The Mercury Diamond Global Tracker™ (MDGT™) index declined 0.1% to 117.9 during the month of October 2016. You may call it a minor softening in prices, but what it really says is that the selling prices of diamonds have once again declined: some more, some less.
MDGT™ tracks diamond prices all across the value chain, from rough to retail, and the index tracks prices of diamonds weighing 1-30 carats. On other indexes, asking prices are showing an even greater decline, down about 2% (IDEX -1.2%, and RAPI 1ct 2.6%) month-over-month
The way we view it, while overall transaction prices declined marginally during October, wholesalers are already reducing prices further. We therefore expect to see those reductions reflected in transaction prices in the market over the coming weeks.
Prices did not begin to decline in October: they have been sliding downwards for months. Year-over-year, MDGT™ fell by 1.9%, and the other indexes by about 3%. When looking at price changes on a monthly basis, we find that during the last 25 months, prices declined during 16 of those months on a MoM basis. Year-over-year, prices have declined 23 times out of 25.
The asking price indexes are showing a very similar situation: during a majority of months, prices declined month-over-month, and with few exceptions, prices declined every month on a year-over-year basis between October 2014 and October 2016.
If different indexes, using different methodologies, come up with such similar results, than the safe conclusion is that prices have been in a downfall trend for two years. That is a two-year period during which rough diamond prices declined in response to polished diamond declines. If rough diamond prices are reduced only after polished diamond prices have declined, and that has been the trend for the past two years, then overall, it would seem that profitability is constantly falling behind. Where do we go from here?
First, we need to accept the reality that the polished diamond prices that consumers are currently willing to pay are low, and continue to decline. Because of this, we need to act under the assumption that for as long as we can predict, this will be the price trend for the near-term future.
Second, polished diamond prices dictate prices up the pipeline. Therefore, rough diamond prices need to be far more responsive to changes in polished diamond prices. Rough prices are rising partially because of increases in demand. How can demand rise in a declining market? Simply because demand for rough often does not reflect demand for polished. It operates in response to other demands in the market: servicing credit, maintaining oversized manufacturing facilities, the rough diamond buying driver, and a number of other factors.
Third, we must remember that the manufacturers are the gatekeepers . Positioned in the middle of the pipeline and with the thinnest of margins, they are the ones that see up-close both the cost of rough and the prices at retail, and have to reconcile between the two sides in a way that makes the process economically feasible. It is therefore their responsibility to manage the flow and price of rough diamonds so they fit consumer purchasing behavior. Remember, a downward market is a demand-driven market.
Fourth, the way gatekeepers manage the cost of diamonds is by reverse engineering the retail price to rough by taking into account yield, manufacturing costs, and profit. Only then can they ensure that they will generate a profit – the reason we are doing this in the first place.
Fifth, while we are applying this logic, we should also invest in marketing diamonds. That requires both generic marketing supported financially by the industry at large, and specific marketing by retailers that drives traffic to stores. Ultimately, marketing will allow us to raise prices and generate a serious and well-deserved margin.
Finally, by improving education and transparency, and by providing historic polished prices with very specific characteristics, we will improve confidence in diamonds and help shift the perception of diamonds as an expense to diamonds as a possible store of value with known resale value.
I believe that if we apply all of these steps, we stand a chance to pull our industry out of the current rut it has sunken into, and pull it towards a much better place.
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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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.