The Virtue Of Caution On Price Increases

Traditionally, this is the time of the year that we are eagerly awaiting the early results of the Christmas jewelry sales. Questions as to whether the market was stable or grew by 3% or 5% or more used to be vital as the rough suppliers, led by De Beers, would take a cue from these results both for the setting of the allocations as well as for prices.  

Supplier of Choice has dramatically changed this. The allocations by De Beers for the first six months have already been agreed with their customers. There can be some variations in the margin or sightholders may want to take more goods early in the year, but the Christmas sales will not have the dramatic ramifications they once had.

There is another aspect to this. In a supply-controlled industry, with rough suppliers sitting on mountains of rough in inventory, the sales mechanism could far more easily utilize a positive momentum to increase the supplies to the market.  

In the new market driven environment, that option does not exist. Some rough suppliers, including De Beers, don’t have in January the rough they plan to sell in April. It’s still in the ground. In a way, rough sales to the markets for the first half of this year were already determined well before anyone knew how good or how bad Christmas would be.  

However, the one area of flexibility that the producers have is prices. A good Christmas will make it easier to raise supplies of rough in January. This is hardly an event that is likely to be met by great cheers of jubilation.

The Christmas results are also important for some other considerations including the ripple effect. If consumer purchases of diamond jewelry increased beyond the previous year’s level, then there will also be an increase in the level of jewelry stock replenishment. This phenomenon repeats itself at each level of the pipeline resulting in such situations that a 5% increase in sales may well lead to a 20% increase in rough off-take at the cutting center level.  

That has always been the conventional wisdom in the way the ripple effect has worked. However, in the new market driven environment, a theoretical need for such an increase in off-take could not be met by the suppliers. They will not have the goods. This may only achieve even greater price rising opportunities for the producers.  

The ripple effect, however, is more than just increased or decreased sales levels. The replenishment behavior is mostly affected by market sentiment.  

In the present atmosphere in which CNN’s Sylvester Eve broadcasts sounded like a worldwide weather report on the various terrorist threat levels and where the first day of the new year is dominated by issues such as armed marshals on airplanes, it is not easy to create the atmosphere of confidence and optimism that is needed to get retailers to replenish at higher levels.  

The lower dollar isn’t impacting sales in the American market. It’s only impacting the rest of the world that has part of its activities in strongly appreciating currencies.  

The currency problem has caused De Beers to make some 400 employees redundant in South Africa, which underscores that the holiday season is not without pain.

At the start of the New Year, it is important not to jump too quickly on positive Christmas sales reports and it is worth the wait to gauge the sentiments and the confidence in the retail sector. This also holds true for the producers. The low dollar will certainly provide an added temptation to go overboard in January when prices are reviewed. Restraint and caution can be beautiful virtues…