumers don’t know how much an F colour diamond should be priced compared to an H color, or how to evaluate the price of an SI1 clarity diamond versus an SI2. Crucially, consumers don’t understand why two diamonds with the same 4Cs may be priced differently. Why would they? They’ve never been taught about the comments section of a laboratory grading report and how comments can impact on diamond  price. You can bet they’ve also probably never heard of the significance of the location of an inclusion on a diamond. 

The discussion of what a consumer knows is linked to changes in rough diamond prices, and with good reason. If demand for certain polished diamond items declines, its price falls because retailers don’t want to hold onto inventory. Diamond polishers, in turn, don’t want to manufacture them and dealers don’t wish to buy the rough that yields an item which is falling in popularity. The open market dictates that rough diamonds should be priced on actual consumer demand.

In the 2009 holiday season, De Beers found American consumers preferred a ‘less for more” approach. They bought fewer items, but were willing to spend more per item for items perceived as lasting and valuable. But this past November and December, consumers returned to their old habit of buying smaller, lower price point items. This change reflects, among other things, a decline in interest in higher value diamond items. This is because the perceived value of precious diamonds is not clear or obvious to consumers.

If you look at two similar items and can’t see a difference – either real (such as size or quality,) or perceived (such as brand or opportunity) – then why would you pay more? A lack of clarity and full transparency is a deterrent to purchasing. In the case of diamonds, where consumers are confused, this is especially true.

Take mobile phones. If you hear a certain model is better than another, you will be willing to pay more for the better phone. But without this information, you may feel out of your depth – and simply buy the lower cost item, or worse, give up altogether, especially if it is too confusing and the purchase is not essential.

When it comes to diamonds, a lack of information and consumer education are now standing in the way of selling more diamond jewellery. 

I strongly believe that two complimentary processes – full disclosure of price components to consumers along with accurately translating polished diamond prices into rough diamond prices – are part of what I like to call a CRYSTAL CLEAR philosophy. 

Let’s make all information known and let’s make diamond prices clear and accurate, once and for all.

 

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 advisor. Nothing on this website can be construed or constitutes an offer or a recommendation to sell or to purchase diamonds or the solicitation of an offer to purchase any diamonds nor does it constitute an offer or a recommendation to sell or to purchase any security or financial product or the solicitation of an offer to purchase any security or financial product

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