Of Rising Rough Costs, Flattish Polished Prices and Sliding Retail Sales

We are just days away from November, and the growing sentiment in the industry is that we won't wake up on Christmas morning with big presents in our stockings. Diamond jewelry sales are expected to be weak in the U.S., the leading retail market. Concurrently, the industry is trying hard to push up the price of polished diamonds.

Here lies our problem - the desire to increase prices is crashing against the psychological barrier of the low sales expectations. The low expectations received careful confirmation this week when IDEX Online Research analyst Ken Gassman projected that diamond jewelry retail sales in the U.S. will be down by about 5 percent this holiday season.

The drive to push up the price of polished is understood. Back in April we reported that some of the speculative buying was pinned on the hope that the price of polished will increase handsomely by the time that the high priced rough is manufactured, some three to four months later.

In the six months that passed since April, prices of rough continued to climb. De Beers’ list price increased on average 7-8 percent and nearly double digit premiums were paid on top of that in the secondary market. During the same period, the average asking price of polished increased by only 3 percent, thus failing to meet manufacturers’ expectations.

The price of the Select MB 2.5-4 carat box, for example, increased more than 6 percent from about $1,134 p/c to $1,204 p/c and buyers were willing to pay an extra 8 percent premium for it just a few weeks ago. Meanwhile, the increase in the average asking price of the resultant polished lagged far behind: 1 carat diamonds increased by 3.6 percent, 1.50 carat by 2 percent and 2 carat goods by 3.8 percent.

Indian traders are telling us that 2009 was very profitable, but in the last two-three months they have been losing money. Maybe not literally, but margins have clearly eroded.

Despite this, calls for rough price reductions are not heeded, and in the short term all main players are saying they plan to pay (or charge) more, through December.

But while the main price driver is the smaller Pique goods, larger goods are behaving differently. DTC list prices of larger rough have generally increased by 7-10 percent in the last six months, and prices of polished have followed: the average asking price of 3 carat goods increased by 5.4 percent in the period, 4 carat goods added 10.2 percent and 5 caraters swelled by 7.5 percent.

The difference between the lower, smaller goods and the larger nicer items is the difference between their main markets. While the first goes to the unpromising U.S. market, the second is snatched up in the emerging Chinese and Indian consumer markets.

The prices of rough are expected to increase on average by about 3 percent until the end of the year. At the same time, U.S. retailers will reduce their exposure by buying less, cheaper and on memo.

We all deserve some holiday cheer, and some presents would be nice too. Sadly, the combination of rising rough costs, flattish polished prices and sliding retail sales won't stuff our stockings a whole lot this year.