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Why the Market for Large Diamonds Is in Free Fall

Four factors are driving the slowdown

Jul 2, 2019 11:37 AM   By Joshua Freedman
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RAPAPORT... As the who’s who in the glitzy world of high-value diamond auctions gathered in Geneva in May, there was an understated tone to this year’s pilgrimage to the Swiss city. While Sotheby’s and Christie’s played up their offerings of magnificent jewels, which usually boost market sentiment with the records they set, dealers approached the sales with some trepidation. The big-stone market, they noted, has seen better days.

The major auction houses are setting lower reserve prices than before in response to the weakness, explained Johnny Kneller, CEO of big-stone manufacturer Safdico.

At the Christie's Geneva auction, a 12.50-carat, D-color, VVS1-clarity, potentially internally flawless rectangular diamond sold for “just” $68,000 per carat. While the stone had non-ideal proportions, the price reflected a serious slowdown in the big-stone sector, stressed Thomas Faerber, a jewelry dealer and co-founder of the GemGenève trade show. The final price was 27.5% off the Rapaport Price List, according to Faerber’s calculations. 

“Apart from the 77% depth, it was a beautiful stone, and I would have expected it to fetch around list price in a better market,” Faerber added. 

The sale was not an exception. Prices of large stones have been plummeting for six months as an array of challenges have dented sentiment, with each discounted sale setting off alarm bells in the trade, knocking confidence further. The RapNet Diamond Index (RAPI™) for 3-carat stones dropped 12% in the first half of 2019, compared with a 3.1% decline for the 1-carat category.

“It’s a vicious circle,” a rough broker said on condition of anonymity. “Some people are expecting prices to come down further, so are delaying their purchases. The one leads to the other.”

Dealers identified four main factors contributing to the downward spiral.

1. Tight liquidity

In the past six months, larger Indian companies have been offloading polished diamonds above 3 carats to raise capital, the anonymous broker observed. That has weakened sentiment in the market, and created expectations that prices will fall further. Retailers don’t want to make purchases when they expect prices to continue their descent, he observed.

“They had to raise cash rather quickly, and to raise that cash in pointer [sizes] doesn’t make any sense, as it takes you way too long,” the broker explained. “There have been quite a few players offering these [large] goods at serious discounts on the market, and as a consequence, people have lost confidence in that product.”

A few low-price transactions can have a wide, negative impact on trading, explained Safdico’s Kneller, who echoed the rough broker’s explanation of the slowdown. The large-stone market is relatively small, so knowledge of a new price benchmark spreads fast.

“The prices were pushed up by speculators with easy credit, and have now dropped as the speculators face liquidity problems,” Kneller said.

2. Stricter compliance

While improved transparency is helping clean up the trade, it has contributed to the high-end slowdown, dealers acknowledged. Individuals who previously stored illicitly obtained wealth in diamonds are no longer able to do so with such ease, a director of an Antwerp-based diamond company noted. Governments are cracking down on the black market, and banks are asking for more documentation to prove the legitimate origin of goods and funds.

In particular, it’s become more difficult to trade with Hong Kong, as the municipality has stepped up its compliance rules in an effort to improve its global reputation, traders reported. Companies with longstanding banking relationships find their lenders are questioning income and asking for proof of transactions.

“The strict regulation of money is not having a positive effect on [the industry],” said Ephraim Zion, founder of Hong Kong-based high-end jeweler Dehres. “It’s [an issue] all over the world, but it’s more pronounced here in Hong Kong.” There’s a direct connection between the compliance challenges and the price of large diamonds, he insisted.

Meanwhile, US sanctions against certain individuals who previously bought diamonds have taken some important clients out of the market, another diamantaire said.

3. Reduced rarity

One ironic influence is mining companies’ success recovering rough. Improvements in technology have helped producers keep large stones intact when extracting them, affecting the rarity of those valuable diamonds, traders told Rapaport News. That’s the case both for 10-carat-plus rough, and for the extraordinary pieces above 100 carats.

“When you’ve got dozens — and I mean dozens — of diamonds that are coming out of the mines right now,…they’re not so rare anymore,” said Alan Bronstein, owner of New York-based Aurora Gems and president of the Natural Color Diamond Association. 

Source: Gem Diamonds company reports

Gem Diamonds found 15 stones over 100 carats at its Letšeng mine in Lesotho last year, beating its previous record of 11 in 2015. It also recovered 137 diamonds between 20 and 30 carats, compared with 113 in 2017. Lucara Diamond Corp., another big-stone specialist, has unearthed 12 diamonds above 300 carats since commissioning new X-ray-transmission (XRT) technology at its Karowe mine in Botswana in 2015, it reported in April. Lucara sold a total of 153 diamonds above 10.8 carats in 2018, compared with 115 in the previous year.

“We’ve heard from competent people that there are more large, D-flawless diamonds on the market,” said Faerber, who noted slower sales by some GemGenève exhibitors due to the situation. “The way to extract these stones has become more sophisticated.”

One anonymous dealer said he personally knew of seven or eight 20-carat, D-flawless polished diamonds. In the past, the number of such stones available would have been significantly smaller. That has made wealthy individuals perceive the product as a less exclusive option than before.

“Prices of diamonds have been falling so steadily over the last few years that people don’t view it as an asset class anymore,” he said. 

4. Economic uncertainty

The tariff dispute between the US and China has aggravated the decline in the past six to 12 months, according to the same anonymous diamantaire.

“One of the main reasons [for the big-stone slump] is that people want to conserve their wealth,” he said. “The trade wars aren’t helping.”

High-end consumer demand in the US — on which the large-stone market partly relies — has also been shaky. The public is now more aware of price “bubbles” after seeing what happened during the 2008 financial crisis, according to Elisabeth Austin, founder of Diamond Runway, which helps connect jewelry and gem sellers with collectors. At the same time, the wealthy are no longer comfortable being seen wearing super-expensive items, she observed.

“The only people in the US who are displaying things of high value are seemingly the rapper and reality-TV community, which the high-end people do not want to emulate,” Austin said. “So we’re still struggling to successfully represent high end to the high-net-worth individuals in the US.” The uncertainty has forced diamond suppliers to carry more large-stone inventory than they would normally want, she added.

Big stones, little optimism

The trade can expect key buyers to sit out for the time being as they see little hope for improvement in the short term. For instance, consortiums that previously bought supersized rough through profit-sharing arrangements are likely to restrict their spending, predicted Bronstein at Aurora Gems.

“The syndicates are overextended, because they’re sitting on hundreds of millions or billions of dollars of rare gems that have nowhere to go,” he said. “They’re also going to be quiet unless they can get a bargain.”

With so many things affecting the market, a lot will have to change if confidence is to return. Last week’s agreement by the US and China to resume trade talks could boost overall sentiment, but the other factors will remain. And dealers will need to find a way around those challenges.

Better marketing is one partial solution, as consumer demand is currently out of kilter with the huge quantities of large diamonds coming out of mines, Dehres’s Zion argued.

“As long as there is an imbalance between supply and demand, things will not improve dramatically,” he concluded.

Image: A round brilliant, 102.34-carat, D-color, flawless diamond Sotheby’s sold privately in 2018 for an undisclosed price. (Sotheby’s)
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Tags: Auctions, big diamonds, Big stones, Christie’s, Gem Diamonds, Joshua Freedman, large diamonds, large stones, Lucara Diamond Corp., prices, Rapaport News, Sotheby’s
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