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WDC launchеd an upgraded and expanded System of Warranties

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Today

Botswana Diamonds completes nine-hole drilling on Thorny River

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Lifeline for small-scale chrome miners in Zim

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Today

Out of the deep blue: Buyers at Christie’s will have a chance to bid for Rolex Experimental Deep Sea Special N°1

Developed as a prototype for perfecting the Rolex diving watch concept, this Rolex Deep Sea Special N°1 was attached to the hull of Auguste Piccard’s bathyscaphe Trieste for the inaugural deep-sea trial to a depth of 3,150 meters in the Mediterranean...

Yesterday

How Rough and Polished Diamond Prices are Determined

25 december 2009

What factors determine the prices of rough and polished diamonds? Is there a truly objective method to set prices? These questions take on even greater importance than usual with the launching of a new pricelist for polished diamonds by the WFDB and IDEX Online, www.israelidiamond.co.il says. Charles Wyndham, of PolishedPrices sheds some light on the matter:

At the end of the day it is obviously the fundamentals of supply and demand that determine the prices for rough and polished diamonds. However, that said there are a myriad of forces or inputs that can determine the price of rough or polished diamonds in a daily market place. The supply / demand will ultimately determine where prices end up but before getting there, there can and is a considerable degree of volatility and diverse inputs, as in any market.

Firstly, I am assuming that it is accepted that diamonds are a commodity. It is only once the diamond has been set in a piece of jewellery that it becomes ‘decommoditised.’

Secondly, the dynamics in the rough and polished diamond markets are different and whilst at some point there has to be a correlation, in practice the two markets act quite separately to each other.

This last point is being amply demonstrated in the current market where rough, as in 2008, is shooting ahead of polished to the point that rough has become in many instances more expensive than the polished diamond.

The rough diamond market has been dominated historically by one supplier, De Beers. This monopoly which once stood at over 80% of the supply to the market, had a major impact on the dynamics of the market selling through its sightholder system.

De Beers as the custodian of the diamond industry, stockpiling goods and using quotas, certainly evened out the fluctuations in the rough market, but it did not set the price. The dictum that diamond prices never were decreased was a figment of the imagination and useful in building up some halo myth about diamonds.

The decision to launch the Supplier of Choice strategy in 2000 and its proclaimed aim of ceasing to be the custodian of the industry certainly increased the volatility in the market, especially when to pay for its own privitization it offloaded its stockpile of around $5 billion at book price.

This act has had a major impact on diamond prices over the past 8 years as the surge in rough which in turn generated a surge in manufacturing capacity has been a major driver for rough diamond prices. Much of the demand for rough diamonds is supply driven in that it comes from the need to feed the overcapacity in manufacturing.

This supply pressure on rough has been exacerbated by other pressures or opportunities available to the rough diamond market as various governments have regulated or provided stimulus for cutting. For example the demand of producers in Africa to have factories set up in their countries has exacerbated this manufacturing over capacity. The Indian licensing system, in particular but not solely, for rough diamonds and the mechanisms used by banks to lend have all impacted on the demand for rough which at various times has skewed the fundamental position temporarily.

In essence the rough diamond market has been and remains highly inefficient with a considerable lack of transparency which impacts on the daily movements in diamond prices.

In fact there has been a deliberate cloak of obfuscation around the whole rough diamond market.

De Beers still as the major player has about 15,000 price points in its price book which apart from ensuring that no outsiders can understand it, has had the advantage of ensuring that neither does De Beers, as premiums or discounts on its boxes oscillate wildly.

The BHP diamond tender system has in fact become a key determinant of prices as it is the only major commercial run of diamond mine tenders held on a regular basis on a fixed assortment that creates a comparable price for the market.

Such tenders of the Letseng production are too heavily weighted in special diamonds (i.e. over 10.8 carats) to be used as a general barometer for the market, though this tender for its narrower range of goods is important in its field.

As more and more diamond productions are tendered and that is assuming that the tenders are not being massaged in anyway, so the pricing of rough will become more transparent and more efficient.

The polished diamonds market is in some ways a more efficient one.

There is much greater competition in polished diamonds as it does not suffer from having one dominant player in the market as such.

In relation to rough but not in relation to other commodities there is greater transparency in that polished diamonds are increasingly certified or third party categorised so like comparisons can be made, which is always a fundamental problem with rough diamonds.

However whilst polished does not have its dominant supplier or trader it does have a dominant and monopolistic supplier of information for pricing.

The current industry benchmark for diamond pricing is the Rap list.

This is a deeply flawed mechanism where one individual, who also trades in diamonds, sets a list based on what is termed the highest New York asking price and this is then used by the industry to discount from to provide the current price.

Therefore prices are not referred in terms of dollars but in terms of a discount to Rap, say 30 below Rap.

The list does not reflect prices, that is reflected in the discounts which as Rapaport himself has stated are geared for a margin of around 25% to 30% but in reality can be much higher (i.e. more discount) or can even go to a premium.

The advantage, as many in the industry perceive it, is that this obfuscation, so similar to what happens or happened in rough diamonds with De Beers, is helpful as it stops the consumer understanding prices and allows greater margins to be made.

The fact that there are such variations in the discount or premiums means that the Rap list neither sets or reflects the current market price; but, it certainly impacts on diamond prices, in particular his failure to increase prices in line with what was happening in the actual market for various Indian polished definitely created a glass ceiling for those prices.

PolishedPrices.com, the price list that I started and which was first published in 2002,sets to mirror the diamond market and in no way to make the market by being based on actual transactions, not as others like to half mimic by saying actual asking prices. By doing so the goal is try and provide independent and reliable information as to what the market is actually doing, not some clandestine clubby in-house manipulation.

So in a circular way rough and polished diamonds are much more similar than would first seem to be the case.

Both are going through considerable change, the collapse of De Beers on the one hand and the inevitable increase in transparency in polished which will dilute the skewing of diamond prices as provided by the Rapaport monopoly.

A key fact in the dynamics of the polished diamond market is that as more and more business goes to India, China and other Far East countries, where consumers are much more price savvy than in the West, obfuscation simply won’t work.

It is well known in economic theory that for markets to work at full efficiency there is a need for perfect information. Whilst in practice this never happens (it is said that economists are people who see something working in practice and then analyse it to see if it works in theory) the better the information available the better the market performs to the benefit of the participants. For too long many in the trade have perceived it to be in their interest for the trade to be cloaked in secrecy. This position is no longer tenable.

An interesting question would be to ask what impact this shift is going to have on the traditional retail trade?