Cost pricing: rough and cut gems

[zeolite]

Edward Bristol’s thread below, discusses the cost of mining and marketing gemstones.

https://www.pricescope.com/community/threads/the-cost-of-gemstones.122265/

In it he mentions cost pricing: "Cost-pricing on the other hand, is based on production cost plus a reasonable profit”. I‘d like to discuss cost pricing in relation to rough and wholesale cut gemstones. In particular, I’ll discuss East African rough: garnets, tanzanite, spinel, sapphire and tourmaline. Based on present prices and trends, the colored stone market is setting itself up for an explosion. Here’s why:

I’ve followed the wholesale colored stone market for 25 years. I would say that, correcting for inflation, the average wholesale cut colored stone sells for 10%-20% less now than it did in 1984. Some species more, some less, but that is an overall average. So yes, gemstones have gone up, but at a slightly lower rate than inflation. I would also say that corrected for inflation, rough prices are at least 4 times as high now as then, with most of that increase coming within the last 4 years.

So how can rough be so high, relative to cut? The answer is that the supply chain has considerably flattened. In 1984, a rough dealer then might buy from the peasant miner, sell it in Arusha, who sells it in Mombasa, who sells it in Nairobi, who sells it to an America rough dealer, who sells it to a cutter. Now a miner might sell it in Arusha, to a dealer who sells directly to an America cutter.

15 years ago, a Cutting Edge winner complained to me about a big America rough dealer I’ll call Rough X. His prices were so far above the market, that this decorated cutter quit dealing with him; they could not make a profit after paying his rough prices. The cut market would not support those excessive prices. I persisted for about 5 years more, buying from Rough X, but only by buying the one crystal in 500 that was well shaped for yield, to be able to pay his price and make any profit on the cut gem. 10 years ago, I also gave up on Rough X.

First let me define some equivalent prices. If a cut gem sells for $100/ct. then an equivalent rough price might be $25/ct. This assumes a 25% average yield from the rough crystal to a well cut gemstone. This totally ignores all other expenses, including the cost of cutting. You just push the magic button, and the rough crystal instantly becomes a well cut gem. Let ‘s call this a rough equivalent.

Buying rough is extremely risky in relation to buying cut gems. Judging the tone of dark rough (blue sapphire, Tsavorite, chrome tourmaline, red garnet) is difficult to predict. Since most crystals are stream tumbled and frosted, guessing the clarity is risky. And cutting away the gem material can change the final color, depending on what zones are removed. So there are significant and total losses when buying expensive gem rough.

On the other hand there are no surprises in judging cut gems. All of the clarity, color, saturation, and light or dark tone are there in front of your eyes.

After you add travel expenses and time to select the rough, costs of cutting the rough, total losses from failed rough, and marketing cost of the cut gem, you try to determine a price equivalent – that is the rough price you can afford to pay, cut and sell the gem, and make some reasonable profit. In our example above, the price equivalent might be $10 to $15 per rough carat.

So after a 10 year break, I again visited Rough X booth, to check on his prices today. He told me his prices, and I tried to be polite and nodded O.K. I walked away from his booth to another dealer, 100 feet away. This dealer sold the same gem, but his were cut. Now lean your head back against the head rest and cinch down your seat belt. Rough X was asking 3 times as much per carat for rough, as the cut dealer was asking per carat, for his cut gem! The rough dealer was asking a rough equivalent 12 times as high and a price equivalent 25 times as high! 2500% percent! And not one rough buyer came by at Rough X as I was shopping there. I don’t have the slightest concept of who is buying his rough, but he is still in business.

So you say fine, don’t buy rough in America, buy it overseas. I was in North Vietnam, near the border with Laos in the 1990’s, trying to buy the ruby rough that was coming out of Quy Chau. I was traveling with fluent Vietnamese speakers (born in Vietnam, live in California). It was like the wild west: no Vietnamese were gemologists, were gem experts, were cutters or were in the jewelry trade. We were packing over $100,000 dollars in cash, and had armed undercover police protecting us. But everyone was selling to the next ignorant person. The prices for rough in Thanh Hoa were higher than finished ruby rings in New York Tiffany’s. And the sellers weren’t kidding on the prices. If an America gem expert wouldn’t pay the price, an uneducated Vietnamese would! Musical chairs until the last buyer was screwed! I had a great time, loved the Vietnamese, but as a rough gem buying trip, it was a total loss. Immense expense and time to travel there, you want to buy, and at the demanded prices, total insanity!

You may find rough cheaper in Arusha, but after factoring in your travel expenses, your time, I’m not convinced it is any cheaper.

Many years ago, perhaps 90% of my purchases were rough. About 3 years ago, I bought perhaps 30 cut tourmalines from one dealer for re-cutting. The rough equivalent prices of these cut gems were 1/3 the price of rough!

I look at the prices charged by some good American cutters that are popular on PriceScope, and I just shake my head. I can’t buy the rough for the price they are selling well cut gems, and I don’t think they can either, if they bought that rough today.

There is no rough crystal in Rough X inventory that I can’t buy at 1/3 of his price as a cut finished gem! The present price of rough is insane and there’s going to be a significant correction, just as there has been recently in the world’s financial markets.

So what’s going to happen in colored stone prices in the near and far future? Here are three guesses.

1 Cut gem prices will double, triple or quadruple. To some extent I think this is what will happen, but perhaps 2 to 8 years from now.

2 Rough buyers will finally wake up, realize that gems can’t be sold at that price point and refuse to buy at all. Miners finally realize that they pushed prices too high and must correct. Total halt in the rough market. I don’t think this is likely; might happen partially.

3 Many cutters, wholesalers and jewelers and others in the trade, go bankrupt, or leave for another field of work that offers some profit potential. Cutters buy poor cut stones to recut and sell. Supply and quality drops drastically, until all of the stones in present inventory, bought in cheaper times, are sold. Then, depending on demand and the state of the world economy, gem prices double or triple. I think this is the most likely outcome.

 

[Barrett]

BAM..excellent disertation Zeolite...was a pleasure to read...I need to copy and save on my computer..welldone, sir
You are exactly right about buying already cut gems as opposed to buying rough..you hit the nail on the head

 

[Arcadian]

You know, this was a fantastic read for someone not in the trade. Thanks for this. Mr zeolite.

This thread brings some of Eds thread down to a level I can understand. I''m going to go back and re read Edwards thread but cause it went well over my head the first time.

-A

 

[chrono]

I don''t fully understand the pricing of rough today either; some are ridiculously expensive for the quality while others appear very reasonable. The same with cut stones. Perhaps part of it might be due to the current economic conditions where someone need to sell badly whereas others want to hold on to their profits.

 

[Texas Leaguer]

I agree, a very insightful article. It reminded me of the time on my first trip to East Africa in the 1980s when I bought a parcel of beautiful rhodolite rough from a prominent local dealer in Nairobi. Gorgeous color, nice chunky sizes, and excellent shapes for weight retention, river tumbled, lightly frosted skins. It was clearly a very select parcel and I was thrilled to get it.

I sent it out to the cutting factory I was using in SE Asia and several weeks later I received a big lot of beautifully faceted pomegranet red gems. And every single one of them was silky and sleepy!!!!

This dealer had in fact put together a highly select parcel. Just waiting for a sucker like me! But what goes around comes around. Over the next ten years I went back to Nairobi many times to buy rough garnets, sapphires, tanzanites, tsavorites and rubies. And I never spent another penny with that dealer. But I made a point to bump into him each time I was in town, just so that he would know what he was missing

The story doesn''t tie in very well with the thread except in underscoring the challenges involved in buying rough. It''s hard enough to find good rough and to make the calculations in terms of yeilds, costs and potential for profit and to negotiate prices that give you a fighting chance. You know that you will have some downside surprises along the way- that''s the nature of rough. But you also have to be concerned about clever games that even supposedly legitimate dealers can play.

 

[PinkTower]

Mr. Z.,

Thank you for taking the time to write this and explain the points you made. You wrote such an interesting and thought provoking post.

 

[Edward Bristol]

Date: 8/8/2009 10:38:10 PM
Author:zeolite

I look at the prices charged by some good American cutters that are popular on PriceScope, and I just shake my head. I can’t buy the rough for the price they are selling well cut gems, and I don’t think they can either, if they bought that rough today.

Yep, but consider that some actually do not make a living, or run a fully taxed company, but do this as a paying hobby. That is the only way I can explain it myself.

 

[PrecisionGem]

I think you are spot on Edward. Some of the guys cutting stones here in the US and selling them are actually cutting for less than minimum wage. If they factored in all their costs such as laps, equipment purchases etc. they are loosing money. Good rough is expensive, one way to get around this is to buy cheaper rough, and I see this a lot with the "hobby cutters". They do an excellent job of cutting, but the stones are not the best quality or color. This kind of gives "precision cut" stones a bad name. I hear things such as "native cutters know how to cut for color better", when the truth is that many American cutters are just cutting inferior goods to start with.

Buying rough stones off ebay, will never yield top quality results. The stones being sold rough on ebay for the most part a junk, those that are not junk, are still not close to top grade material.

What puzzles me, is how some of the Thai dealers can sell cut stones so cheap. All I can figure is the pictures can not represent the finished stone accurately, or they are outright frauds. When I see cut chrome tourmaline selling cut per ct for half of what rough per ct is being sold for right in Tanzania. Something is out of whack.

 

[T L]

Date: 8/11/2009 9:25:58 AM
Author: PrecisionGem
I think you are spot on Edward. Some of the guys cutting stones here in the US and selling them are actually cutting for less than minimum wage. If they factored in all their costs such as laps, equipment purchases etc. they are loosing money. Good rough is expensive, one way to get around this is to buy cheaper rough, and I see this a lot with the 'hobby cutters'. They do an excellent job of cutting, but the stones are not the best quality or color. This kind of gives 'precision cut' stones a bad name. I hear things such as 'native cutters know how to cut for color better', when the truth is that many American cutters are just cutting inferior goods to start with.

Buying rough stones off ebay, will never yield top quality results. The stones being sold rough on ebay for the most part a junk, those that are not junk, are still not close to top grade material.

What puzzles me, is how some of the Thai dealers can sell cut stones so cheap. All I can figure is the pictures can not represent the finished stone accurately, or they are outright frauds. When I see cut chrome tourmaline selling cut per ct for half of what rough per ct is being sold for right in Tanzania. Something is out of whack.

While I do agree that most Thai dealers are not accurately representing the goods and that's why they can sell so cheap, there are some Thai dealers with fantastic bargains on authentic stones that are properly repreented. I know a very popular vendor who makes a living reselling ebay merchandise from Thai sellers at prices that people think are too good to be true, Since he gets that material so cheap to begin with, and I know what he pays for the original stones and what he gets for them. Am I saying he hasn't been fooled, maybe, probably, but for the most part, I think most of his merchandise is legit. I also know some serious gem collectors that are as smart as the best GG's out there, and I know who they buy from on ebay.

I think the Thai's can offer such good prices because they have the cash to buy whole parcels, and then provide the savings on to the customer. Remember my violet tourmaline that is GIT certified copper bearing purple tourmaline. Very rare color and rare stone, and large. You yourself said it would heat to blue. I won that on auction from a Thai dealer for around $300 after 33 bids or so. The stone is probably worth far more. There are deals to be had on ebay, but you really need to know what you're doing. Most of the time it's shark infested waters.

I have to say that the recent stone I got from you Gene, the Loliondo, is at a price comprable to what I would pay on ebay for such a stone, if I could find one as large and nice on ebay like that. There's currently a 7 carat trillion on ebay with a similar color (although heavily photoshopped) from a Thai seller. It looks like a Loliondo. He says Namibian, but they all do. I think it's Tanzanian. It's more included and contains black inclusions, and the dealer wants as much as you wanted for the one I just bought. I think sometimes you can get a better deal from the precision cutters than on ebay in cases like that. That's why I jumped on the stone when you put it up for sale.

As for precision cutters that cut and sell inferior goods, I don't care if they're cheap. Any amount of $$ is too much $$ to pay for a stone that is overly extinct, and has very poor color.

 

[Edward Bristol]

Yes, all very correct.

I’d like to add another business model: "The Surfer"

The surfer uses waves of incredibly cheap new finds to run his business. These waves are rolling through Bangkok on a monthly basis.

It is always the same pattern:

1. A “new find” floods the market: wonderful quality, great colors, thousands of carats at a fraction of former prices.

2. Nobody ask too many Qs and the gems get sucked into the market and sold at normal rates. It’s surfers paradise.

3. Somebody cries “foul” (often getting terribly grilled for it) and a painful scientific discussion starts. The surfer is still happily working the wave.

4. Some gem testing authority officially announces what everybody secretly knew right from the start: Chantaburi has found a new trick. The new find is in fact a new treatment.

5. The wave crashes.

6. The surfer dives and waits for the next wave.

Today, with everybody sensitive about ruby and sapphire, this old trick works especially well on semi-precious.