Edahn Golan: Lower Price Jewelry on Rise, Rough Prices Not Falling

Rough Market
22/06/2017 16:59

In his latest blog post, "A Market in Chaos", diamond industry researcher and analyst Edahn Golan examines the disconnect between the rising trend of lower price point/smaller-diamond jewelry and the willingness of manufacturers to pay more for the rough to produce it. He starts with trends in the consumer jewelry market - because this is the ultimate determining factor for the diamond market - that are demonstrating a distinct shift towards lower value goods. Drawing on his impressions from the JCK Las Vegas show, Golan writes, "The trend of smaller diamonds stood out. Several designers specifically stated that this is part of their effort to appeal to young adults. Of course, with smaller diamonds also comes lower cost and lower price point. The price point clearly appeals to millennials and, I suspect, to a growing base of Chinese consumers as well, a trend worth noting."

He adds, "The interest of American consumers in lower price point jewelry items has been standing out for some time. If a jewelry design is to be set with diamonds and have a lower price point, it dictates that the total weight and size of the diamonds be lower." And indeed, the polished diamond market is following suit. "In mounted goods sold by specialty retailers in the first four months of the year, the share of diamonds weighing 0.10-0.19 carats increased almost 10% year-over-year, while the share of 1.00-1.04 carats dropped nearly 20%, based on data collected by NPD’s Diamond Tracker service." Meanwhile, "The share of loose diamonds weighing 0.10-0.19 of a carat increased by more than 23% year-over-year, as the share of almost every other size range below one carat declined." Golan believes trend of smaller goods will be here for a while, with the value of wholesale goods on the American market declining accordingly. 

While polished trade figures from Antwerp did not represent a particular trend, "in India, the polished diamond trade was in line with cyclical trade: exports were up double digits, although the average value sunk 17.3% to $609 p/c." The disconnect appears, however, when turning to the rough market, as the lower value stones on offer at De Beers June sight were being sold at a premium. This leads Golan to ask the following: "In a market of continuously declining polished diamond prices, the cost of rough should follow suit, or at least so goes the theory in a pure-play market. The explanation for the willingness to pay more for rough is found in other realms. What is driving this decline?" The answer: falling supply of the type of stones most in demand. And this is not because De Beers is artificially 'gaming' the market, but rather because South African diamonds - typically lower cost goods - were not part of De Beers recent mix due to a decision taken by South Africa's minerals minister, Mosebenzi Zwane. 

Summing up the situation, Golan writes, "The limited supply has resulted in manufacturers, mostly in India, finding themselves pressed operationally (factories must run, and at least at near full capacity) and psychologically. The demand fever is being starved instead of fed. A large company has a flow of operations, and a shortage is a disruption that causes companies to seek out supply, even at a higher cost." Noting that retailers have a very specific set of consumer-demanded categories - at specific price points - and are less interested in others, while wholesalers carry the full range and must still manage to move the less desirable items, Golan concludes the following: "The balancing game here is interesting: retailers will buy items that are in demand, but won’t pay more for them, resulting in steady prices. For goods not in demand, wholesalers are unwilling to lower prices because the cost of replacement in a market of rising rough prices does not allow them to compromise. Downstream hardship is not deterring manufacturers from buying less rough at higher prices. This is a bottleneck issue. Once matters in South Africa are resolved, some of this pressure will be alleviated."