Industry News by Nemesis

Drastic Rough Diamond Price Cuts Will Result In Billion-Dollar Losses

November 26, 2015

There’s absolutely no argument that rough diamond prices are much too high today. Manufacturers are having an extremely difficult time selling the polished coming out of this rough as buyers are simply unwilling to pay more. That this is mainly because diamond miners have only looked at their own bottom lines and ignored the warning signs in the production pipeline is also an uncontested fact. That this has considerably weakened and destabilised the diamond production pipeline is also undeniable.


However, calling for an immediate reduction of between 30- and 50 percent in rough prices is a hasty, unthought-out and counterproductive step. It will immediately result in huge losses for the diamond processing industry running into the billions of dollars. Going by last year’s diamond pipeline value estimates, rough sales by the mines totalled $16.7 billion and polished that came out of it was estimated at $22.3 billion. Much of the rough sold this year and the resulting polished is still lying either unprocessed or unsold in the inventories of diamond processing firms. There aren’t any official estimates, but any random fraction you select will give you an inventory value in the billions of dollars at any given moment.


The fact that an immediate 30- to 50 percent reduction in rough prices will cause catastrophic losses doesn’t really need any underlining.


Instead of seeking a drastic price reduction, the industry has to work collectively to first clear the production pipeline of this high-priced stock. The most practical way is to drastically reduce supply and in effect starve the pipeline until it clears. Combining this with a moderate price reduction will help the industry get its inventory moving by mixing higher priced goods with slightly cheaper ones and averaging out a cost that is acceptable to polished buyers.


After being bludgeoned by market forces and something of a manufacturers’ revolt, the mining companies have finally instituted these two measures. De Beers has allowed its Sightholders 100 percent deferment of their intentions to offer (ITOs) and other major suppliers like Rio Tinto and ALROSA, faced with losing clients, have adjusted and eased their long-term contract norms.


These actions have come very late in the day, no doubt, but the right moves are in place nonetheless.

For the long term, however, profitability in the industry can only be restored by a concerted global promotional campaign to raise the perceived value of diamonds with consumers. Again, movement her has come very late, but it has, nonetheless come. The Diamond Producers Association (DPA) has now engaged a creative agency to put in place a global promotional strategy that will resonate with today’s younger consumer.


I can’t stress the importance of having a global and permanent promotional initiative in place. This promotional strategy has to reach all the way to retailer, who is the industry’s point of contact with the consumer — the ultimate valuer of all our products.


In the absence of such a campaign, the jewellery retail industry is increasingly resorting to staggeringly large discounts — that too in the all-important holiday season — just to move product. While this might clear shelves of inventory in the short term, all it does is devalue our final product further. A consistent promotional campaign worldwide is the only way for long-term success.


In the interim, whoever is to blame, it is in the global industry’s interest to actually get a closer interaction between miners and the mid-stream so that the pipeline as a whole gets more in sync with what needs to be done globally to improve the big picture for everyone. Finger-pointing and trying to apportion blame is not really going to get the industry out of the very deep hole it is in right now.

Instead of an angry or panicked reaction, the global industry needs to chart a calculated way forward.


Source: GemKonnect

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