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Diamond Prices, Discounts and Liquidity
Jul 1, 2004 11:43 AM
By Martin Rapaport
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Diamond pricing is a complex issue. Diamonds come in a vast range of shapes, sizes and qualities. A simple analysis of polished would consider 18 sizes, 10 colors, 10 clarities and three types of cuts, yielding 5,400 categories of diamonds – and that is just for rounds. If you add three more basic shapes, there are 21,600 categories of diamonds without considering the type of cert, fluorescence and many other factors.
Not only are there many types of diamonds, there are many diamond markets. A cash buyer for an original $5 million business of polished diamonds in Russia will pay a much lower price than a retailer in Ohio requesting a specific diamond on memo. Markets are defined not just geographically, but also by the terms and conditions of sale. Dealers who pay cash are in a different market than retailers who buy on credit. The price you pay for a diamond depends highly upon how, where, how much, and from whom you buy. Cutters, dealers, wholesalers, retailers and consumers all buy and sell diamonds at vastly different prices in very different types of markets.
Diamond markets are dynamic. Diamond prices move sharply upward when we shift from a buyer’s market with excess inventory to a seller’s market with severe shortages of popular goods. While price movements are very sluggish in weak markets, they can become very volatile when demand exceeds supply. While changes in rough price levels do not automatically translate into equivalent polished price movement due to substitution effects, polished inventory levels, manufacturing overcapacity and a host of other factors, movement in the rough markets does bring pressure on polished prices. The impact of rough on polished depends on the overall level of demand in the polished markets. If there is consistent demand and shortages of polished, rough prices will push up polished prices. If there is excess polished inventory, higher rough prices will have little or possibly negative impact on polished prices.
Diamond prices do not exist in a vacuum. They are constantly changing as they are influenced by an endless stream of events. Volatile foreign currency rates and stock market performances, expansion and/or decline of Far East economies, and even the latest De Beers advertising program are all examples of events that have had a direct impact on prices for select types of diamonds.
Sometimes overall diamond markets change fundamental direction with very significant implications for diamond prices. Understanding and tracking diamond prices as we shift from buyer’s markets to seller’s markets requires a high level of expertise and experience. Communicating diamond prices in an effective manner is no simple matter given that prices for different types of diamonds in different markets move at different rates.
The Rapaport Price List
The Rapaport Price List is successful because it provides a rational, universally accepted pricing standard that everyone, everywhere can use without restraining the ability of diamond traders to establish their own personal pricing levels. Rapaport offers a price that is, by design, sufficiently high to clear all markets. Market participants establish their own particular level of discount below the Rapaport high asking prices. The level of discount depends on numerous factors, including: the specific quality characteristics of the diamonds; the market in terms of location and transaction conditions; the diamond’s liquidity level (i.e. the length of time it takes to buy or sell the specific type of diamonds); and the overall condition of the diamond markets. Please read our “Introduction to the Rapaport Price List” on page 16 of this issue for more details about the Rapaport Price List and see our Diamond Listings section for detailed discount information.
Buyers and sellers using the Rapaport Price List are able to compare their individual, discounted transaction prices to the Rapaport global standard. They know how they are doing relative to others in the market by gauging their level of discount. They are also able to instantly communicate broad ranges of prices for multiple diamond categories in multiple markets by using the price discounting system.
To help us understand the discounting system, consider a number of students taking a very hard exam. Even if no one in the class gets a grade of 100, everyone knows how they are doing by comparing their grade to the 100 standard and to each other’s grade. That is how it works with the Rapaport Price List. Even if no one ever buys at full Rapaport list prices, everyone knows where they stand relative to the Rapaport list and others. This gives the diamond market a very real sense of price space.
In summary, the fact that everyone can trade using the same price list while maintaining their individual, discounted price level provides optimal pricing standardization, functionality and transparency in the complex, dynamic diamond marketplace.
Discount Issues
The interesting thing about discounts is that Rapaport does not set them. Diamond traders armed with money and diamonds do battle in the competitive marketplace. They decide if they want to do business at 40 percent or 20 percent below Rap. The discount levels reflect the liquidity and bid/ask price levels of particular diamond categories. Diamonds that are hard to sell and illiquid attract weak bids and sell for large discounts. On the other hand, diamonds that are very liquid sell quickly because they are in strong demand and short supply. These liquid diamonds attract high bids and sell for low discounts. In general the stronger the diamonds and the stronger the diamond market, the lower the discount levels.
While Rapaport does not set the discount levels, we do adjust the Rapaport Price List to reflect higher asking prices. Historically, trading in the New York market has been at the 20 percent to 35 percent discount level, although there have been times during relatively weak markets when the interdealer discount levels approached 40 percent. Over the past few months, the diamond markets have become much stronger. The availability of well-cut diamonds at strong discounts has disappeared. Super dealers can no longer buy super deals. Bigger businesses at strong discounts are not available. Rough is tight and expensive and better-quality, larger polished are often unavailable. Needless to say, prices on the Rapaport Price List have increased and the discount levels have declined.
Some cutters and dealers are very unhappy with Rapaport because they believe that the price list has not increased fast enough. As one trader recently exclaimed: “If I used to be able to buy certain diamonds at 35 percent below the Rapaport Price List, why must I now pay 27 percent? Why hasn’t Rapaport increased prices so that the discount remains at the -35 percent level?”
The fact is that discount levels are dynamic and they have come down in the current strong market as they have in the past. Rapaport does not now and has never in the past pegged discounts at a 35 percent level. What we can say is that we are now more sensitive to discount levels than we have been in the past and have targeted what we think is a reasonable interdealer discount level in the 20 percent to 35 percent range, given current market conditions. We do caution, however, that if polished markets become extremely hot, speculative and/or hyperliquid, discount levels may decline much further, as they did in the late 1970s and early 1980s.
We recognize that the lower discount rates have created problems for the suppliers that use the Rapaport Price List to establish long-term pricing commitments with their customers. Buyers should be aware that discount levels have decreased and that suppliers who were able to buy large blocks of diamonds at high discounts in the past may no longer be able to do so. It is reasonable for such suppliers to renegotiate their pricing commitments at this time. Firms that have questions about this are encouraged to contact us directly.
Furthermore, it is important to point out that the tightening of polished diamond availability is creating a situation where it is becoming increasingly difficult to supply large orders of similar categories of diamonds for multistore programs. While in the past, large retail chain buyers may have been able to obtain lower prices for larger orders, the new realities of the marketplace are such that larger orders may be more expensive to fill than smaller orders. Unless suppliers have arranged for special allocations of rough for specific retailer programs, the general availability of diamonds in the open market may be insufficient to meet the needs of selective diamond buyers servicing large programs. Large buyers and merchandisers are well advised to consider diversifying their large orders so that they do not pay premium prices for large quantities of particular diamond categories that may be difficult to source.
Outlook
The diamond markets are coming under severe price pressure. Rough prices appear out of control and polished prices have been spiraling upward. Much of the demand for polished is coming from the dealer sector, and there are concerns that retailers may not support the higher price levels if the holiday season does not meet or exceed expectations. It is certain that shortages of select qualities of diamonds will force retailers and consumers to pay significantly higher prices this holiday season. Furthermore, prices for diamonds on memo calls will be much higher this year, and retailers should expect the overall discount level for diamonds to decline sharply.
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Tags:
Consumers, De Beers, IDI, Manufacturing, Russia
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