A De Beers wholesale price list and other market observations

Edahn Golan

1. There is generally a good mood in the entire diamond pipeline, something I haven’t seen in quite some time. From top to bottom, diamond miners are reporting an increase in income and production, as well as a rise in rough diamond prices. De Beers, Alrosa, Rio Tinto Diamonds, Petra and Gem Diamonds are all doing very well – and they represent the majority of the supply of rough diamonds to the market.  Polished diamond wholesalers are quietly saying that they have had a decent year so far, which means good turnover. Polished diamond prices have inched-up this year, starting in late March after the Hong Kong show. The IDEX Online index shows a four-month run that we have not seen since the first half of 2011, just before the August 2011 price drop. During the current month, prices have softened a bit, more an indication of traditionally slower summer activity (many diamond traders are on vacation in August), than an actual weakness in demand.

2. The US jewelry retail sector is also doing well, which is why many loose diamond firms are refocusing their attention on that market. There are a few reasons for this increased attention. India is growing slowly and steadily, and in China the growth in demand for diamond jewelry is continuing, however there is a certain shift in the source of demand for luxury goods that is causing a slowdown.

It was always obvious that the middle-class in China is growing, and spending is growing with it. What was less discussed was the role bribery plays in luxury demand. Recently the Chinese government decided to crackdown on “gift-giving” to government bureaucrats, police officers, customs workers, municipal officials and other folk that have the ability to make people’s lives smoother. In a heavily bureaucratic country such as China, the administrative wheels tend to turn slowly and inefficiently, and therefore “greasing” them is common. Luxury items such as imported alcohol, cigars, diamond jewelry and other fancy items are apparently popular lubricants in this regard. The new laws and recent crackdowns have hurt luxury sales in the country.

3. During my travels this summer, I saw an ad running in an in-flight magazine that tells part of the current diamond story in the US today. A full-page ad states, “Calling this a diamond would be an insult.” The ad discusses at length the company’s offering of lab-made diamonds. What threw me off was that they are apparently distancing their product from diamonds (while all along endlessly saying “diamond”). This is the opposite approach to that of other sellers of lab-made diamonds to date.

4. A recent examination of diamond buying and selling by American independent jewelers portrayed a surprising picture of the role recycled diamonds play in their business. Over the past year, I’ve been working with retail metrics firm NPD on a polished diamond project. Based on preliminary data, retailers buy diamonds from consumers for much less than from wholesalers. For example, they paid 41 percent less for half-carat rounds.

Even if these goods are sold back to consumers at a discount, the margins are still fantastic. From our sample data we found that these goods accounted for 18 percent of diamond sales turnover by these retailers. Chain store retailers should start re-considering their current approach of not buying diamonds from the public.

This brings me to another ad I ran into, which suggests you “sell your unwanted diamonds for cash.” This far more understated ad is by a Dayton, Ohio, jeweler, “a premium buyer of high quality diamond jewelry,” according to the ad. They offer “honest appraisals, premier service, and trusted industry expertise.” This firm is not an occasional buyer of recycled goods, but part of a growing number of firms, which turned that into a business model.

5. Considering the above figures, large chain retailers are maybe contemplating entering the recycled goods arena, yet De Beers is already moving in on its own, announcing an initiative called The International Institute of Diamond Valuation (IIDV). If recycled diamonds is an interesting component of diamond retail sales in the US, maybe it is affecting De Beers’ own business. Who says monolithic institutions are hidebound and slow to react? This is to be seen as an interesting move by De Beers CEO Philippe Mellier.

Currently described as a six-month research project looking into consumer attitudes towards selling diamonds, the project is tackling one issue that hurts investment in 1-3 carat diamonds – investors’ ability to sell the goods for a profit. The erroneous popular view is that of buying at retail prices and selling to retailers. Retail is not where investments are made. With a double-digit discount to wholesale prices, retailers are not those who should be blamed for this either.

In that regard, one thing that the De Beers project aims to do is offer “the best possible …prices” for recycled diamonds. This may translate to a decrease in the 40 percent discount to wholesale prices retailers are attaining today.

6. The most interesting aspect in this exercise is that De Beers will actually have a publicly known wholesale price list! Imagine the impact this will have on the market and on the whole price list arena. It would possibly be short-lived if De Beers does not want to be perceived as setting market prices, but in the meantime, what if the popular price lists lower the price of an item and then De Beers increases their wholesale price on the same item. Whom would the market follow? Many key players will closely follow De Beers’ list is my guess.

Source Idexonline