Rapaport Magazine

8.5% and 60%

By Martin Rapaport
RAPAPORT... De Beers has increased rough diamond prices by an “average” 8.5 percent since January 1, 2008. Its Diamond Trading Company (DTC) extranet notice to sightholders says “all areas have shown some price growth,” with increases concentrated in IF to SI qualities.

While De Beers efforts at transparency are commendable, its notice is confusing and misleading. Retailers and polished dealers must be warned that an “average” price increase is not an evenly balanced increase in all sizes and qualities. Significantly higher “boom” prices for very large, fine-quality diamonds average out with same, or even lower, prices for small, mid-quality stones. Someone with one foot in boiling water and another in freezing water has a fine “average” temperature. Furthermore, rough price increases do not automatically translate into polished price increases. Prices for many mid- to low-quality polished diamonds are not increasing; they are declining and are in real danger of collapse should Indian and Chinese economies decline.

Pity the uninformed buyer who meets some slick salesman and believes the “8.5 percent” price hike propaganda. If he ends up paying too much for low-quality commercial goods and then tries to raise prices in this difficult market — he will go bankrupt. Unless you are buying top-quality stones that are in short supply, higher prices are strictly for suckers. If some fast-talker tries to get you to pay too much by citing the De Beers 8.5 percent price increase, show him the door — and don’t be afraid to give him a kick in the pants on the way out.

Unfortunately, our story does not end here. Things much more important than rough diamond price increases are happening and they will have major impact on us, our industry and the global economy.

The price of rice, the basic food source for many of the poorest people in the world and about half the world’s population, is up a shocking 120 percent over the past 12 months and 60 percent so far in 2008. Food riots have broken out, with prices of all foods increasing. And it’s not just food. Led by oil, almost all industrial material prices are increasing significantly. An uncontrollable inflationary cycle has begun. Double-digit dollar inflation is inevitable.

By now, it’s clear that U.S. demand for commercial and promotional-quality diamonds is deteriorating, with the primary culprit being declining disposable income among low- to mid-income consumers. If people need money for fuel, food and housing, they buy fewer diamonds. In fact, they buy less of everything, driving economies into recession.

Our great hope for the commercial diamond industry is that the booming economies of India and China will replace declining U.S. demand. But there is now danger that increasing commodity prices will reduce disposable income and domestic demand in these countries. Furthermore, a U.S. recession and inflationary weak dollar are reducing exports. The bottom line is if India, China and Asia can’t drive themselves forward without American consumer demand, things may get awfully quiet for a while.

So it looks like an inflationary cycle, followed by recessionary correction amid reasonable concerns about a global slowdown. High-end, luxury-brand products will continue to sell to the fabulously wealthy, who may become even more fabulously wealthy as the rich get richer and the poor get poorer. The market for bread-and-butter diamonds is going to require patience, artful market positioning and strong strategic focus.

I’ll tell you a secret about inflation: Prices are an illusion. Traders focus on prices and percentages, but they don’t really matter. The diamond business is not about higher prices; it’s about adding value on the margin. Your diamond business is about you, your customers, your product, how you manage risk and how you position yourself in the market.

Commodity Price Changes 
Commodities:Changes Since January 2008:   Changes Since 2007:
Rice                        60%             120%
Copper                     29%               39%
Platinum                     27%               72%
Diamonds-5ct.*                     25%             107%
Aluminum                     24%                 3%
Oil                     15%               92%
Diamonds- Rough                       9%               16%
Gold                       5%               39%
Diamonds - .30ct *                       3%               12%

*Diamonds: Rough - De Beers, Polished - RapNet

Article from the Rapaport Magazine - May 2008. To subscribe click here.

Comment Comment Email Email Print Print Facebook Facebook Twitter Twitter Share Share