Price-increases in the diamond market

[Paul-Antwerp]

Dear Pricescopers,

Since we have a history of regularly bringing you information about the general diamond-market, here is what I consider very important information. Let me first give a short post with our experience, and then speak about the general worldwide diamond-market in a more extensive second post.

Last week we were participating in an important tender of rough diamonds. Since some of the parcels were composed very much to our liking, we bid very seriously to have the highest bid and thus purchase these parcels. In fact, we bid about 12% above our calculated base-value. Our disappointment was huge when the results of the tender revealed that we were not even within 20% of the highest bid.

Other Antwerp trading houses have now raised prices on their polished goods to improve their ability to purchase rough. The end-result is that we had no choice but to increase our own price-level today, by an average of about 5%. All of our dealers in the US and Europe have been informed, and they will probably adjust their pricing to the public too.

The current price-increase is limited and we will be monitoring both the markets of rough and polished diamonds closely in the next weeks and months to see if this is sufficient. If prices of rough remain at the level reflected by this last tender there will most probably be further increases. If the market cools down however, this small adaptation might be sufficient.

The underlying causes of current price-developments will be covered in the next post.

 

[Paul-Antwerp]

This will be a long post, but very informational I hope.

Before I explain the underlying reasons, let me first state that the current market cannot be compared to those of twenty years ago. There is no company with extraordinary market-power controlling the market, and prices of rough diamonds reflect a relatively open market with many buyers trying to purchase from various independent sources.

If we look at major diamond producers (miners), this is the situation:

- BHP-Billiton sells most of its output through tenders. They have two different tender-systems but the result is that the selling-price of their rough is determined by the market of cutters and rough-dealers.
- Alrosa sells part of its production directly to a selection of clients and another part through tenders. Prices of the direct sales-system logically follow the resulting prices of the tenders.
- De Beers sells its output to a selected group of sightholders. Prices are regularly adapted to market-conditions but this also changes the De Beers-purchase-price, since they must pay more to their suppliers (part of their output). Currently, the DB-price is considered well below the market-price, which is reflected in the very high premiums on DB-boxes on the secondary market, with the secondary market showing the real market-price.
- Diamdel, as a subsidiary of De Beers, but technically a customer-sightholder, sells most of its goods through a tender-system, again showing a true market-price.
- Finally, Rio Tinto sells most of its output to a selected group of clients, but carefully follows market-conditions.

Most artisanal digging operations, outside of the control of the bigger mining houses, benefit from modern information-technology, and they know trading-prices on the Antwerp-market perfectly well.

If we look at pricing-levels on the rough diamond market, and compare that to the polished diamond market, there is clearly more volatility in rough diamonds. Competition in this market is fierce, and if a cutter cannot buy rough there is absolutely no possibility of him maintaining a business. As such, prices of rough change more heavily as they follow the way cutters and dealers of rough view the future of the market. Prices of polished goods change slower, with sellers valuing long-term-relationships more - and this over various distribution-levels (wholesalers-retailers).

For most buyers of rough diamonds, sales to wholesalers/importers are most important. And these sales are increasing heavily because of the ripple-effect and good economic conditions in young, growing markets like China and India. So, with current demand increasing at the wholesaler-level, the demand and appetite for rough diamonds is also very high.

On the demand-side, most producers reduced the output and activity of their mines at the end of 2008, and not all are back to full-production.

In this regard, it is important to realize that there has not been a major diamond-find in the past 15 years. As such, mines are ageing and it is logical to assume that output decreases with age. In fact, a number of mines and producing countries will dry up in the next 10 to 15 years. Because of this, certain miners are also reluctant to return to full-production-levels and some even announced this publicly.

At the end of the day, the rough-market sees increased demand and reduced supply, resulting in higher prices. Considering that cutters and rough-dealers do not foresee an increase in supply in the next years, this then increases their appetite for rough.

All this leads to very high prices of rough diamonds right now, and there is no immediate expectation of them lowering. There might be some overshooting, resulting in a small correction, but overall it is clear that prices of polished diamonds have to go up sooner or later to sustain current prices of rough diamonds. These higher polished diamond prices are already clearly visible on the Antwerp-market.

I hope that this background-info was somewhat clear, and I will gladly answer requests for further clarification.

Live long,

 

[Shadowplay]

Date: 6/9/2010 3:53:01 PM
Author: Paul-Antwerp
All this leads to very high prices of rough diamonds right now, and there is no immediate expectation of them lowering. There might be some overshooting, resulting in a small correction, but overall it is clear that prices of polished diamonds have to go up sooner or later to sustain current prices of rough diamonds. These higher polished diamond prices are already clearly visible on the Antwerp-market.

This is all assuming that public demand of polished stones will remain high or increase. If one was a pessimist and expected the markets to drop then this wouldn't result in the prices of polished rising... If they can't move polished stones it would result in the proverbial poop flowing back uphill to the dealers/cutters/etc and them taking a bath on the high priced roughs they bought.

I respect your opinion and think you're probably right (at least temporarily) but I don't see this being sustainable given the fragility of the world markets currently.

 

[dreamer_dachsie]

Thanks Paul, very informative!

We have been talking about prices rising and it seems to be really happening. My diamond, bought one month ago from BGD, would cost 4% more if I wanted to purchase today from the recently posted shipement at BGD. I am sure similar increases are coming or have arrived at other vendors. So consumers are already feeling it.

 

[Karl_K]

I am hearing the same thing as Paul and we are seeing the same thing with being outbid.
While I think long term the estimated price pressure from China and India are overblown it will be there and the supply restrictions will continue.
That is offset somewhat by:
The Russian government is holding on to a massive amount of rough so if they choose to sell it may help somewhat.
Right now easy credit in India is also driving prices up and that will end.
So it is not all gloom and doom but prices arent going to come down I think but may stabilize eventually for a while.

I also think there is going to be massive resistance to the price increases on the polished side and in some ranges they have already priced themselves out of the market in today''s economy.
It is going to get even harder for cutters and dealers to survive.
It is a hard time to be in the diamond business.

 

[diagem]

Date: 6/9/2010 4:50:05 PM
Author: Karl_K
I am hearing the same thing as Paul and we are seeing the same thing with being outbid.
While I think long term the estimated price pressure from China and India are overblown it will be there and the supply restrictions will continue.
That is offset somewhat by:
The Russian government is holding on to a massive amount of rough so if they choose to sell it may help somewhat.

Dont think its the case at this time and date. They offloaded loads in the last 3 quarters.

Right now easy credit in India is also driving prices up and that will end.

Logic says you are correct..., but reality shows its a good long term investment & the Indian financial institutions are flowing with this strategy!

So it is not all gloom and doom but prices arent going to come down I think but may stabilize eventually for a while.

I am afraid "stable" is a rare word in Rough Diamond Value Estimation these days & in the near future.

I also think there is going to be massive resistance to the price increases on the polished side and in some ranges they have already priced themselves out of the market in today''s economy.

If you are talking about the US market you might be correct..., but Emerging Markets are (at the moment) paying super high prices for the specific good they are looking for (which happen to be parallel to the US demand).

It is going to get even harder for cutters and dealers to survive.

Yep..., cutters must think "out of the Box" to survive at present! Buying original Rough lots and processing it AS-IS to profitable Polished is just unrealistic these days!

It is a hard time to be in the diamond business.

 

[WinkHPD]

Date: 6/9/2010 6:32:36 PM
Author: DiaGem

Date: 6/9/2010 4:50:05 PM
Author: Karl_K
I am hearing the same thing as Paul and we are seeing the same thing with being outbid.
While I think long term the estimated price pressure from China and India are overblown it will be there and the supply restrictions will continue.
That is offset somewhat by:
The Russian government is holding on to a massive amount of rough so if they choose to sell it may help somewhat.

Dont think its the case at this time and date. They offloaded loads in the last 3 quarters.

Right now easy credit in India is also driving prices up and that will end.

Logic says you are correct..., but reality shows its a good long term investment & the Indian financial institutions are flowing with this strategy!

So it is not all gloom and doom but prices arent going to come down I think but may stabilize eventually for a while.

I am afraid ''stable'' is a rare word in Rough Diamond Value Estimation these days & in the near future.

I also think there is going to be massive resistance to the price increases on the polished side and in some ranges they have already priced themselves out of the market in today''s economy.

If you are talking about the US market you might be correct..., but Emerging Markets are (at the moment) paying super high prices for the specific good they are looking for (which happen to be parallel to the US demand).

It is going to get even harder for cutters and dealers to survive.

Yep..., cutters must think ''out of the Box'' to survive at present! Buying original Rough lots and processing it AS-IS to profitable Polished is just unrealistic these days!

It is a hard time to be in the diamond business.

Hmmm,

It would appear that Yoram and I have been using only one brain between us I agree so much with what he is saying.

One of the things I heard most consistently in Vegas last week is how much China and Indea are taking the market away from us as the large consumers. It would appear that they will be buying more diamonds in all sizes than we are in the near and long term future, so I too see long term price increases over the next few years and some of them might not be at all as gentle as this one.

As for the public will not pay higher prices: I have heard that over and over again since I first got into the business in the early 70''s. Heck, I have even believed it many times, and always have I been wrong. Today''s young adult regularly spends about 5 times as much as his parents generation did, and they spent tons more than my generation did. I think that higher prices are coming, and that they will be here to stay and that even if we will not pay those prices for diamonds, that there are those who will.

I would love to be wrong, but I do not believe that I am.

Wink

 

[Paul-Antwerp]

Shadowplay, Karl and Yoram,

When you are saying or doubting the ability of the market (especially the American) to carry higher prices, please consider the following recent figures:

- 1st Quarter-sales of polished diamonds by Harry Winston up 25% compared to last year.
- 1st Quarter-sales of Tiffany''s up 22% compared to last year.

We also see demand increasing with our retailers, although this obviously is in comparison to a relatively weak 1st quarter in 2009. Then again, if the ripple-effect increased slightly lower retail-demand of about 10% in 2009 into almost no demand at the Antwerp-level, the same ripple-effect multiplies the current higher retail-demand to a huge demand at the Antwerp-level. The ripple-effect is a multiplier-phenomenon, that is very important to the demand for rough diamonds. If it needs further clarification, please ask.

With the economies of India and China growing strongly, they represent a strong foundation for global demand of polished diamonds. I know that John Pollard is awaiting the launch of PS 2.0 to publish some articles on the Chinese diamond-market, and I highly recommend reading those.

Then again, it is not all gloom and doom on the American market. Do consider that the number of marriages are projected to rise a whopping 20% in the next six years.

The only short-term negative effect on the demand-side could come if we do end up in a double-dip-recession.

Live long,

 

[Paul-Antwerp]

Karl and Yoram,

Your comments on Russia and its government are somewhat incorrect. Let me clarify.

During the financial crisis, Alrosa was the only diamond-miner who maintained production. For about 6 to 9 months, they sold almost the entire production to Gokhran, the Russian State-Depository.

At the beginning of this year, when prices of rough started to increase, Gokhran was asked whether they were going to sell this stock, and they officially announced that they will hang on to this stock for at least a number of years. So, there is indeed a small buffer-stock in Russia''s state-coffers, but it reaching the market soon is not to be expected.

Live long,

 

[diagem]

Date: 6/10/2010 6:50:25 AM
Author: Paul-Antwerp
Shadowplay, Karl and Yoram,

When you are saying or doubting the ability of the market (especially the American) to carry higher prices, please consider the following recent figures:

Never said I am doubting..., but the greater price resistance is coming out of the US & EU when comparing to emerging markets.

- 1st Quarter-sales of polished diamonds by Harry Winston up 25% compared to last year.
- 1st Quarter-sales of Tiffany''s up 22% compared to last year.

Paul..., I would think its somehow not objective to compare sales figures to 2009 (1st & 2nd quarters) but the financial world is living by those.

Its known (although HW''s higher sales figure are overweight by international sales vs US sales) that business is picking up in the US in the right places & with the right products. Even last year''s (2009) overall jewelry sales dropped by a single digit % vs 2008 numbers. But we must take account of the facts/signs that international Diamond buyers are taking advantage of the softer US market to purchase Diamonds at lower prices than available in other world cutting centers etc. I did not attend the Vegas show..., but I hear plenty of overjoyed dealers who sold nicely to mostly Indian dealers. You were there..., maybe you could shed some light on this phenomena?

We also see demand increasing with our retailers, although this obviously is in comparison to a relatively weak 1st quarter in 2009. Then again, if the ripple-effect increased slightly lower retail-demand of about 10% in 2009 into almost no demand at the Antwerp-level, the same ripple-effect multiplies the current higher retail-demand to a huge demand at the Antwerp-level. The ripple-effect is a multiplier-phenomenon, that is very important to the demand for rough diamonds. If it needs further clarification, please ask.

Ripple effect is part of the situation..., speculation is the other

.

With the economies of India and China growing strongly, they represent a strong foundation for global demand of polished diamonds. I know that John Pollard is awaiting the launch of PS 2.0 to publish some articles on the Chinese diamond-market, and I highly recommend reading those.

Then again, it is not all gloom and doom on the American market. Do consider that the number of marriages are projected to rise a whopping 20% in the next six years.

The only short-term negative effect on the demand-side could come if we do end up in a double-dip-recession.

Live long,

 

[diagem]

Date: 6/10/2010 7:04:20 AM
Author: Paul-Antwerp
Karl and Yoram,

Your comments on Russia and its government are somewhat incorrect. Let me clarify.

During the financial crisis, Alrosa was the only diamond-miner who maintained production. For about 6 to 9 months, they sold almost the entire production to Gokhran, the Russian State-Depository.

I am not familiar with the exact numbers but believe Gokhran purchased approx (b]

At the beginning of this year, when prices of rough started to increase, Gokhran was asked whether they were going to sell this stock, and they officially announced that they will hang on to this stock for at least a number of years. So, there is indeed a small buffer-stock in Russia's state-coffers, but it reaching the market soon is not to be expected.

Live long,

I am certain there is somekind of buffer stock (never said they dont), but we will never know if its still in tact or already found its way to the open market.
Its Russia remember?

One thing is for sure..., as of present time I believe no one is too worried if the Russians do decide to sell their 'small' buffer stock. Maybe even on the contrary

.

 

[twocaratsD]

I have a question you may think foolish, but here goes. I am very new to the diamond business and have an opportunity to obtain rough from a trusted associate in West Africa. I made contacts interested in purchasing rough at the JCK show last week, some in New York, others in Antwerp. My question is this...Is there a difference between prices, in general, paid for rough in Antwerp versus New York, or elswhere in the US for that matter?

Any feedback would be welcomed.

 

[marcy]

I hate to see it but I am not surprised. Everything continues to go up in price.

 

[Karl_K]

Date: 6/14/2010 10:28:57 PM
Author: twocaratsD
I have a question you may think foolish, but here goes. I am very new to the diamond business and have an opportunity to obtain rough from a trusted associate in West Africa. I made contacts interested in purchasing rough at the JCK show last week, some in New York, others in Antwerp. My question is this...Is there a difference between prices, in general, paid for rough in Antwerp versus New York, or elswhere in the US for that matter?


Any feedback would be welcomed.

Where the ones interested FBI?
No one in their right mind would consider buying out of channel these days.
The chances of ending up in club fed(US and other countries) are to high.
Belgium has very strict rough import rules do you know what they are?
Do you know the US rules? and punishments?
My advise save yourself a ton of hurt and stay far far away.

 

[twocaratsD]

Okay...Everything concerning the rough diamonds is handled correctly. Kimberly, etc. The diamonds are transported through legal channels. All legal challenges met, do you have an opinion on where it would be best to sell, US or Belgium? We spoke to many interested dealers from both at JCK, so unless there were more FBI guys(Die Hard, lol) than dealers, I believe they were serious buyers. All issues handled properly, just wondering where it''s best to sell rough.

Thanks

 

[Bosie]

Agree with Shadowplay.

I have many jewelers as clients, they are hurting big time by lack of "demand".

Now you want to raise prices?

 

[missydebby]

question: does this effect all carat weights across the board, or does it fall heavier on some and not the other?

 

[JoeNewbie11]

Manipulating prices by holding off supply never ends well. In the short term, this strategy may drive prices up, but once the holders of the supply try to or must liquidate, supply outsrips demand and prices nose dive.

A recent example would be the US housing market. Millions of homes, know as the "shadow inventory", are being held on the balance sheets of banks, while being witheld from the market. This action has stabalized prices for now, but at some point, the game ends and the homes must be sold on the free market. Prices will tank when that happens.

As a consumer, if you find a diamond that you like and feel the price is reasonable buy it. But don't buy in fear that prices will rise because someone says so, we've all heard that line before...

Prices will rise in a sustainable way when there is organic supply and demand with real economic growth around the world. Or maybe the next tulip mania will be a diamond mania!

 

[Paul-Antwerp]

Date: 6/15/2010 3:35:33 PM
Author: twocaratsD
Okay...Everything concerning the rough diamonds is handled correctly. Kimberly, etc. The diamonds are transported through legal channels. All legal challenges met, do you have an opinion on where it would be best to sell, US or Belgium? We spoke to many interested dealers from both at JCK, so unless there were more FBI guys(Die Hard, lol) than dealers, I believe they were serious buyers. All issues handled properly, just wondering where it''s best to sell rough.

Thanks

I would suggest you starting a new thread with your questions. You might get a reply there.

Live long,

 

[Paul-Antwerp]

Date: 6/15/2010 5:43:23 PM
Author: missydebby
question: does this effect all carat weights across the board, or does it fall heavier on some and not the other?

I would say that the higher the weight of the stones, the higher the price-rises. Also the effect will be bigger on higher colours and clarities.

Live long,

 

[Paul-Antwerp]

Date: 6/15/2010 5:21:36 PM
Author: Bosie
Agree with Shadowplay.

I have many jewelers as clients, they are hurting big time by lack of ''demand''.

Now you want to raise prices?

Bosie,

I do not want to raise prices. To the contrary, a flat price-level or even a lower price-level would be extremely beneficial for us, whereas a higher price-level is actually bad for our business.

But we are faced with retailers (our clients) complaining that we do not have sufficient supply to satisfy their demand, while we cannot buy rough of which the resulting polished will cost less than our sales-price.

Live long,

 

[Bosie]

Paul
Thanks for the reply.

I am having trouble with and have always have trouble with the line "larger stones are scarce".
Everyone I know who wants a larger stone, gets one. The jeweler just goes to his resources/suppliers and gets it within a few days. That is just my experience, others may have different experience.