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Supporting Services: Price Lists

Supporting Services: Price Lists

So far in my series on supporting services in the diamond industry, we have looked at several different types of businesses that have developed to serve the needs of manufacturers, miners, and rough dealers. These businesses do not take ownership of diamonds, but rather help to facilitate the activities of those who do. One that I am particularly passionate about, and have written extensively about over the past few years, is diamond pricing. The publishing of diamond price lists has become a backbone of our industry.

Prior to the mid-1970s, the price of a diamond was subjective, and the final price paid was largely dependent on the bargaining and negotiating powers of the buyer and seller. The final price of comparable diamonds could vary widely. Traders and retailers within the industry were much better versed in the going prices of any specific category of diamonds than those outside the industry. Even though the 4Cs were well established and widely used at that time, the standard model for pricing a diamond was much more malleable than it is today. This meant that every diamond sold was subject to a negotiation process that determined the final price, and could vary widely between two identical diamonds bought and sold by different traders. Whether or not a mainstream pricing system would have helped to stop the massive speculative bubble in diamond prices that occurred in 1980 is debatable, but certainly pricing lists became more in vogue after 1982, when the price bubble burst and diamond prices came crashing back down, making the need for a pricing system all the more urgent.

In 1978, Martin Rapaport introduced his first polished diamond price list. At the time, the introduction of a price list was not well received by those inside the industry. The concern was that this was an attempt to commoditize diamonds, and that it would hurt the industry’s ability to make a profit. To quote Harvard Business School professor Clayton Christensen from his bestselling book The Innovator’s Dilemma, the Rap list was a ‘disruptive technology,’ and led to a wholesale change in the way diamonds would be bought and sold. However, like many economic disruptions, the advantages and utility of the list soon overcame some of its more negative implications, and traders eventually adopted it. Today, polished diamond price lists are the norm. These lists attempt to establish a benchmark price for diamonds at the wholesale level.

As the internet advanced, Rapaport also developed an online diamond-trading platform. Rapaport enjoyed a near monopoly on polished diamond price lists until 2001, when IDEX introduced its own trading platform, and, a few years later, its own polished price list, based on the asking prices listed on the diamonds offered on the site. In 2008, IDEX added a full B2B transaction system for diamond wholesalers and industry buyers, called ‘Guaranteed Diamond Transactions’ (GDT). Another company, Polished Prices, entered the market, offering price lists and indexes based on a basket of popular diamonds and size ranges. 

The major conventional price lists, which continue today as the de facto standard in diamond pricing, are based on asking prices, which may prevent them from achieving their most important purpose: to provide diamond businesses and consumers with an objective reflection of actual diamond prices. For example, the disclaimer at the bottom of the Rapaport Diamond Price List reads: “Prices in this report reflect our opinion of HIGH CASH NEW YORK ASKING PRICES. These prices may be substantially higher than actual transaction prices. No guarantees are made and no liabilities are assumed as to the accuracy or validity of information in this report.” IDEX’s price list states: “Prices of actual transactions may vary significantly from this report. Prices are affected by various factors including but not limited to diamond quality, certification & geography. IDEX does not guarantee the accuracy nor the validity of this information.”

As those of us in the industry know very well, actual transaction prices can deviate dramatically from the list prices, and are usually traded at a steep discount to the list price. By contrast, the consumer, who might find himself in possession of such a price list, may or may not have any idea how to interpret it, and will most likely make a decision based on a lack of information, despite feeling that he has all the information he needs. Even some of the more sophisticated buyers, who understand the nature of the list prices, may not fully grasp that even some diamonds with the same 4C characteristics can be drastically different in appearance and value.

Most of the current diamond price lists do not include many characteristics beyond the 4Cs, characteristics that help establish a diamond’s value accurately. For example, the grading certificate that accompanies a diamond has an impact on its value, something that consumers likely have little or no knowledge of. I have argued at length about what I call a diamond’s irregularities. Different comments or irregularities found on a grading certificate, such as fluorescence, can dramatically impact the value of two stones with otherwise identical 4Cs. My research firm, Mercury Diamond, has compiled a list of over 400 irregularities, and has shown the extent to which each impacts the final price of a polished diamond. Our Mercury Crystal Clear™ is a comprehensive system that takes into account all of the factors that affect a diamond’s price. Unlike most of the other major price lists, our prices are based on actual transaction prices for diamonds, which change regularly and are updated in real-time.

In addition to providing a current, accurate, and transparent guideline for polished diamond prices, we have also used our polished pricing data to develop a rough diamond pricing system based on the underlying value of the resulting polished goods. We believe that this is an essential tool for anyone buying rough, with the belief that the value of rough should reflect the end consumer’s willingness to pay for the resulting polished.

Our industry finds itself at a point of crisis, even if many are unwilling to talk openly about it. Polished diamond prices have been in decline for 31 consecutive months, while at the same time we have witnessed steadily increasing rough prices, which no longer bear any resemblance to the underlying value of the finished product. We must move away from the old habits, even if they are firmly entrenched in our day-to-day mindset.

Price lists have been in use in our industry for nearly 40 years, yet we still lack the transparency that they were designed to create. In my opinion, the current crisis is driven by the fact that the rough market is not using the value or demand for polished diamonds to price its input resources or establish appropriate levels of supply. I have argued many times that expanding on the growing business of diamonds as an alternative investment class is one of the ways that the industry can increase demand. Transparent price lists based on full and complete knowledge of a diamond’s price is the basis for such a market.

   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.

 

July 2017 Market report
Rough and Polished Disconnect: What to Do About It

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