Diamond Wilderness

Some trends in the changing diamond landscape suggest where we are headed. Retailers aren’t sanguine about the high-end business and steep price increases. One prominent retailer told me he sees it as a bubble inflated by mindless extravagance in some foreign markets. The bloom may be off the rose. Prices for big stones have flattened, and we may see a decline, though that may not mean better times. At this writing, rough buyers in Antwerp are saying no, which brings a chill to the market. A decline in prices is dangerous now that the DTC is no longer a market buffer. In addition to eroding the capital base of dealers, a price decline in the overstuffed pipeline can cause banks to retreat from extending lines of credit. The DTC, sensing danger, has rushed out a new money offer to sightholders who can implement new marketing plans that have commitments from retailers and that target the problematic middle qualities.

As for retailers, they have to contend with a weak dollar that puts them at a great disadvantage in the global market. For now, they’re not getting first shot at prime stones. If this continues, retailers will find it difficult to get the stones they need.

One wouldn’t guess this is a problem, given the number of stones listed on Idex, RapNet, Amazon, Blue Nile, etc. Some 500,000 diamonds are listed, a daunting number. New sites pop up every day. This benefits anyone seeking a stone. One young dealer told me he resigned from the Diamond Dealers Club because his needs are satisfied by the main wholesale networks. Their power and functionality are growing, and even if we eliminate duplicate listings, any dealer or retailer can find plenty of stones.

But these listings are the unsurprising result of diamond manufacturers needing to maximize exposure of their inventories, and, perhaps more telling, to unload inventory in a time of restricted credit, a weakening economy, and uncertainty about how long the price bubble will last. The last crash in diamond prices, in the early 1980s, wiped out many companies. Now companies play it close to the vest. They’re trimming inventories and pricing competitively—online sites keep companies, and their pricing, in line.

The larger mass market is more complex. Labor rates in India and China have risen 20 percent or more. In China, new work rules have boosted labor costs by 15 percent. India no longer has duty-free exports to the United States, and the rupee has risen 12 percent against the dollar. That means a 20 percent increase on a complete piece of jewelry. Major chains have resisted absorbing the increases, further shrinking supplier margins. All that comes before other costs, such as co-op or returns, which have long been a part of dealing with the majors. To some degree, the problem is on hold. Much merchandise was not returned after last season because it was bought before the sharp rise in gold and diamond prices. Now the majors are using that inventory. Some suppliers are recycling old inventories to fill current orders, even though it represents profitless sales at today’s replacement values.

What happens when these inventories are sold? One Indian supplier says he won’t restock promotional grades of diamonds for 2009—and he says many other companies will refrain from stocking inventories that may or may not sell profitably. Majors believe that raising prices to reflect current manufacturing costs will extend the declines is sales.

Is this a lose-lose scenario? One thing is fairly certain. The combined effect of a slack economy, stricter bank lending, and a concern that prices won’t sustain their current levels means inventory is a hot potato. It’s possible that a worldwide economic slowdown will bring diamond prices down—at least for a while—but the structural changes in pricing make it highly unlikely that we can recapture those lost price points, at least when it comes to traditional gold and diamond jewelry. In the longer view, we will see higher diamond and gold prices. Somehow, somewhere, there needs to be an accommodation between suppliers and retailers. It will be painful.

Diamond people may benefit from a fundamental shift in public preferences, for example, to silver. That has begun already, though it’s unlikely to come close to replacing gold. Major chains will see declining units but better margins. So might suppliers. The other certainty is that jewelry will continue to be sold in large numbers in the United States. Diamonds will be a big part of that.

benjanow@gmail.com