Mining, Retail and the Elusive Margins

Results from the just concluded 2013 are slowly coming in and they are providing a mixed view of the year. The big miners mined more, but prices of rough diamonds fluctuated – rising, falling and rising again. Polished diamond sales were less than stellar and their prices bucked the trend of rising on average by 3.5%-4% year-over-year. In December 2013, the average price of one carat round diamonds was nearly flat – down by 0.2% year-over-year. On an annual basis, the picture is worse: the average price of 1-carat rounds in 2013 were 3.7% below the average price in 2012. Retailers also need ways to improve profitability and all clearly need better market intelligence.

Following are some details about the changes the diamond economy went through in 2013, and my thoughts about the path ahead:

1.    2013 was a year of growth in some respects for the diamond industry. Both Alrosa and De Beers have increased production during the year thanks to acquisitions (Nizhne-Lenskoye by Alrosa), restored production (at De Beers’ Jwaneng following the slope failure in June 2012), and higher ore grades (at Alrosa’s Jubilee pipe and De Beers’ Orapa and Venetia mines).

Alrosa’s diamond production in 2013 increased 7% to 36.9 million carats while De Beers’ production increased 12% to 31.2 million carats. Based on its reports, diamond sales by Alrosa are estimated at $4.8 billion in 2013, compared to $4.45 billion in 2012.

Alrosa’s latest report unveils some of the price shifts that took place during the year. The average price per carat it achieved for gem-quality rough during the fourth quarter was $192. By comparison, for the entire year, the average price was $176 p/c while in 2012 sales averaged $194 p/c. This tells us that the average price of gem-quality diamonds fell in 2013, but rose again near the end of the year, nearly reaching the 2012 price levels.

The price of rough was clearly too high and Alrosa was forced to lower prices, under pressure from manufacturers which were unable to increase the price of polished. Is the recent increase in rough diamonds sustainable? I’m doubtful. Polished diamond prices have not increased at the same ratio, and there are no indications that they will increase in the coming months.

2.    The numbers are not in yet, but polished diamond sales in 2013 are not expected to bring a whole lot of cheer to anyone. Although the volume of sales may have increased, prices of polished were flat at best. A bearish bridal market in the US, where the percentage of couples deciding to have a family but skip getting officially married is affecting engagement ring sales – the main driver of diamond jewelry purchases. This is a cultural shift, something that tends to happen slowly over time. A turnaround, whenever it may happen, will also be slow.

3.    Diamond traders have an exceptional ability to collect data from the market. A small and close-knit community that is also characterized by great confidentiality makes this skill essential, partly because to date no alternative has been found. Without an outside system that collects large volumes of accurate data and analyzes it, manufacturers are in a tight spot: the miners are pushing in one direction, the retail landscape is changing in ways that it’s difficult to gauge and making good long-term strategic planning becomes a magical skill.

This needs to change. Diamond polishers must know how the consumer market is shifting, what goods are stuck in store inventories, which items are in rising demand, where the margin pockets are hiding and more. Without it, the industry’s evolution is stunted.

4.    Retailers are also in a bind. Without continued growth in the bridal category, an inability to increase price points, when all the while wholesalers are desperately trying to push up the price of polished diamonds, retailers need some relief as well. According to a preliminary analysis we’ve done, retailers find it with recycled diamonds. They buy diamonds from the public at prices that are far lower than the wholesale price of fresh goods, and then sell them back to the public at a price that is often a little below typical retail prices. In between, the margins they make are enormous. Mid-double digit margins can turn into triple digit margins.

I’ll have more on this in the future, but for now it’s worth noting that retailers are happy to employ recycled diamonds to protect their margins, which means that to improve sales of fresh goods (diamonds that were recently polished) prices have to come down across the board and that starts with the miners. Once again, the recent rough diamond price increases are harmful to the diamond economy.

5.    The simple conclusion would seem to be – much lower rough diamond prices, somewhat lower polished diamonds prices, better margins, better information and the development of venues other than bridal to expand the market.

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