Internal Economic Factors
March 13, 13
Without De Beers exerting its influence and limiting price changes, prices of rough diamonds started to both fluctuate both more frequently and more widely in the second half of the last decade than they had ever done before.
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Broadly speaking, rough diamond prices oscillate to a greater degree than wholesale polished diamond prices, while prices in stores are affected the least. This is a result of different levels of financing capabilities, marketing limitations and price buffers.
When demand for rough is growing, traders and polishers are willing to gamble and buy goods at a higher price. They do so with the assumption that there will always be someone willing to pay the higher price when they sell the goods. Naturally, when demand rises, shortages are created and traders feel they must pay more to get the goods.
This will lead DTC Sightholders (the Diamond Trading Company, the rough diamond sells and marketing arm of De Beers) who buy directly from the miner, to offer their goods to the secondary market at a large premium. At times, traders were willing to pay 10 percent, 15 percent and even upwards of 20 percent to buy the rough goods.
By the time this more expensive rough diamond stock arrives at the polishing plants, the price is so high that manufacturers are forced to increase the resultant polished diamonds for more. This will happen even if demand for polished goods would not ordinarily necessitate price increases.
This situation is part of what limits the price fluctuations for polished diamond prices compared to rough diamond prices. Going down the pipeline, there are more participants and players, the competition for the goods is less intense and price moderation is enforced by market forces.
Retailers face a different reality – the price point. Large specialty retailers, such as Zale and Signet Jewelers, as well as other large mass marketers, such as JCPenny and Wal-Mart, offer diamond jewelry by price category. They plan their offerings well in advance and order large quantities of diamonds to exact measurements and by specific color/clarity categories. If the price of the components of the jewelry items change – either because the price of gold or diamond changed – they still want (some may argue need) to maintain the retail price to ensure they have an offering for each price category.
To do so, they try to limit their costs by either choosing diamonds with lower color or clarity with a somewhat lower price or they absorb the price difference by decreasing their margins. Either way, the result is that, at least in the store, the price will change very little.
Internal diamond pipeline forces that influence polished diamond prices start with fluctuating rough diamonds and the premiums they may carry. Trade fairs have a great influence over prices, especially in the period leading up to the opening day of the show. This mechanism is an interesting one...
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