12 Oct 2015 14:40 IST

Diamonds are taking a cut

The prices of top-quality diamonds are on a multi-year decline. Here’s why

If Marilyn Monroe were alive, she would be doing a jig right now. It is not just the prices of unglamorous commodities such as iron ore, zinc and lead that are on a decline. Top-quality diamonds have seen their prices tumble too.

A Bloomberg index that tracks polished diamonds shows that prices across grades have fallen 12 per cent in the last one year. Prices of top-quality polished diamonds (grades that are closest to flawless) have dropped 13 per cent this year.

The trend isn’t new. In fact, diamonds have been getting steadily cheaper over the last four years and prices of top-quality polished diamonds are now a good 35 per cent below their highs of August 2011.

But, before you swoop in to acquire the girl’s best friend, it may pay to understand why diamond prices are on a decline and why industry insiders are now beginning to mention the dreaded ‘g’ word — the possibility of a global diamond glut!

China factor

Let’s start with the China factor first. In recent months, it has become apparent that the Chinese economy is slowing more sharply and suddenly than anyone thought. Chinese consumers have been at the forefront of global demand for most luxury goods ranging from Gucci shoes and Louis Vuitton bags to iPhones and pink champagne in recent years.

It has been no different for diamonds. China is today the second-largest market for global diamond sales, accounting for 16 per cent of the world market.

While the US remains the kingpin with a 42 per cent share, it is China’s fast-paced growth that has kept diamond demand aloft in recent years. Mining giant De Beers in its latest Diamond Insight report noted that Chinese purchases of polished diamonds expanded at 18 per cent annually between 2009 and 2014, while the rest of the world increased purchases only at 3.7 per cent. This tells you that belt-tightening by the Chinese cannot augur well for diamantaires.

The Chinese slowdown has already begun to pinch India’s diamond hub of Surat, where smaller diamond polishers have been shutting shop.

Solitaires and sub-one carat stones were the most eagerly lapped up by Chinese buyers and this segment has seen prices fall quite a bit in recent times.

This is expected to leave some of these diamond processors with excess stock of diamonds too, which may be liquidated at a discount.

But then, the China factor has only aggravated the problems already created by the market forces of demand and supply.

In the past, even if polished diamond prices moved up and down, the prices of uncut diamonds used to hold rock steady through economic ups and downs.

De Beers’ grip loosens

This susceptibility to market forces can be traced to the weakening of De Beers’ iron grip on the global diamond market over the past two decades. Until the mid-nineties, the mining giant owned many of the active diamond mines in the world, controlling as much as 90 per cent of all global rough diamond supplies. With a tight grip on supplies, De Beers would only sell parcels of diamonds to carefully chosen ‘sightholders’; it alone would decide prices for the parcels and stockpile any excess output so that the market was always a little short of the sparklies.

But the discovery of prolific diamond mines in Russia and then in Australia and Canada, put an end to the De Beers’ hold on the markets since the nineties, and its share has since plunged to a third.

Today, three to four global mining giants produce most of the world’s rough diamond supplies. Of the 142 million carats of roughs mined last year, Russian giant Alrosa produced 26 per cent, South African behemoth De Beers 23 per cent and Australia’s Rio Tinto chipped in with 10 per cent or so, with other miners producing less than 5 per cent each.

Weakening demand and relentlessly falling prices have of late put such a squeeze on the polishing industry, that has been pressured by these miners for a cut in the prices of its raw material — uncut diamonds.

And surprisingly, both De Beers and Alrosa have recently obliged, slashing the prices of uncut diamonds by 6-8 per cent from August 2015.

Diamond industry watchers see this as a sign that the inexorable market forces of demand and supply are finally beginning to catch up with the ultimate luxury product. With this has ended the fiction that diamond prices can head only one way — Up!

Rare really?

Some industry experts are also piping up with the information that diamonds are really not as rare as jewellery buyers around the world have been led to believe.

Diamonds (or at least the garden variety white ones), they point out, are far more abundantly available in nature than gemstones such as rubies or emeralds. They attribute the global yen for diamonds mainly to slick marketing by the world’s largest diamond miner from the nineties.

Before the ‘diamonds are forever’ campaign which established the white rock as the only acceptable symbol of eternal love, lovesick men were happy to seal their proposals with chocolates or flowers.

But that evocative tagline and some heavy-duty endorsement by Hollywood celebrities (Remember Marilyn Monroe in ‘Diamonds are a girl’s best friend’), helped establish the diamond as the pinnacle of romantic aspiration for young lovers worldwide.

To cut a long story short, if you’re looking for an investment, plonking your money on diamonds isn’t a great idea, even after this price fall.

With diamond prices now showing a tendency to respond to old-fashioned demand and supply, price appreciation is no longer a given.

Unlike gold, diamonds aren’t a universally accepted store of value either; so no global central bank would hoard diamonds in a crisis. Once bought, diamonds also offer limited resale value, unless they’re really rare.

This should tell you that there’s only one real reason why you should buy diamonds. Like Marilyn, to flaunt them!

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