The math for setting prices in the market is fairly straightforward, and I have presented it over time more than once. In a way, you could argue that it is a technical matter. However, the process is is more than reverse engineering the price consumers are willing to pay for polished diamonds to calculate what the cost of rough diamonds should be. It’s also about adding value.
A simple example of adding value is the transformation of rough diamonds into polished diamonds – manufacturing. There are several others, and they are important because of the role they play in bringing a worthwhile product to consumers. They include branding, stone matching, financing memo goods, financing jewelry manufacturing, aiding in marketing efforts, and even specialized knowledge that either enhances the diamond or improves its salability. Mercury Diamond, for example, continues to invest in building tools that supports identifying and valuating diamonds as an asset, and by doing so bring in new diamond buyers.
Adding value is so important that it is worthwhile to ask ourselves if there is any need at all for a stage in the diamond pipeline that does not add value. What kind of stage would that be? Simply buying polished diamonds, and then selling them on, often to other players in the industry, does not add value.
If you have ever heard of the spaghetti chart, you’ll know what I’m talking about. The chart depicts the many hands a diamond may go through before a consumer buys it– the final and real destination of nearly all diamond trading. A few years ago the system was so inefficient that a polished diamond could change hands so many times that it could take as much as a year and a half before being sold at a store.
Please don’t get me wrong - I’m all in favor of people making money. If a member of the diamond industry can purchase and sell a diamond and make a 5% profit, that is great. The problem with not adding value and needlessly increasing the price of a diamond is that it’s very inefficient economically and makes it practically impossible to continually make or average a 5% profit on transactions. If the cost of rough is set by how much consumers are willing to pay for polished diamonds, then there is a cap on how much could be added to “fresh” (recently manufactured) polished diamonds
So if the math is price of polished, less the cost of manufacturing plus desired profit equals cost of rough, then repeat trading is excess addition to the price of polished. In an efficient economy, this “excess” is not needed, and in real life, where the drive for efficiencies is constant pressure set on manufacturers, than “excess” is always shaved off.
This brings up the question of the role that the traditional diamond centers play. It used to be that diamond trading centers focused on manufacturing, around which an entire support system developed. This includes knowledge in how to buy rough, manufacturing technologies, financing, and more. That is the midstream. Now that almost all manufacturing had moved away from these trading centers, what is left?
Knowledge, technology and financing are very important parts of the midstream, but they are support systems. They are there to serve manufacturing. Once manufacturing moved away, with the exception of a few large companies, most of the companies in those centers began to focus on trading polished diamonds.
Large manufacturers reach and serve jewelry makers and retailers, but pure trading activity is an essential service in parallel with manufacturers, to fill certain gaps in supply. They even improve efficiency, to a degree. But how many are needed for this function? In each of the traditional centers there are thousands of traders, and the general sentiment among many is that there are too many trading firms. Most of them buy based on a vague benchmark pricelist and try to sell to others based on this list.
If the need for so many pure polished diamond trading companies is in question, and they are by far the largest population of these diamond centers, maybe the diamond centers themselves have passed their maturity stage and outlived their utility in their current form.
I don’t mean to suggest that tens of thousands of people in the diamond industry should go home and lose their jobs. What is needed is an understanding that if manufacturing has migrated to other centers, then a change in the way of operating is needed because insisting on doing the same thing in a changing market means that you are losing out.
Instead of doing business the same old way while losing market share to other centers, these companies should make change in order to gain a new edge. One such change should be a greater reliance on higher quality information. That is why the industry should not be afraid of publishing transaction price lists. Anyone that adds value over the average transaction price can and should ask for the appropriate price.
By increasing transparency, a transaction-based price list can also play a role in improving banks’ confidence in financing the diamond sector, a central issue in the midstream of the diamond pipeline.
For my business, I developed a set of tools that help me make better decisions. My company Mercury Diamond tracks real transaction prices of white diamonds. We created a monthly price list based on those transaction prices (the last one is posted below). We also track fancy color transaction prices ,and created a price list for them as well. Using the above we can find the right cost of rough diamonds that will leave us a real profit in hand .
In addition, we track changes in demands and changes in availability of goods, which allows us to understand which areas of the trade are saturated, where goods will be needed, and at what prices. We also created a tool that allows final buyers to find what kinds of diamonds they can buy for any given budget, make their choice based on their preferences, whether they be related to size, shape, color, clarity, or any combination thereof, and help them stay within their budget. These are proactive tools that help us make much better decisions, maintain profitability, and prepare for real changes in the market.
If the traditional diamond centers want to rise again and flourish, they need to adapt to changes, adopt new tools, and move forward. Otherwise, they are at the risk of being left far behind.
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.