What Goes Up…

…may not come down, if diamond prices follow demand in the Far East

For some months now, the diamond market has been moving at rocket speed, mostly in indeterminate directions. Most insiders will agree on one thing: uncertainty, the very thing all markets hate. As much as that was the case before the unrest in North Africa and the Middle East, those events and the disastrous earthquake and tsunami in Japan only served to remind us all of the fragility of our existence.

The Hong Kong International Jewellery Show, held in March, was an excellent illustration of the contradictions in the diamond business. It’s the only major international show with a heavy representation of diamond dealers from all over the world. Many dozens of companies from Antwerp, Israel, India, the United States, and China were there. At first glance, it was a sight to see. 

The stocks of diamonds on display were staggering, enough to make one wonder what all the talk of shortages was about. But that was the topic of conversation everywhere. 

In larger goods, prices were rising again, as they have been for months, spurred by a belief that we are facing real shortages and inflation. In this area, the Asians—and the Chinese in particular—were out buying in strength. The Chinese market is expanding rapidly, and there is a conviction that inflation is on the way. That will push local prices significantly. 

However, in small goods—especially under-3 pointers, the bedrock of the jewelry business—there are real shortages and rapidly rising prices. Production is down, as Indian companies claim they have difficulty producing profitably. Part of that is related to the severe decline in the number of workers and factories that occurred with the onset of the recession three years ago. And now, the strength of the Indian economy, rising wages, and a strengthening rupee have all conspired to make hiring and increasing production very difficult. 

For the first time in memory, ­suppliers we spoke to in Hong Kong said the power was now in their hands, whereas for many years the buyers held the power in negotiations. Suppliers said they quoted prices and refused counteroffers. There were five auctions during the show, and all sold out. Dealers who could not attend subsequently bought goods from those who did attend—at 5 percent to 10 percent premiums. 

No diamond buyer has escaped the rise in prices.

As we know, speculative bubbles can evaporate suddenly. Cases can be made for prices to go either way. In the meantime, there are some real ripple effects in the United States. Some ­jewelry manufacturers are simply having a hard time finding enough goods or are very hesitant to pay sharply higher prices, unsure if customers will pay the increase. As it is, the euphoria of a successful Christmas and a good start to this year has faded. We will see retailers continue to buy this year, steadily and carefully, but we can already assume that the bulk of goods to be produced and delivered this year will be with diamonds that are 15 percent or more over last year’s average prices—and still going up.

In the mass market, conditions are even more slippery. Large chains need reasonably stable prices, but quotes by suppliers offered with samples may not hold until orders are received.

One fact stands out: The United States is still, by far, the largest market in the world. But it is mature, and growth in the low single digits is the best we can expect in the years to come. Asia, by contrast, is quickly developing a large middle class that will grow in strong double digits, just as our middle class is under duress. It is no accident that the Hong Kong show had a huge number of diamond dealers in attendance.

We should remember that dealers offer just three things to buyers: price, inventory, and quick service. And they seek willing cash buyers and volume. That is why they are represented in Asia in force.

All this is not lost on the big mining companies, who are all moving further into rough and polished tenders. That is recognition of a future in which constricted supplies will favor cash-rich buyers. American retailers will need to think carefully and plan for those days.

One way to hedge bets is to consider forecasting diamond needs, perhaps based on the past 12 months of sales with a 5 percent to 10 percent projected cost increase, and make some early purchases. Maintaining a three- to four-month supply provides a good cushion, at least against short-term volatility.