Diamond specialist Ehud Arye Laniado takes an informative look at the options for purchasing and selling rough diamonds, explaining the advantages and disadvantages of each. "Manufacturers essentially have two alternatives when it comes to buying rough diamonds. They can either buy directly from mining companies, or they can buy from others companies in the secondary trading market." Mining companies (producers) sell their diamonds either through a "sight" system or through tenders and auctions. The Sight system received its name because diamond buyers were invited to De Beers’ offices in London to see the diamond parcels before buying. Sights are typical for major producers such De Beers, ALROSA, the state-controlled Russian company which is currently the largest producer in the world; Canada-based Dominion Diamonds; and mining giant Rio Tinto. Due to their size, these companies can offer manufacturers large allocations each month, which are generally consistent in composition.
Sights, Tenders, Auctions
Laniado writes, "In a typical supply system, large producers maintain a list of 80-100 companies that are invited to view and buy diamonds. These companies tend to be large, financially stable firms that are required to provide assurances of their financial health and capacity to the producer... Consistent supply is vital to manufacturers, and they will generally pay higher prices to secure it, and there is often little room to negotiate on price or quantity in this system... This system of selling rough depends on large volumes, which enable consistent allocations over time. In recent years, many smaller mining companies have entered the market. It is now common for a company to own only one or two smaller mines. This makes it harder to sell a consistent and homogenous product to manufacturers, which has led to a new practice of selling diamonds via tenders."
"In a tender, miners will usually sort diamonds into small parcels that are homogenous in terms of characteristics such as size, quality and color. Diamond buyers are invited to view the diamonds for sale and evaluate what they believe to be the appropriate price for each parcel. Rather than the producer determining the price of each assortment, here the buyers bid for individual parcels and the miner typically sells to the highest bidder... Producers can also sell diamonds through auction. Auctions are similar to tenders, though the bidding process is more sophisticated. Diamond auctions work much like auctions for precious art or collectibles, where interested buyers place incrementally higher bids until a single buyer remains."
Laniado explains that "For manufacturers, tenders and auctions have advantages and disadvantages. On the one hand, diamond parcels sold through tender are often smaller than large Sight allocations. This allows smaller companies with less capital to participate without having to commit to large expenditures." It also allows smaller companies to purchase specifically what they need for their particular manufacturing needs. "The disadvantage of tenders and auctions is that buyers are not guaranteed a supply, which is the primary advantage of the Sight system... Buyers have no assurance that they will be successful in acquiring diamonds each month. This makes it difficult to guarantee a steady supply for their factories, which makes planning more challenging.
There are up to 5,000 individual manufactures in the industry today and these companies must source their rough stones from somewhere. This is how the secondary trading market developed. Trading centers such as Antwerp and Israel supply the secondary market. "Secondary market trading is a critical channel for rough diamond supply, particularly for smaller manufacturers that cannot afford to spend millions each month to purchase regular allotments from mining companies. Like polished wholesalers that maintain large inventories and sell to small retailers with small budgets, rough traders can supply smaller quantities to smaller manufacturers on an as-needed basis. Profitability in this market fluctuates with supply and demand. Due to the ongoing financial crisis, profitability is currently very low, often non-existent. This is why the number of secondary market traders and small manufacturers has been declining."