Diamond prices 2000-2006:

Diamond prices 2000-2006: A free-floating experience

The beginning of the second millennium coincided with fundamental changes in the structure of the world diamond market. On July 12, 2000, De Beers officially announced its new marketing strategy, dubbed Supplier of Choice (SoC). However, the changes in De Beers’ strategy were not limited to marketing. Some may consider, and with good reason, that although in the long run SoC stimulated customer demand for diamonds by forcing the sightholders to increase their marketing, this was not at all the main component of the new strategy. Of much more importance was De Beers’ withdrawal from regulating diamond supply in the world market and, consequently, from forming the market prices for rough diamonds. De Beers’ obvious intention was to begin a grim competitive struggle against large independent producers of diamonds such as for world market share. The keystone to success in that struggle was to escalate De Beers’ production levels. Below we shall see what happened to market prices for rough diamonds after De Beers refused to continue supporting them.

Development of the new strategy had apparently begun long before the official statements, and various components were put in place before any official announcement. De Beers began with pricing. In 1999, the group started getting rid of its stockpile of rough diamonds, which was traditionally its main tool to regulate the volume of diamonds on the world market. The stockpile was formed basically as a result of buying up “surpluses” of rough stones on the open market, which otherwise could have depressed prices. The scheme was simple. De Beers’ purchasing offices offered to buy the stones for amounts based on the price lists for rough diamonds (probably with some discounts and extra charges). Thus, the market always had a buyer establishing a threshold, below which prices were not able to fall. The deliberate reduction of the stockpile was a vivid illustration of De Beers’ rejection of its traditional policy of commodity interference and regulation of market prices. In 1999 and 2000, De Beers reduced its stockpile by 9 million and 2 million worth of goods, respectively. In that time, De Beers’ sales increased by 57 percent and 8 percent, respectively, to .24 billion and .67 billion a year. From 2001 to 2003, reduction of the stockpile proceeded, though at a slightly slower pace: from 0 million to 0 million annually. From 1999 to 2003, De Beers earned some billion by selling off its stockpile of rough diamonds. In the same period, De Beers’ sales totaled .8 billion.

What were the dynamics of the rough diamond market in the new conditions? As an indicator of prices, we used the price index of Almazuvelirexport (AUE), which is based on world market prices for representative run-of-mine assortments. After calculating mid-year values for the index, it is possible to get a general picture of price behavior, which proves that the much-discussed rise in rough prices began to become apparent in 2003, and in 2006, prices went down.

Table 1.Translation of the heading:
Индекс АЮЭ – Index AUE
Среднегодовые цены на алмазы – Average annual prices for rough diamonds

However, this general picture conceals a number of interesting features. From September to November 2006, market prices for rough diamonds rose 30 percent. Prices were characterized by high volatility, i.e. the tendency to vary over rather wide limits (4 to 6 percent) over short intervals of time (one month). As a rule, such price ranges have an oscillatory character, i.e. a decrease is followed by an increase. At the same time, several underlying price trends could be observed. To reveal these, we used a trend indicator widely applied in technical economic analyses—exponential moving averages (EMA). One is a “fast” three month average, and a second is a “slow” six month average.

Table 2. Translation:
Индекс АЮЭ – Index AUE,
сен – September
дек – December
мар – March
июн – June

This analysis seems to show that the time De Beers chose to make fundamental changes in its price policy was not the most suitable. In 1997-1998, the situation on the world diamond market was not good because of the financial crisis in Southeast Asia. From 1996 to 1998, De Beers’s sales fell 31 percent. In October 2000, the state of the U.S. economy worsened. Although the crisis that everyone was so afraid of turned out to be only a slowing of growth, still, in 2001, consumption of diamond jewelry fell by more than 6 percent. In 2001, De Beers’s sales fell 21 percent to .5 billion. Still, De Beers made no attempt to support the market. The conglomerate’s falling sales were accompanied by a reduction of the stockpile by 0 million and an increasing in mine production of 7.2 percent. Presumably, during that period, the company faced a shortage of rough diamonds due to the purposeful measures it had undertaken to simplify the diamond pipeline. Nevertheless, despite the reduction of the cumulative market supply of rough diamonds, prices fell 26 percent from June to December 2001.

In 2002, diamond prices remained quite stable. Demand for diamond jewelry increased. De Beers’ sales grew 16 percent that year to 0 million, 0 million of which came from the stockpile sell-off.

The upturn in rough diamond prices began in 2003. That was the last year De Beers was actively reducing its stockpile. In 2003, the stockpile was reduced by 0 million to 5 million. After 2003, De Beers stopped reducing its rough stockpile. The size of the stockpile became equal to the mid-year cost of about three sights which, apparently, is the minimal level necessary to maintain sales stability. By comparison, in 1998, the value of the stockpile equaled 14.5 sights.

From 2004, the rise in rough diamond prices accelerated, with seasonality of price dynamics becoming more distinct—falling prices at the end (September to December) of a calendar year. Seasonal recessions became deeper, so deep that the rise in prices occurring at the beginning of the year was practically neutralized by their decrease in the last several months. Indeed, in 2004 and 2005, from January till July or August, diamond prices on the world market soared by 20 to 25 percent, only to subsequently return to their initial levels. It turns out that generally the range of prices was almost neutral during the year, and the actual rise in prices for rough over longer periods was considerably smaller than what it might seem over the short run.

However, the price decline of 2005 was unusual. Having seemingly begun as a seasonal downturn, though starting earlier than usual, in August 2005, it did not cease in December, but continued into 2006. The unusual nature of this downturn was further highlighted by the absence of obvious supply or demand factors causing it.

Consumer demand for diamond jewelry increased 6 to 7 percent in 2005. In other words, demand for polished diamonds is generally growing. The cost of diamonds set in jewelry also increased by 6 percent in 2005. Preliminary estimations for 2006 results point to continued healthy development of the consumer market, at rates comparable to those of 2005.

A.V. Nikolashenko, economist and head of the FSUE Almazuvelirexport Market Research Office;
V.G. Bek, director of Almazuvelirexport subsidiary Almazy.