Everyone agrees: The diamond market, and the way diamonds are sold, is a mess. The system has broken down. While producers continue to post strong profits, manufacturers’ margins have been whittled down to nothing, and the middle market’s woes have brought the industry to a crisis point.
On paper, the way miners sell rough has not changed for decades. Most producers still sell to a set list of clients, at a set number of sales, at prices that the producers determine. De Beers originated the “sight” system and most (but not all) of its competitors still follow its template. It is, in theory, a sensible model, offering consistent sales and supply to both producers and manufacturers.
What’s changed is pricing. In the cartel era, prices stayed mostly static, and De Beers announced increases every year or so. (Decreases were kept quieter.) But now rough pricing has become much more dynamic. In 2010, De Beers’ prices rose 27 percent. So far this year, it has said prices have dropped 7 percent, though the final tally will likely be far higher.
The price changes are seemingly driven by several factors, including the growing influence of tenders and increased pressure on miners from corporate parents and diamond-producing countries. Sometimes these factors converge. Botswana is now selling around 12 percent of its production through a new company, Okavango, via spot auctions and tenders. When those sales achieve high prices, how can De Beers explain to its longtime partner why its sight prices are lower?
On top of this, information now is more instantaneous, so producers have better and more accurate data about what’s happening with polished. So the question for miners becomes: What is an acceptable return for manufacturers?
“The price changes are seemingly driven by several factors, including the growing influence of tenders and increased pressure on miners from corporate parents and diamond-producing countries.”
For the last year, the producers’ answer has seemingly averaged in the single digits. That isn’t much, especially when you consider that manufacturers also incur costs, overhead, and interest on the financing required to pay upfront. While all cutters have different models, there is almost universal agreement that transforming diamonds is no longer profitable. And companies that don’t make money don’t stay in business. They also don’t receive bank financing. The current situation cannot continue.[one_third_last]
“What is an acceptable return for manufacturers?”