IDEX Online is a pioneer trading platform designed to change the way diamond transactions are made putting them on a technologically new footing completely on a par with modern communication environment. This diamond exchange also offers continuously updated pricing benchmarks for its customers, thus balancing the market. Besides, it features a namesake online news agency, IDEX Online, one of the most prominent sources of news and comments on events in the diamond industry.
Its long time Editor in Chief Edahn Golan recently launched a new diamond research venture after serving in this quality for 12 years. His new venture conducts in-depth research and analysis of the diamond pipeline, specializing in polished diamond prices, diamonds as an investment asset class and the rough diamond market.
In this interview with Rough&Polished, he shared his views on some of the problems in the diamond market, including round-tripping in India, rough and polished pricing, Kimberley Process and others.
IDEX Online, being a diamond exchange, keeps its finger on the market pulse. Is it upbeat or downbeat this year compared to 2012?
So far this year, polished diamond prices are generally not showing great movement up or down. Of course, there are specific items that are doing very well, such as Princess-shape diamonds, which increased significantly after a long period of subdued prices.
The second and third quarters are expected to be somewhat better, especially if the JCK Las Vegas show goes well. One reason to be upbeat is the continued growth in retail jewelry sales in the U.S.
A senior GJEPC executive recently said that India’s export of polished diamonds went up 28% in February on the backdrop of now non-existent round-tripping. Do you think India, being a major buyer of rough, has finally succeeded to stop speculation in the diamond market?
Round-tripping and speculation should be viewed separately. Round-tripping has been generally curbed in the past year after the Indian government started to tax polished diamond imports in January 2012. The 2% import tax took the air out of most of this trade and today, if it exists, it’s at a much-reduced scale. You can see a calculation I did estimating this trade in a column published in early May (India’s Weakness is Everyone’s Weakness. But is it Weak?).
In this context, the GJEPC should be congratulated for recognizing the issue and the harm it caused the Indian trade. They successfully lobbied the Indian Ministry of Finance to add the tax, a measure that few business industries would have taken.
As for speculation, this term has now gained a negative connotation, but it should be viewed in two contexts. One is the more common one of rough diamond dealers buying rough with the intention of re-selling it at a higher price. The only reason they can do it is because they have first-hand access to suppliers – DTC and Alrosa – and the dealers’ clients are essentially paying for their lack of access. That is an inefficient component of the diamond trade. This inefficiency results at times in runaway rough diamond prices and kills the margins of those that need it most – the mid-size and smaller manufacturers.
Speculation, in this context is harmful. However, there is another kind of speculation that shouldn’t be ignored, that of manufacturers that purchase rough to protect prices. If manufacturers expects a rise in demand for polished diamonds, and want to avoid purchasing rough when demand is on the rise – and their prices higher by default – then they’ll buy rough in advance if they have the financing to do so. In this scenario, speculation may cause a small increase in the prices of rough, especially if the buyer is a large company, yet this is a logical event in a manufacturing environment. In this context, speculation is normal.
The Rapaport Price List, the oldest industry benchmark for polished pricing, is sometimes blamed for monopolizing pricing data and cited as the major hindrance to higher market prices for polished diamonds. Do you think the emergence of IDEX Online or Polished Prices as alternatives will help to balance diamond pricing? In what way?
Of course, whenever you have choice, competition increases and the market becomes more efficient. Now that traders have a number of alternatives, they have the opportunity to compare and decide which works better for them. I hope they choose IDEX because it updates weekly, is based on a very broad base, has a clear methodology to changes in the price report, and gives traders a better sense of where prices are heading.
The rough market, unlike polished, has long been monopolized operating a closed pattern of pricing, which to a wide extent remains true until now. Once you said that the concrete floor of rough diamond prices, hard and opaque, needs to be cracked. How can it be done given, among other things, that rough has an even vaguer system of classification compared to polished?
Indeed, it is tougher. Rough prices, once in the hands of traders, tend to fluctuate in a more erratic pattern than polished, but miners have what in the diamond industry is referred to as “a strong hand,” the ability to hold on to the prices and not compromise. As a result, miners very rarely reduce prices. The only way around that is a further fragmentation of the mining sector, which is not very likely. Alrosa is a rising force and the departure of BHP Billiton and the expected departure of Rio Tinto from the diamond-mining sector will only result in further consolidation.
Diamond manufacturers are sometimes called to resist rising rough prices. But if the latter are climbing up wouldn’t it be logic to start raising polished prices, which sometimes lag behind price growth rates displayed by other luxury goods?
Polished diamond prices are more influenced by demand than the cost of the raw material. If consumers are not buying more, or they are unwilling to pay more, retailers won’t buy or pay more either. This is a resistance that moves up the diamond pipeline but stops at the manufacturers, who are stuck between a rock and hard place, between consumers’ unwillingness to pay more and miners’ unwillingness to charge less for rough.
This of course is a failure of the diamond industry. Consider gold, for example. If the price of gold goes up, this trickles all the way down to – consumers. The only way to resist rising gold prices in jewelry is to design lighter jewelry with the same feeling of volume. We don’t see this with diamonds. If gold prices go up, sometimes the pressure is on diamond prices, of all things. This is something that must change. Marketing and design would be a great help in that.
In the absence of a new major diamond field discovery for many years, ALROSA and De Beers are now positioning themselves to find one in Angola. If their venture will be a success, what will be the repercussions on rough prices and the market in general?
There are known resources that are currently not being developed. Alrosa reported it has large reserves, and it’s probably a strategy not to develop them yet. It’s difficult to forecast the impact new mines will have on prices without knowing what kind of demand will exist at that time. Considering that De Beers and Alrosa have a ‘strong hand’ they’ll clearly do everything they can to resist lowering prices.
Rio Tinto said their Argyle output was 15% lower in the first quarter this year than one year ago. May it have any impact on polished goods made of Argyle pink rough?
After the underground mine in Argyle was opened, we can expect a rise in diamond production from that mine – in goods overall and of pink diamonds in particular.
There is an ongoing controversy over whether the Kimberley Process should re-define ‘conflict diamonds’ to include human rights violations or not. What is your view of this problem?
There are two basic demands in this context. One is to widen the definition of ‘conflict’, which currently considers only rebellious forces as a source of violence; the other is of extending the KP tracking mechanism to polished diamonds.
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KP defined conflict based on the issues of the day – civil wars in Western Africa. Today this is a little outdated and the issue the world is facing is of violence by other sources. In this context, police and army forces firing and killing people at or around diamond sites, as in Marange in Zimbabwe. The definition should be broadened to meet ethical issues, but it should not be in the form of targeting a single country.
As for tracking diamonds from mine to store, the issue really focuses on manufacturing and wholesaling, where rough is turned into polished and the goods are constantly being sorted and mixed – and where margins are very narrow. The right thing to do is create a system that works out the ethical issue, but without further eroding margins in that part of the diamond pipeline. Currently the demand is for manufacturers and wholesalers to adopt a tracking system that will increase their expenses. At the same time, many retailers are stating that they are not willing to pay more for polished diamonds. This is not right or fair, especially because the demand for the tracking system comes from retailers.
Retailers will have to decide – do they want to maintain their current price points, or do they want a tracking system. If they want the first, they shouldn’t demand that manufacturers be alone in paying for a new system, further eroding their margins. If retailers feel that a tracking system is what is needed, they should be willing to foot the bill – at least partially. Until this is worked out, a new system won’t be in place.
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“Currently the demand is for manufacturers and wholesalers to adopt a tracking system that will increase their expenses. At the same time, many retailers are stating that they are not willing to pay more for polished diamonds. This is not right or fair, especially because the demand for the tracking system comes from retailers”
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India and China are often mentioned as major diamond jewelry consumers of the future. However, the United States remains to be a tacit heavyweight in terms of diamond consumption. What is the picture as seen by IDEX Online?
We expect all three markets to continue growing, with China and India growing at a faster pace than the U.S.
What is your outlook for the polished market in 2013?
After 12 years with IDEX Online, I just started a new venture, Edahn Golan Diamond Research & Data. The idea is to conduct in-depth research and analysis of the diamond pipeline, specializing in polished diamond prices, diamonds as an investment asset class and the rough diamond market. This is done out of the understanding that the diamond industry will continue to grow and that financial institutions, which already have an interest in the industry, will have an even greater interest in it in the coming years.
Diamond jewelry demand is continuing to grow in the main markets, U.S., China, Japan and India. In the first quarter of 2013, jewelry sales jumped in the U.S., which is a very encouraging sign. If JCK Las Vegas goes well, and the general economic environment improves – at least in the minds of consumers – then 2013 will be better in terms of diamond jewelry sales and could be better than 2012 for loose polished diamonds as well. I’m optimistic.
Business also think long-term, at least five years ahead. The long-term prospect is very exciting, with the industry seeing ETFs, financial firms investing in diamonds, retail sales rising, and wholesale doing better too.
