The diamond-industry, pre- and post-coronavirus

[WillyDiamond]

Wrong people, wrong forum? I don’t think so.
Appreciate you supporting prices from a “Trade” perspective.
Agree 100% with something you said...”it follows no common economics”
Maybe now it will.

 

[Paul-Antwerp]

Diagem, you were wrong in stating that it may not make economic sense. It simply does.

Willydiamond, imagine any industry with common economic rules. Now, it can be foreseen that the demand-curve shifts down. I agree. By how much, nobody knows. But even the earliest signs show that demand did not go down to zero.

At the same time, the supply-curve shifts down. And all indications are, it goes down by a lot.

What does that do to resulting price-level, which is the equilibrium-point where both curves meet? I do not know, but the likelihood of it being higher than before is rather high. But while you use news about reduced supply as a proof that price will go down (completely against any economic theory), most industry-voices in this thread state: "We will see."

I have no problem with you posting your dreams. But if your dreams make no economic sense, please forgive me for correcting them.

Live long,

 

[Karl_K]

If demand is reduced and you can reduced supply and keep the value illusion alive you can hold prices.
Until someone panics or a bank calls in a loan then all bets are off.

 

[diagem]

Diagem, you were wrong in stating that it may not make economic sense. It simply does.

Live long,

I wrote "common" economic sense, we are not a common industry, our products are not a common commodity, our business values and practices are far from being called common.

Because of such reasons, our financial institutions & models, governmental duties and other practices that are pretty common everywhere else need to be adjusted to our needs.

We are mostly not a common industry.

 

[WillyDiamond]

Paul
You can have a lot of supply or very little supply, I personally believe that “demand” is going to price this thing in the future and I am hopeful that price will reflect accordingly of supply/demand models rather than a few dictate what the price should be. Will prices be higher or lower in the future, we will have to wait and see. IMO, the only way for prices to be like they have been in the past or even higher if the big boys play with supply and hold back. But how long can they do that?

I don’t know how it is in Belgium, but in the US we just had the worst jobs report of all time. It took the stock market 10 years to reach its highest level, that was eliminated in 1 month. Just unbelievable. I do believe the market will recover but will take time. You just don’t turn a switch and pop it comes back. Diamonds are luxury items. Economists are predicting an unemployment rate of 25% in the US. So when it comes to diamonds, you do the math.

 

[Paul-Antwerp]

WillyDiamond,

You may not know but I am not a diamond-cutter by education. I however am an Economics-Major, I would like that you take into account my very careful words when I talk about Economics.

For starters, the often expressed notion that diamonds are luxury items generally meets a condescending smile on my face. According to theory, a luxury item is a product where demand increases (or at minimum decreases only slightly) with price-levels going up. Various such products exist where the desire of the consumer to own that product increases because of it being more expensive. If the same product were sold half-price, less consumers would want it. Now, my history in diamonds teaches me that diamonds is not such a luxury product. Unfortunately, possibly.

To the contrary, all indications are that consumer-demand for diamonds is modeled in a similar way as many other non-consumer products.

More important however is that Demand on its own never establishes a price-level, for no product. The combination of Price and Volume (both go together) is always the result of both Demand and Supply.

Again, you bring up fairytale-stories about someone dictating price and a few big boys playing with supply. None of that has value.

Rather, we are in a situation where the demand-curve of consumers will probably shift. Logical.

You may not know, but when that happens, what is called the ripple-effect happens. In short, if consumer-demand goes down 5%, a retailer will not only want to buy 5% less, he will also want to reduce inventory to bring it more in line with the new level of demand. So, the retailer's demand will go down 10%, for instance. Next comes a wholesaler, who not only wants to buy 10% less, but also wants to reduce inventory, resulting in 20% lower demand towards cutting-houses. Going further towards the source, demand of rough diamonds coming from miners will quickly be down 50%, caused by a 5% decline in consumer-demand.

Understanding that process, do you see why we today see announcements of mines running into trouble? Many of them carry enormous debts, combined with a very high cost of production.

The first effect of this crisis is clear: the volume of new rough diamond-production will decrease. By how much depends on the position and strength of each individual miner. Final volume combined with final demand for rough diamonds will create a price-level there. Whether price will be higher or lower remains to be seen. But we can readily assume volume to be clearly lower.

How that finally will translate versus consumers is an even more complicated question. But rest assured, the result will be based upon volume and supply-cost coming out of rough diamonds. The higher the reduction in consumer-demand, the bigger the ripple-effect and the more volume produced will be reduced. You may hope that consumer-demand will make prices plummet. Reality however is that it will reduce volume produced, prices only as a secondary effect.

Live long,

 

[yssie]

This thread is a fascinating read. Thank you for starting it Paul, your article is appreciated And thank you to all the industry professionals who have shared thoughts and observations.


As someone who has neither trade experience nor education in economics...

This was the poetic answer of a major Indian diamond-trader: “Can't an overflowing river upstream cause a lot of damage, from the midstream all the way up to the delta? As the crops along the overflown river's path would be washed out, wouldn't this cause a lot of famine for an unwanted period of time? Shouldn't the flow be controlled before such a scenario happens? Sometimes, man-made dams are necessary with some pains in the near future, but fertile and fruitful in the long run."

My first thought, reading this thread, is that until very recently freshly-cut material was clearly the predominant feed to this river - diamonds that are new to the world's supply. Until recently there weren't viable alternatives (at scale), and until recently there wasn't appetite (at scale) for anything else.

I don't know about Asia, but in the modern West worry about "blood diamonds" - the hysterical propaganda, not informed opinion - is zeitgeist. Mix reduced mined diamond availability with lab diamonds at low cost and #BePopularAvoidMinedAvoidConflict, and I do think you've got a recipe for diminishing the cultural value of a "new" mined diamond.

I can't help but wonder if this major Indian trader is giving these new tributaries the gravitas they're due.

 

[Garry H (Cut Nut)]

In support of Paul's thesis.
1. In school vacation time in Australia (because we have 4 terms and pretty good weather all year around) the commuter traffic times almost halve. Yet only 10-15% less cars on the road.
2. The oil price shocks (like the recent one) always confound - a 5% drop in demand can cause a 50% or more drop in price. Or as we saw - a negative price!

 

[prs]

You may not know but I am not a diamond-cutter by education. I however am an Economics-Major, I would like that you take into account my very careful words when I talk about Economics.

For starters, the often expressed notion that diamonds are luxury items generally meets a condescending smile on my face. According to theory, a luxury item is a product where demand increases (or at minimum decreases only slightly) with price-levels going up. Various such products exist where the desire of the consumer to own that product increases because of it being more expensive. If the same product were sold half-price, less consumers would want it. Now, my history in diamonds teaches me that diamonds is not such a luxury product. Unfortunately, possibly.

To the contrary, all indications are that consumer-demand for diamonds is modeled in a similar way as many other non-consumer products.

More important however is that Demand on its own never establishes a price-level, for no product. The combination of Price and Volume (both go together) is always the result of both Demand and Supply.

Again, you bring up fairytale-stories about someone dictating price and a few big boys playing with supply. None of that has value.

Rather, we are in a situation where the demand-curve of consumers will probably shift. Logical.

You may not know, but when that happens, what is called the ripple-effect happens. In short, if consumer-demand goes down 5%, a retailer will not only want to buy 5% less, he will also want to reduce inventory to bring it more in line with the new level of demand. So, the retailer's demand will go down 10%, for instance. Next comes a wholesaler, who not only wants to buy 10% less, but also wants to reduce inventory, resulting in 20% lower demand towards cutting-houses. Going further towards the source, demand of rough diamonds coming from miners will quickly be down 50%, caused by a 5% decline in consumer-demand.

Understanding that process, do you see why we today see announcements of mines running into trouble? Many of them carry enormous debts, combined with a very high cost of production.

The first effect of this crisis is clear: the volume of new rough diamond-production will decrease. By how much depends on the position and strength of each individual miner. Final volume combined with final demand for rough diamonds will create a price-level there. Whether price will be higher or lower remains to be seen. But we can readily assume volume to be clearly lower.

How that finally will translate versus consumers is an even more complicated question. But rest assured, the result will be based upon volume and supply-cost coming out of rough diamonds. The higher the reduction in consumer-demand, the bigger the ripple-effect and the more volume produced will be reduced. You may hope that consumer-demand will make prices plummet. Reality however is that it will reduce volume produced, prices only as a secondary effect.

Live long,

Paul, I suspect your example might be a little exaggerated. Following the logic, if consumer demand were to decrease by 10%, wholesale demand would be down 20%, and demand for rough would quickly be down 100%. It's true that a 5% decrease in consumer demand might produce a temporary 10% decrease in wholesaler demand as the retailer reduces his inventory by 5%. However these days many retailers don't actually keep much inventory. If you look at the PriceScope diamond search well over 95% of the diamonds for sale are virtual, and not owned by the retailer. For decades business schools have been preaching the merits of JIT inventory and supply chain management. So a 5% decrease in consumer demand would certainly have a ripple effect up the supply chain, but that ripple should pass thru the chain fairly quickly. It should be nowhere near the effect you are suggesting.

However a 50% decrease in consumer demand might be a whole different story. Entities that can no longer cover their overhead would be forced to liquidate inventory to generate cash flow or meet bank loan collateral demands. Worst case they go out of business and liquidate their entire inventory.

 

[Garry H (Cut Nut)]

Paul, I suspect your example might be a little exaggerated. Following the logic, if consumer demand were to decrease by 10%, wholesale demand would be down 20%, and demand for rough would quickly be down 100%. It's true that a 5% decrease in consumer demand might produce a temporary 10% decrease in wholesaler demand as the retailer reduces his inventory by 5%. However these days many retailers don't actually keep much inventory. If you look at the PriceScope diamond search well over 95% of the diamonds for sale are virtual, and not owned by the retailer. For decades business schools have been preaching the merits of JIT inventory and supply chain management. So a 5% decrease in consumer demand would certainly have a ripple effect up the supply chain, but that ripple should pass thru the chain fairly quickly. It should be nowhere near the effect you are suggesting.

However a 50% decrease in consumer demand might be a whole different story. Entities that can no longer cover their overhead would be forced to liquidate inventory to generate cash flow or meet bank loan collateral demands. Worst case they go out of business and liquidate their entire inventory.

Wrong I am afraid.
One of my dearest friends (in Vegas) runs a retailer consultancy using their inventory reports from a variety of different software systems.
He will tell you that most B&M stores have stock turns of less than 1.0. Almost no one with a decent sized business has more than 1.0 times turn (me included).
To compete you need to have goods.
In USa a lot of diamonds are on memo, but they are usually goods that dealers can not sell fast.

I am an armchair economist too and Paul is on the money PRS

 

[AV_]

@prs Somewhere on a nearby, recent post, @diagem mentions this possibility of second market sales. The demand for such diamonds - given the type of transactions & expected discount, looks like a hundred year drought to me [high elasticity, perhaps - prices are also not stable in the best of times, you must have seen some of this, posisbly a different side than I].

 

[diagem]

Great explanation on the ripple effect by CEZ

http://www.idexonline.com/Memo?Id=45762

 

[Garry H (Cut Nut)]

Great explanation on the ripple effect by CEZ
http://www.idexonline.com/Memo?Id=45762

For those who do not know Chaim - he is an intellectual power house. Kind of the thinking persons economist (not Rapaport who is the populist economist).

A lot of cutting manufacturers will be working on man made and so you could expect to see a lot more of those goods in the market!

 

[AV_]

@diagem Carpe diem!

 

[AV_]

@diagem @Garry H (Cut Nut) I do not disagree with anything in the IDEX model, not least because this is not theoretical Econ. [I am aware enough if it to have left, caveat] - a part of it talks of various forms of expectations over shocks, and this is something else, but neither theory nor anything tells much of what used to be a tall tale state of the world. I feel that diamonds are not a single type either - as you put it, @diagem "a strong flow" to 'discover the value of' [ref. www, www.]

 

[Serg]

The ripple effect refers to structural dynamics and describes a downstream propagation of the downscaling in demand fulfilment in the supply chain (SC) as a result of a severe disruption.
The bullwhip effect refers to operational dynamics and amplifies in the upstream direction as ordering oscillations.

Ripple effect without Bullwhip effect is not danger for the diamond industry . The standard Bullwhip effect is well known in the diamond industry and main players have skills , instruments to damp it. Unfortunately there are several ripple effects( waves) is coming together in same time . it creates huge soliton ( tenth wave).

1) Loans payback demand from banks( it had been started 2 years ago .if prices go down then second wave will much more deeper and more critical for mining and manufactures industries )
2) End of developing diamond market cycle in China . It could not grow more so fast as 5-10 years ago. Thousands new jewelry shops in Chine had created high demand for surat manufactures 5-10 years , because they were buying to create stock . Now they have enough stock and will buy only according sells .
3) Less and less consumers demand for natural diamonds due changes in consumers values and weakness in diamond sales technologies .
4) Decreasing middle class in EU and USA
5) MMD growing supply , aggressive marketing
6) Second hand diamond
7) global economical crisis

Temporally all these waves could reduce end consumers prices that creates many bankruptcies in diamond pipeline ( mining companies, manufactures, retail) . From one side it significantly reduces supply from other sides it will create new products, new companies, new business in next 3-7 years:

• Second hand diamond business becomes much bigger and stronger . In beginning it reduces new sales but finally it supports new sales.
• MMD market also become much bigger and it will help natural diamonds back to Luxury market.
• Biggest Luxury companies come to diamond market both for natural diamonds and for MMD
• Natural diamonds become more expensive. MMD become cheap with very big color variety

it is impossible to predict now new equilibrium point , but most probably it will far away from current .
I am happy to see big changes in the diamond industry .

 

[Paul-Antwerp]

One month after my original post, a lot has happened. Still, a lot is remaining at a standstill too.

It will be interesting to see tomorrow's online-presentation by Martin Rapaport. Traditionally, the Rapaport Breakfast is a big thing during the Vegas-show. And you can count on Martin coming up with a new topic every year, often coinciding with a new initiative of the Rapaport-group. Even then, listening to Martin expressing his truth is entertaining, educational and sometimes eye-opening.

Tomorrow, he will present his yearly highlight online. I am truly curious how he sees the State of the Industry. Surely, he will defend the business of the Rapaport-group, but I wonder how he will position it.

Stay tuned, thus. Looking forward to tomorrow

Live long,

 

[diagem]

One month after my original post, a lot has happened. Still, a lot is remaining at a standstill too.

It will be interesting to see tomorrow's online-presentation by Martin Rapaport. Traditionally, the Rapaport Breakfast is a big thing during the Vegas-show. And you can count on Martin coming up with a new topic every year, often coinciding with a new initiative of the Rapaport-group. Even then, listening to Martin expressing his truth is entertaining, educational and sometimes eye-opening.

Tomorrow, he will present his yearly highlight online. I am truly curious how he sees the State of the Industry. Surely, he will defend the business of the Rapaport-group, but I wonder how he will position it.

Stay tuned, thus. Looking forward to tomorrow

Live long,

Looking forward to his presentation too, every year its like a big informing comedy show...
I think he might have a difficult time defending the old Rapaport agenda today because he never really revealed his systematized methods.

 

[Paul-Antwerp]

Hi Yoram,

He can bring it as a topic or he can totally ignore the topic of the Rapaport pricelist. I wonder to what extent Q&A will be possible in a webinar.

It probably will be like soccer without public. It is the same game, but it is not the same game

Live long,

 

[Dizzie]

Really curious to hear the insight from the Rappaport speach

 

[diagem]

Hi Yoram,

He can bring it as a topic or he can totally ignore the topic of the Rapaport pricelist. I wonder to what extent Q&A will be possible in a webinar.

It probably will be like soccer without public. It is the same game, but it is not the same game

Live long,

When the Rapaport blowup happened, the whole communications buildup was happening on two Telegram (app) groups, I am not sure you were connected but I was, at the same time Rapaport also opened a Telegram group as contra discussion...., as discussions heated up rapidly, Rapaport closed the group.

I guess this might answer the question...., I suspect a public-less game with no conference call after. Just a hunch.

 

[diagem]

Great Cooperation with Tracy Ellison aka @thediamondsgirl on IG.
Actually the first time I have seen a meaningful and present educational from any Industry Icon..., well done RAP.

 

[diagem]

I must say, yesterdays's Rapaport state of the industry webinar really impressed me, not so much for its content even though he did touch serious issues on the horizon (with his humoristic persona capabilities) but mostly with his flowing authenticity in his voice...

He was an open book, dont know if deliberately but this is the first webinar where practically every question from the 600+ virtual participators was answered.

it was a hour and a half webinar and a full hour of Q&A's. there were questions about every facet of the industry including quite a few questions touching on his current affairs, he left no question unanswered. and IMO says a lot about the man!

I was able to feel his pain but by his addressing every comfortable and uncomfortable question with a calm and relevant answer, just shows how much of a mensch he is.

And as mentioned in my post above, I was very impressed with the fact that he brought Tracy Ellison aka @thediamondsgirl into participation where for the first time allowed a non-diamond professional communicate important information about marketing diamonds in our digital age, a topic many, many professionals have zero knowledge and understanding.

This is exactly what I have been preaching to our industry leadership for years while encountering barely any cooperation. Hoping maybe Rapaport opened up a new educational direction we were so lacking off.

In any event, there were a lot of "I just dont know" sayings reflecting our current environment on a wide scope..., we are all moving towards an uncharted waters, but a couple of his main louded points were, If you cant add value over the physical costs of diamonds (no matter their levels) do yourself a big favor and get out of the business before you get naturally ejected.
And if your business model is selling diamonds the cheapest, your suppliers will overpass you eventually, there is no hope for such models anymore.

 

[xxxxxx]

@diagem Thank you for taking the time and sharing your thoughts on the webinar. Very interesting! Rappaport isn’t really of interest for your business is it?

Did he touch on the subject of lab growns?

 

[diagem]

@diagem Thank you for taking the time and sharing your thoughts on the webinar. Very interesting! Rappaport isn’t really of interest for your business is it?

Did he touch on the subject of lab growns?

Yes, I must admit, it was entertaining and informative as always.
I dont use any Rapaport services because his services the greater generic market who utilizes his price lists, Rapnet platform and auctions., my business model is build on other priorities.

Lab growns, this is actually the only subject that wasn't pleasing to me because I believe they are here to stay and thrive while Rapaport cancels them out straight out..., a tone I didnt like or appreciated.

 

[Paul-Antwerp]

In my view, Rapaport confirming that a lot of the outcomes after this crisis are still unknown is most important. Accepting the unknown is important.

But he did shock the audience by clarifying that new rough diamonds will decrease 40%, thus new availability of polished diamonds reduces in a similar, probably even higher way.

Live long,

 

[Serg]

At least last 10 years Rapaport was claiming about future rough diamonds shortage . All these 10 years I see what the industry has much more rough than it needs.

 

[Karl_K]

But he did shock the audience by clarifying that new rough diamonds will decrease 40%, thus new availability of polished diamonds reduces in a similar, probably even higher way.

Live long,

I assume you meant quantity and not price, they do not have the headroom to raise prices that much or at all.
All a shortage of rough will do is accelerate the acceptance of MMD.

 

[Paul-Antwerp]

It seems I need to clarify here.

Nobody, also not Rapaport, now mentioned a shortage of rough. Predictions are that sales of rough will decrease 40% this year. That is in line with earlier news that sight-cycles have been canceled or deferred, and that mines have been put on maintenance.

Live long,

 

[WillyDiamond]

Paul
Why is supply going to be down? MInes are closed? Labor shortage or layoff? Not clear on this. Are the factories adjusting supply to “anticipated” lack of demand?