Lower priced diamond rough…will it help?

De Beers lowered the price of rough by around 10%. While this does add a slightly better chance of profitability for cutters, how will it affect jewellery at the retail level?

DeBeers likes to believe that it is the driving force in the diamond industry. For nearly 100 years they have manipulated diamond prices and supply to create a demand based on false rarity. Over the last decade or two, their control has weakened and recent events at their monthly sights are showing signs that their grip may be crumbling even farther.

The true drivers of the diamond business are the consumers. They are the ones that provide the profits that keep the entire industry going. They are the ones that will decide the fate of the industry. We must listen to them.

Consumers are already speaking to us. They are losing interest in diamonds. They no longer believe in the investment value of diamonds and diamond jewellery. They still like the sparkle but are not interested in paying the traditionally high prices. As a result, retail diamond prices are falling and the volume of sales is growing smaller.

The drop in retail diamond price coupled with lower gold price will, in the long run, be a good thing. If jewellery is affordable more people can be in a position to buy and we will see a recovery in jewellery sales volume.

The problem is that retail jewellers are sitting on older inventory purchased at higher prices. Lower retail prices cut deeper into margins that are already too slim. Cutters and wholesalers face the same issue. They have been absorbing increases in rough prices in order to move goods, often losing money.

The recent reduction in the price of rough may help manufacturers make a small profit or at least break even, but the reduction is not enough to translate to lower wholesale prices. It will require a significant lowering of rough prices to make any real difference.

Retailers have an advantage over most cutters and diamond manufacturers; they can turn to other product lines to maintain profitability. Coloured stones are increasing in popularity and the margins are quite strong. While retail diamond margins languish in double digits or even single digits, colour can produce keystone, triple keystone or higher profits. Diamonds will still be used as accents, but colour will take the starring role.

Eventually diamonds will find their natural price level. DeBeers will need to be sensitive to retail demands and adjust their prices accordingly. It won’t be surprise if they make a few more attempts to fall back on their old manipulation techniques but if they truly want diamonds to be a commodity it is inevitable that prices must follow consumer demand.

There will always a demand for jewellery. It has been that way for thousands of years and that will not change. It will take time for the current problems to work themselves out and the industry will finally stabilize at price points that will produce profits and customer satisfaction. But it will still be stressful for a while.

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