Global polished diamond prices rose slightly in December 2006, after sliding for the previous five months. While the increase was very modest – the IDEX Online Polished Diamond Price Index registered 110.43 for December 2006 versus 110.41 for the same month in 2005 – December’s price trends reflect a market which appears to be finally firming.

 

This incremental price increase of 0.02 points on the IDEX Online Index was so small that the year-over-year percentage gain showed “flat;” none-the-less, IDEX Online Research believes that this may be the inflection point for the potential stabilization of diamond prices, and could perhaps even be the beginning of a gradual up-turn in polished diamond prices.  

 

The graph below illustrates monthly diamond price trends for the past year. Comparisons are based on monthly average prices, year-over-year.

 

Source: IDEX Online Research

The firming of diamond prices at the end of 2006 comes in the face of significant headwinds, including the following:

 

• A global economic slowdown is expected in 2007 - Most forecasters calling for global economic growth to slow in 2007. In part, this is due to normal cyclicality; in part, higher energy prices have put the brakes on expansion. Diamond and jewelry demand correlates closely with economic cycles: When the economy is soft, jewelry sales weaken significantly.

• A weak holiday selling season in the U.S. market – Early reports suggest that the 2006 holiday selling season was a disappointment for many U.S. jewelers. As a result, their stores may be over-inventoried, and they could delay re-ordering new merchandise from diamond suppliers.

• Supplier prices higher – After enduring rising rough diamond prices in 2005, and relatively stable rough prices during 2006, most diamantaires have finally raised their polished diamond prices in an effort to recapture their cost increases. Earlier in 2006, these suppliers had been reluctant to pass on these price increases because they feared that it would hurt demand for diamonds and diamond jewelry.

• Market uncertainty – There is a high level of uncertainty in the diamond and jewelry industry. Bankers have been reluctant to extend new credit lines to suppliers. Further, consumer demand has been below expectations. Finally, recent high profile diamantaire failures have threatened to undermine industry confidence.

On the other hand, there are some reasons for diamond prices to stabilize, including the following:

 

• Rough diamond supply moderating – The DTC, the supply and marketing arm of De Beers, has indicated that it will cut back on the supply of rough diamonds that it plans to offer during the first half of 2007. Estimates of the supply cut-back range from a 15 to 30 percent reduction. The impact of the DTC’s supply reduction on the diamond industry’s supply-and-demand equilibrium could cause polished prices to rise in 2007, even if there is some softness in final demand. The following graph illustrates our estimate of the DTC’s Intention To Offer (ITO) plan for the first half of 2007.

Source: IDEX Online Research

• Diamond pipeline inventory clearing – For most of 2006, the diamond pipeline, from mine to market, was overflowing with inventory. Many suppliers were cutting prices in an effort to sell off excess inventory. Despite a weaker-than-expected holiday season in 2006, and the prospects of softer demand in 2007, it appears that diamond pipeline inventories may be down. This has led to firming polished diamond prices.

• Consolidation in the supply chain – Because of an over-inventoried diamond pipeline and the lack of pricing power, there has been a rise in business failures among diamond suppliers. As the financially weak competitors are weeded out of the market, the remaining diamond suppliers could gain some pricing power. While business failures are never pleasant, consolidation in the diamond and jewelry pipeline will be good for the industry in the long term.

Diamond Prices Relatively Steady for Full Year

After rising sharply in the early months of 2005 and then falling back somewhat later that year, diamond prices held relatively steady in 2006. It has taken roughly twelve months for the market to reach equilibrium between supply and demand.

 

The graph below summarizes the IDEX Online Polished Price Index from the beginning of 2005 through the end of the year 2006. After falling in late 2005, polished diamond prices have stabilized and appear to be edging upward.

 

Source: IDEX Online Research

Demand Strong for Large Diamonds

Consumers in virtually all of the more mature global markets desire large diamonds – these large diamonds have been dubbed with the moniker “Statement Diamonds.” In America, which consumes roughly 50 percent of the world’s diamonds and diamond jewelry by value, shoppers want diamonds larger than 2.0 carats. Demand for smaller diamonds in the 1.0-to-2.0 carat range has softened notably.

 

Among the smallest diamonds – “flash for no cash” diamonds known as melee – prices appear to be firm, according to market sources.

 

The graph below illustrates the price disparity between large diamonds versus prices for diamonds in the 0.5-to-2.0 carat range.

Source: IDEX Online Research

The IDEX Online Diamond Price Index

The IDEX Online Diamond Price Index is a real-time index derived from actual asking prices of the global diamond industry. The IDEX Online Diamond Price Index objectively reflects price trends as they happen. The Diamond Index and Diamond Drivers were formulated following comprehensive research and analysis of the IDEX inventory database, aggregated since 2001. Research and development were conducted in cooperation with Dr. Avi Wohl, Senior Lecturer of Finance at the Faculty of Management, Tel Aviv University, Israel.

 

Additional information is available from IDEX Online Research. The e-mail address is diamondprices at idexonline dot com.