by Erez Jacob Rivlin, a diamond market analyst a nd diamond mining consultant. Served as an advisor to the Russian Government, (Minister Bychkov), on diamond issues, a nd to the Angolan President dos Santos. erezrivlin@yahoo.com
Have you ever wondered lately exactly when rough diamond prices went down? Analyzing the specific period during which prices change could generate tools to improve the challenging decision-making related to diamond trading. Experienced diamond buyers are very familiar with the question that so often echoes in their head: "Should I risk and pay a higher price now for this parcel, or should I wait a few weeks, because market prices might not go up yet?"
Despite being generated by the rough market, the polished diamond market is structured very differently. The number of players in the global polished market is much larger, with tens of thousands of polishers, traders, jewelry manufacturers and jewelry shops, in every city of the globe. In addition, the trade in the main world centers is fundamentally different in many aspects.
Rough deals are on average much larger than polished transactions and are paid in cash or with shorter supplier's credit. But the most significant difference is speed. Many polished diamond traders are accustomed to holding their goods for a period of four to 12 months until sold to the right buyer, while rough sellers are nervous about keeping their goods in the safe for a mere two weeks. This makes the speed of transactions in the rough market six to 10 times faster than the polished market, resulting in much faster price fluctuations.
These are some of the reasons why the rough diamond price mechanism is very different from the polished one, even though polished diamond prices are obviously impacting rough diamond prices and vice versa.
In the chart below the timeframe during which a change in rough prices takes place is defined in five phases: STABLE, FREEZE, START, NEW and STABLE. The same process is similar in both directions when prices are going up and going down. These five phases could be considered the five fingers of the invisible hand that shapes rough diamond market prices.
A 'stable market' is never fully stable. For example, at the end of 2020 and the beginning of 2021 when jewelry sales started to rise sharply, jewelers cautiously started buying polished diamonds to fill up their stocks. Nobody could really have predicted the very exceptional environment of a global pandemic in modern times, but the positive feedback from the jewelry and polished markets brought the rough market into a Stable Up phase. There were positive rumors and good mood but no impact on prices yet. Once frustrated consumers in Corona lockdowns kept on spending their money on jewelry like never before, the market moved into a series of cycles of price increases.
On the other hand, in an opposite example, the market moved into a very short Stable Down phase, just after the Russian invasion. Then within a very short consideration, it moved into the Freeze Down phase, when rough buyers offered 10% to 30% lower prices in tenders, acting in a very predictable way, as they usually act during a major world crisis. The low offers, that did not reach the minimum price, resulted in large values of goods remaining with the sellers. A similar situation happened in the offices of the rough trading centers in off-tender trading. In the Freeze phase, in both directions Down or Up, there is a big gap between sellers and buyers, the number of deals is reduced drastically, and despite a strong pressure on prices there is no clear new price structure yet.
Once some sellers start giving in to the repeating low offers, the market moves to the next phase: Start Down. It begins once a minimum critical mass of traders, about 10% of the market volume, starts selling their goods for new prices. A crucial defining aspect of the Start Down phase is the distinction between established sellers who have accepted the new price reality, and the sellers who will sell for any price due to financial pressures.
Towards the end of the Start Down phase, the reduced number of sellers who have so far tried to resist the downward trend realize that new prices are prevailing. But still, in the New Down phase, a small group of stubborn sellers will keep on trying to sell their goods for the old prices, and some not-so-updated buyers will make the mistake of actually paying the old prices.
For some traders the rough market is currently in the beginning of a Freeze Down phase. High inflation in 2021 did not prevent diamond market prices from rising sharply, but the negative impact of a long-lasting high inflation must be dealt with responsibly. The dark clouds of a recession are on the horizon, fueled by the Corona aftermath and the ongoing Russia - Ukraine war. On the other hand, the four main global diamond market players, De Beers, the Botswana government, Rio Tinto and even the Russian government, have proven themselves able to handle crisis times without destabilizing the market. (I only refer to the strategic diamond trading decision-making by the Russian government impacting the diamond market. This argument is not a statement of support for any other actions by the Russian government!).
It's only when rough sellers and buyers understand which phase of the price cycle the diamond market is in, that trading decision-making will become more efficient and beneficial to all parties involved.