Rough Prices and Choked Jewelry Sales

1. Rough diamond prices remain firm. Miners, namely De Beers and Alrosa, who supply nearly 50 percent of the global output by volume and a similar amount by value, are so far insisting on not lowering their prices. Traditionally, when a price correction is needed, instead of lowering prices, assortments of rough diamond parcels were improved. This creates a de-facto price reduction.

At the upcoming sales weeks by De Beers and Alrosa, assortment improvement may very well take place, but this is a painkiller, not a cure.

2. Polished diamond prices are sliding. The price of the raw material may be steady, but the resultant product is sold for less. The price declines are an important signal to the market: consumers are not willing to pay so much for diamonds. This is mainly true for the ‘Bread and Butter’ items – 0.3-2 carats VS-SI rounds in a wide range of colors.

3. The U.S. economy, despite the gloomy talk, is improving. Unemployment is slowly declining, inflation is at bay, the stock markets are rising, housing starts are up year-over-year and jewelry sales are rising month-to-month. Yet retailers are reluctant to pay more for diamonds.

4. Retailers know their customers. If American retailers are resisting further price increases, even after gold prices have cooled, they are reflecting a sentiment that is coming from their clients. It’s difficult to claim that retailers misunderstand their clients at a time when they are showing significant improvements in sales, at least high single digit every month on a year-over-year basis.

At the same time, expenditure on diamond jewelry as a percentage of total real income is declining, as shown in a recent column (www.idexonline.com/portal_FullEditorial.asp?id=38402).

If the economic situation is improving, and overall jewelry sales rising, but diamond jewelry sales are stagnating, then it’s time to consider the fundamentals. Are consumers interested in diamonds at all? Are diamonds slowly losing their appeal and becoming less fashionable? Or maybe pricing issues are blocking marketing efforts?

5. Polished prices are above pre-crises levels. The IDEX Online polished diamond index has been hovering around 133-134 for about a year now. Five years ago, in August 2008, at their peak before the 2008 economic collapse, rising prices pushed the index to an average of 128.9. Today prices are on average just 3.5 percent higher.

6. Today’s higher polished prices are not generating better margins. In fact, nobody is better off with the higher prices. De Beers, despite a rise in production, reported that sales in the first half of the year are unchanged year-over-year at $3 billion. At higher rough diamond prices, this means that De Beers sold fewer diamonds by volume.

Polished diamond prices are artificially high. Not because De Beers is manipulating the market, or any other such sinister reason, but because manufacturers have no choice – the price of rough is high.

If polished diamond prices continue to slide, something considered bad news for the diamond trade, they may reach a more palatable level for consumers, resulting in improved sales. Instead of scrambling to block sliding polished diamond prices, rough diamond prices should pull back. Not in a hasty manner, but to allow them to slide to a reasonable level. This will invigorate sales all along the pipeline and allow diamond jewelry to recapture lost market share.

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