The cost of gemstones

[Edward Bristol]

Gemstone pricing is a horror:

A kilo of ruby or sapphire can cost anything between ten dollar and one billion dollars. There are reddish brown cabochon rubies for three bucks and finest Burmese for the price of a Mercedes.

How do such price variations happen?

Theory: Marketing pros differentiate between "market-pricing" and "cost-pricing".

A “market-price” is given to a product by a sale at $X.

"Cost-pricing" on the other hand, is based on production cost plus a reasonable profit. Cost-pricing is the way most industrial goods are calculated.

Gemstones are obviously "market priced", like paintings or a rare stamp. For such items the real production costs are irrelevant.

Reality: Gemstones do have significant production costs.

We have tried to shed some light on the cost of mining and selling gems online from Sri Lanka. To do so we assumed one fictions stand-alone mining and marketing operation.

Here is a summery:

• We need $109.000 per annum to run a gem mine and offer the finds online.

• The actual mining operation in the jungle accounted for only 36% of our expenses, processing the gems took 19% and the lion share of 45% went into sales & marketing.

• From a different angle 45% of our expenses were related to local staff, 39% went into locally purchased material or services; and only 16% were used for services abroad.

Conclusion:

• Government policy must do all to keep Marketing & Sales inside the mining country. Many gem exporting countries have utterly failed here, loosing the main value creation to Bangkok.

• One mine alone can not afford sales & marketing. Only a network of mines can do so.

 

[Richard Sherwood]

Interesting. Keep going...

Are you currenty operating a Sri Lankan mine?

 

[VRBeauty]

Edward:

Your post is fascinating. I hope it sparks a robust discussion, because I'd love to explore the hows and whys of gemstone pricing and the international gemstone picture further.

Are there any examples of countries who have done what you are suggesting -- control all operations of their gemstone sales, including marketing? I thought Tanzania had imposed some strict controls on the processing and sale of tanzanites, but I'm not sure of the accuracy of these reports.

I've been pondering this line of questions because I recently bought some low-end cut stones from Thai sellers via ebay. I'm assuming these sellers are also Thai cutters, which might explain how they get access to the rough to begin with. I'm also assuming that much of what they're selling is "dross" -- stones cut from rough that's too small or poor quality to cut into premium stones for the non-ebay market. But I still have a lot of questions about how this end of the market works.

As a tangential question, it sounds as if your mining operation is contributing quite a bit to the local economy, and I assume there are other operations in the vicinity doing the same thing. Do these influxes of money have a positive effect on the local economy?

I hope I haven't strayed too far from your original post.

I'm off now, as my real life is calling me! But I do hope this will become an informative discussion!

ETA no matter what deBeers would have us believe, we are talking about non-essential, luxury goods... which I'm sure contributes to price variability somehow....

 

[zeolite]

Edward, I think this is an interesting topic. I want to discuss another aspect of this, and don’t want to be rude or hijack your train of thought. So here are my ideas in a separate thread:

https://www.pricescope.com/community/threads/cost-pricing-rough-and-cut-gems.122389/

 

[Edward Bristol]

I am glad this topic is of interest. I wasn’t sure because supply chain is not exactly a funny topic.

Yes, of course, local mining is often the only significant business in those rural areas of Sri Lanka. However, the authorities have managed to choke off prosperity to the local people.

I’d like to give an example: To get a license to legally export gems from Sri Lanka one needs first to cut through much red tape. Mark, compared to the red tape we may bemoan in the west this red bared wire. (Many miners do not even have an ID)

Further down the road, once you are actually ready to ship to a costumer, you will spend at least one day in the Gem Authority where your export is examined, registered, certified, valued, packed, and finally is sealed with 6 wax seals and six (no kidding) different signatures on twelve documents with double copies. If something went wrong in this paper orgy or somebody didn’t show up to work you will have to come back next day and next.

Finally, when all is done, the package goes into the Gem Authorities safe and stays there until DHL, and only DHL, comes once a week; and charges you double than Fedex or 50 times more than normal airmail. (There is rumor that the boss of the gem authority is a close friend of the boss of DHL but who knows?)

Sri Lanka shots itself straight out of valuable business. Nobody can live through such a process to ship single items with a refund policy.

Hence all shipments from Colombo are made in big parcels, preferably pre-shaped, to Bangkok or HongKong, where they are split up, cut and then marketed.

Bang, like that, 75% value creation has left the country. The miners are left with digging in the dirt. A few whole sale traders do OK but thats it.

Why did the government do this?

No bad intention. But actually they intended exactly the opposite. They wanted to control rough from leaving the country to be cut elsewhere. But, as governments tend to do, they got it wrong; and far too late.

 

[Barrett]

Very enlightning, edward..it''s a shame that the govt. has screwed things up so bad..happens time and time again..keep on truckin'' and hopefully things will get better.

 

[chrono]

It’s very sad that something done with good intentions ends up hurting the very people it is trying to help.

 

[Edward Bristol]

Yep, at the core of the problem lies the fact that the gem world has changed from a small multi-layer wholesale market to a much bigger but flatter retail market and that government policy is still designed for the last century.

I may add that Sri Lanka is relatively liberal and yes, one can do business there.

Circumstances in countries like Tajikistan (not to speak of Burma) do not allow their “common” people to do any legal gem business at all. People are forced into illegality, or they need to be big/connected enough to buy themselves legality.

 

[VRBeauty]

Edward -- Am I reading what you read correctly? Sri Lanka has made it so difficult to move minerals or gemstones out of the country, that 1) the miners are forced to sell to exporters, and 2) many of the exporters consolidate the minerals into large lots of rough and ship it that way, to avoid the paperwork and headache associated with each shipment. I'm guessing that rough consolidated this is not sorted and graded to fetch the maximum possible price? As a result, 3) cutting, which commands higher pay, is essentially exported with the rough, as is 4) any cut the country of origin might have had from the higher-priced finished gemstone.

So the government's policies are in effect shipping most of the value added portion of the gemstone business out of the country.

As a gemstone lover, I'm not interested in shooting myself in the foot. On the other hand, I don't like the idea of countries that are rich in raw materials shooting themselves in the foot and depriving their citizens of fair return for their natural resources and work. Are there any OPEC-like consortiums in the gem world?

 

[Edward Bristol]

Need to add:

It is not allowed to export rough legally. Even for a crystal one needs a special permission (read 2 extra days).

Trick 1: Preformed cut is allowed, so they ship out parcels with per-shaped rough. Still sales & marketing remains abroad.
Trick 2: Ship rough illegally.