Will Rationality Rule in the Diamond Business?

The diamond market predicament, which began late last year and developed into a full-blown crisis in the past few months, is continuing to evolve in a somewhat predictable way. There are positive aspects to this, such as we saw in the De Beers Sight last week. The diamond miner has reduced production and prices in response to the drop in demand. Sightholders have also decreased their requests for goods. Will this rational behavior prevail? 

 Less than $500 million worth of goods were sold, most of it was in regular supply and the rest additional requested goods (ex-plan) that are currently in demand, which allow for a certain level of profitability. 

Prices were on average 2-3% lower, and assortments of many of the goods improved. For some of the goods, the combination of the two meant an even better price per carat. For some of the larger goods, weighing 2-carats and higher, prices were significantly reduced. The Fine and Commercial High boxes in the 2.5- to 10-carat size range have been well received by Sightholders. Prices for those goods were down by 6-7%.

For some of the boxes, assortments were said to be better than those of the Russian supply. The improved assortments made some boxes profitable, according to a few of the Sightholders. 

_{Polished Diamond}

Decreasing Prices 

Price reduction plays an important role in the current economy of the diamond industry. As long as the prices of rough increased and the prices of polished decreased, manufacturers sold fewer polished for less money. This generated less income to buy rough diamonds. The decrease in rough prices helps turn this around, making replenishments of rough easier from a financial perspective.

In some cases, the assortments were considered not good enough and the prices of some boxes were still high. Such was the case with the assortments of most of the Preparers boxes (pique goods) and 3-6 grainer boxes. The diamond pipeline is full of 0.20-0.50-carat polished goods, which are mainly made from 3-6 grainers. Therefore, there was an expectation for improved assortments and prices for those goods.

Decreasing Supply

In this context, however, it must be reiterated that simply reducing prices is not the ideal solution. A reduction in supply may better serve the needs of manufacturers, as it will maintain the value of their inventory—a key asset. The relatively small Sight serves that end.

The decrease in supply was initiated by the mid-stream that ordered fewer and only necessary goods. This is a rational move on the part of buyers. They focused on profitability. The ex-plan goods were also for items that the market wants and needs—goods that result in polished diamonds in demand and within profit margins. Because of this, refusals were minimal. 

Clearly, miners and manufacturers responded to market conditions. Reducing mining output means that the diamonds left for now in the ground will be extracted later and sold when rough prices are revived. This is a win-win situation for the miner. De Beers made an additional effort to adjust to current market conditions by improving assortments and lowering prices. Manufacturers, on their part, bought what they needed and at prices that allow for a profit. A modest price reduction and a decrease in supply is the right combination for the market. This may be a sign that a new era has been ushered in, where emotional buying ends and economically-motivated logical decisions rule.

Attendance at Tenders

Another aspect of the evolution of the current crisis is seen at tenders. At tenders, buyers can pick very specific items that they need and offer a price deemed to fit current market economic dynamics. Tenders held by junior miners were crowded. Attendance at tenders of goods sourced from major diamond miners was scarce. The few that did attend those tenders spent long hours viewing the goods, according to participants. 

Overall, trade in rough diamonds is on the softer side, sign that a recuperation is not yet underway. The Antwerp rough market in particular seems to suffer. In India, manufacturers decided to take a prolonged vacation. The hard-working Indians on vacation? This is another measure taken to reduce costs and improve cash flow. 

As manufacturers headed home from the Sight with a certain level of relief, they said they continue to be worried about the next rough diamonds sales week that will take place in June. They speculate that the size of the next round of supplies will be large, and that is cause for concern.

_{Rough Diamonds}

Depressed Downstream

The polished diamond markets are weak in the last few weeks. Prices continued to decline nearly across the board, even though many manufacturers and diamond wholesalers are firm on their prices. They are doing this even though it impacts their cash flow.

Sentiments strengthened slightly in the past week, when shortages in certain sizes and qualities helped stabilize prices in some areas. There seems to be some general improvement in demand and prices for small Rounds up to a quarter carat, capped at polished diamonds of 0.29-carats. 

At the same time, other sizes and qualities are still blocking the pipeline, and prices of 0.30-carats and larger rounds are still soft. The major force weighing down on the polished trade, and by extension everything that is happening in the rough market, is the weak demand from consumers. Without this demand, there is nothing to pull up the price of polished diamonds. 

There are reports that jewelry sales in the U.S. are growing at a slow pace. Consumers are actually buying more jewelry, but interest in diamond jewelry seems to slow down. The $78 billion in jewelry sales leans more to gold and less to diamonds. The decrease in retail sales combined with jewelry containing fewer diamonds results in a double decline in diamond sales.

_{Dubai International Jewllery Week}

The Road Ahead

The struggle to bridge the very low pace of polished diamond sales with relatively low prices, and the high prices of rough, is taking a toll on some. More and more traders are concerned about the direction of the market. They question how drastic a change is needed to improve the entire pipeline. 

This is not desperation! This is the growing bed of new ideas and innovation. Many realize that the diamond industry is fragmented, and that consolidation of some kind is needed. Miners took the important step of reducing production, price and supply. Because of that, manufacturers can protect polished prices as the cash flow is there and does not force them into distressed sales. 

This is a good, yet not ideal, solution. There is an urgent need for a consolidated marketing and advertising effort. If the midstream had better margins, and it should have better margins, it could contribute to advertising and not rely on a fragmented retail market or the goodwill of miners. That would create an important change. Since the generic marketing effort ended, a new generation has become a consumer with little appetite for diamond jewelry. That is the price of the lack of a concentrated marketing effort to promote diamonds. The tide needs to change, and the loss of market share to other luxury items reversed.

This is needed not for confronting the proliferation of lab-made goods, which have a niche role. What is needed is a campaign focused on ensuring that the current and next generations of young people and couples will continue to have an interest in diamond jewelry and buy diamonds. 

This concentrated marketing effort to revive the appeal of diamonds should have another purpose - promoting diamonds as wealth preservation asset. Such an effort will strengthen interest in diamonds not just as an expense on an adornment, but also as a potential use of financial ability in an educated way that could turn an expense into an asset for wealth preservation purposes. 

The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information on this website without consulting a professional qualified advisor.