RAPAPORT... Financial crisis, banking bankruptcies, credit and liquidity problems, plummeting commodity, equity and housing prices, extreme wealth deterioration, unemployment, official U.S. recession, Mumbai terrorist attack, declining consumer demand for diamonds, extreme oversupply of diamonds in the distribution pipeline, huge diamond production overcapacity, excess inventory, falling diamond prices.
Okay, if you are still reading this you have passed the first test. You are not afraid to confront reality. If you know how to buy at the right prices and give your customers a good deal, then you have a fairly good chance of making some money in the months ahead.
So what’s going on? How do we deal with all of this? It looks like we are entering the eye of a perfect storm after having survived the first half relatively well. Markets are stabilizing in spite of the relatively steady flow of bad news. Rough prices have dropped about 50 percent, but polished prices are holding up pretty well, with only minor dumping so far by a few sellers who need money. Amazingly, astute cutters with money, guts and customers can, for the first time in a long time, make real money buying super-cheap rough and selling polished at profitable “bargain” prices.
Warning: The storm is not over. Expect us to exit the eye after the new year and get ready for round two. We expect a severe credit crunch, serious liquidity problems, a moderate number of bankruptcies and some serious inventory dumping. It’s too early to tell what the banks are going to do, but it’s not going to be good. They won’t be handing out money like candy anymore and they will be watching to see if your customers pay you after the holiday season or return goods. You can be sure the banks won’t be financing inventory anymore. The only way you will be able to buy new goods is if you sell old goods. Diamonds may be forever, but cash is king. Get liquid, stay liquid and spend your cash wisely.
How to make money when prices go down? Sell cheap and buy cheaper. Let’s say you have a diamond that cost you $1,000 and you can now replace it for $700. Sell it for $770, pocket the profit and replace it or hang on to the cash. As long as you can replace it, you can tell yourself you have not lost money. Don’t hang on to old inventory because of historic cost. A diamond is only worth what you can buy it or sell it for.
Possible positive: President-elect Obama seems to be getting his and America’s act together. He is looking like a good guy, capable of significantly improving the mood of young to middle-aged Americans. Expect market sentiment to improve as the inauguration approaches and to carry on throughout the initial honeymoon period. Barring additional bad business news, there might be a healthy bounce in equity prices as the new President creates a more positive mood in and about the U.S. If equity prices ever return to their former glory, baby boomers can make a big difference.
Protesting Lower Prices
One of the most important issues today is confidence and the recent drops in the Rapaport Price List. Over these past four weeks, I have travelled far and wide to Israel, India, Dubai, and Belgium and held open town hall meetings with thousands of diamantaires. My mission was to listen to the diamond community, evaluate market perspectives and explain my view of current market conditions. The primary, overriding, clear and angry message from suppliers was consistent. “Don’t go down with prices.” Most suppliers were not interested in discussing how to deal with lower prices; their focus was on denying the fact that prices had declined. Many people were overcome by emotion. There were strong and powerful demands from strong and powerful people.
On October 31, the Rapaport Price List reduced a broad range of prices by about 5 percent, and on November 11, we lowered prices for many qualities of 3-carat and larger diamonds by a maximum of 10 percent. These price changes were taken after careful investigation and fairly reflected changes in price levels.
The reactions of diamond suppliers and the leadership of the diamond bourses were very strong and very negative. There was, and is, a strong feeling that Rapaport should protect the market, maintain illusion and confidence in diamonds and, above all, not lower diamond prices in difficult market situations. Some diamond suppliers and bourse officials have accused us of harming the diamond industry by publishing lower prices.
At first, I was amazed that during a period when equity and most commodity prices had plummeted by some 25 percent to 60 percent and global wealth had crashed by ten trillion dollars in nine weeks, anyone could be surprised by a mere 5 percent drop in diamond prices. Why was the diamond industry taking such a natural and necessary move so hard?
DenialThen I read an open letter to the diamond industry by the highly respected chief executive officer (CEO) of Rosy Blue, Dilip Mehta. One statement in particular caught my attention. “We need to highlight, in our communications to the consumer, the fact that overall polished prices have not fundamentally been impacted by the global economic crisis.”
And Avi Paz, president of the World Federation of Diamond Bourses (WFDB), requested that Rapaport “freeze diamond prices.” He was backed up by a special meeting of the Antwerp World Diamond Center (AWDC) that demanded Rapaport stop publishing lower prices because doing so harms the industry.
With all due respect to Dilip, in my opinion, his statement is obviously incorrect and probably illegal in the U.S. and other jurisdictions where misrepresentation to consumers is against the law. As to Avi, and his Belgians, in my opinion, it is unfair and unethical for the diamond industry to deny price information to customers and consumers when prices decline. Furthermore, such denial would destroy confidence in diamonds and the diamond industry. Obviously, we will keep publishing the Rapaport Price List, rejecting all efforts of coercion, while continuing to reduce or increase prices as and when we believe necessary.
Now, we must be careful not to personalize Dilip’s or Avi’s position. There are probably hundreds, or even thousands, of diamantaires who agree with them. And that’s scary.
Let’s consider the position of Dilip and friends. Could it be that they actually believe in the illusion that polished diamond prices are not subject to the economic environment? Is it possible that they are in deep denial about economic reality because they have so much of their personal wealth and identity tied up in diamond inventory? Are we at the point where some of the largest inventory holders can’t handle softer polished prices?
And what about Avi and his friends? Do they really believe that they, or anyone, can control diamond prices through a price list? Are our suppliers in such bad shape that the only way to deal with lower prices is by denying their reality? Why are the bourses protecting inflated prices, inventory holders and the old bankrupt ways of doing business, instead of finding new ways for cutters to prosper with lower rough prices?
The key issue here is how the diamond industry and its leadership react when times get tough. Do we hold back information in the hope that this will limit negative consequences and enable some of us to make higher prices from far-off customers? Or do we support broad-based transparency that forces us to confront challenges head-on and put our house in order before things get worse? Do we protect buyers by bringing them under our information umbrella, or cut them off from information so we can charge them more? Can we make a living if our customers know our prices? How transparent and honest can, or should, our industry be?
Rapaport Statement: Industry Comments on Diamond Pricing
December 2, 2008
“Suggestions by industry leaders that the diamond trade should ‘highlight in our communications to the consumer the fact that polished prices have not been fundamentally impacted by the global economic crisis’ are irresponsible and unacceptable. Such misrepresentations and similar false statements by salesmen of investment diamonds that polished diamond prices never decline destroy the credibility of diamonds and the diamond industry. It should be clear that diamond prices fluctuate and may decline due to a number of factors, including changes in the external economic environment. We call on the diamond trade to exercise caution in how it represents diamond prices and caution buyers that diamond prices may decline under adverse market conditions.
“I am surprised that leaders of the diamond industry at the recent Antwerp Diamond Symposium and Avi Paz, president of the World Federation of Diamond Bourses (WFDB), has requested that the Rapaport Price List freeze diamond prices or cease publication during difficult times. In my opinion, it is unfair and unethical for the diamond industry to deny price information to buyers and consumers when prices decline. Furthermore, such denial of price information destroys confidence in diamonds and the diamond industry. The Rapaport Price List will continue to publish prices as it has for the past thirty years. We will provide our benchmark diamond prices to the best of our ability without bias as to whether prices are increasing or decreasing.”
Article from the Rapaport Magazine - December 2008. To subscribe click here.