Dynamics of prices in the world market of polished diamonds

By Tatiana Pototskaya, Cand. Sci.(Geogr.), expert market analyst, Marketing Department of Kristall PC

To conduct the present study, it is necessary to define several time intervals: max (representing the duration of one long market cycle of the world economy - from one economic crisis to another i.e. from the 1970s of the 20th century), average (one decade), min (dynamics of prices during 2006 for every month).

1. There are some particularities of diamonds prices within max time interval:
Two “peaks” of price rise: the first was in 1979-1980 (47 percent higher compared with the previous year), which can be connected with the investment boom due to the activity of Diamond Dealers Club on conversion of diamonds weighing 1 carat and more into the investment goods. The second peak took place in 1986-1989 (13 and 23 percent higher compared with the previous year), when “Reaganomics” started to bear its fruit, promoting production and, consequently, consumption in the USA, including jewelry items. If during the first peak the price change amplitude was equally high for all categories of diamonds, then during the second peak the significant price amplitude was observed only for large stones weighing 3 and 5 carats. It is necessary to note that both periods when polished diamonds prices soared concurred with the periods of rises of rough diamond prices. At the same time, the growth rate of polished diamonds was higher, particularly in 1979- 1980.

Price crashed in 1981-1985 (minus 27-49 percent). It can be connected with both objective reason (the world economy overcoming the crisis that was originally shown in oil price reduction and, consequently, prices for all energy resources, and then for other groups of products in production of which electricity is used) and subjective reasons (the consequences of the investment boom crash in the USA). At the same time the slowdown of prices change rate for polished diamonds was not accompanied by the slowdown of prices change rate for rough diamonds.

In the period under consideration large diamonds (3 and 5 carats) were subjected to the most acute price fluctuations, while price fluctuation for diamonds weighing 1 carat and less were less significant.

2. If we speak of a one decade interval (1996 - 2006), the constant gradual reduction of the real prices for diamonds of all categories of weight up to 2004 by 1-2 percent (in contrast to the positive dynamics of nominal diamond prices on diamonds in the same period) should be noted. After 2004, the decline in prices can only be observed for stones weighing 0.5 and 1 carat. Prices for larger diamonds (3 and 5 carats) began to increase rapidly. During the whole period the smallest fluctuations of prices were observed for diamonds weighing 1 carat (prices for this group decreased only 4 percent during the decade). Prices for diamonds weighing 3 and 5 carats increased 9 percent, but the price for 0.5 carat stones fell 30 percent (tabl.1).
 
2001 was the worst year, when prices for all groups of stones fell 3 percent, but for the category of stones weighing 0.5 carats were down as much as 5 percent. The reason could be the crisis of overproduction of goods, which was the consequence of celebration of the millennium. However there were “good” years: 2004, when prices for diamonds weighing 1, 3 and 5 carats grew 4, 7 and 3 percent correspondingly. There were some positive trends in 2005 and 2006 for stones weighing 3 carats (up 8 and 3 percent correspondingly) and 5 carats (up 12 and 7 percent). In this case the positive trend indicated two processes. Firstly, it was a natural consequence of the increase of the diamonds mining prime cost, connected with putting into operation of new diamond deposits and reconstruction of old diamond mines, and also with transition to underground mining (Africa, Australia, Russia, Canada). Secondly, it was due to speculative operations with the categories diamonds having hoarding characteristic (large stones with good qualitative characteristics).

Table 1
Average prices for different categories of diamonds in real prices (dollars per carat) for the last decade (percent change from the previous year) [Rapaport Diamond Report]

	0.5 carat	1 carat	3 carat	5 carat
1996	-1	3	-2	-2
1997	-1	1	0	0
1998	-4	-3	-2	-2
1999	-2	0	-2	-2
2000	-3	0	1	-1
2001	-5	-2	-1	-2
2002	-2	-2	-1	-2
2003	-2	-1	-2	-2
2004	-2	4	7	3
2005	-4	-2	8	12
2006	-4	-2	3	7
Total	-30.0	-4.0	9.0	9.0

3. At first sight diamonds prices within min time interval (2006) developed in accordance with pricing trends of 2005 (nominal prices): prices for large stones (3 carats and more) continued to increase though not so rapidly; at the same time prices for small stones weighing 1 carat and less decreased. In 2006 H+, VS+ diamonds weighing 3, 4 and 5 carats were in highest demand, and prices for them were up 6, 10 and 10 percent correspondingly, while in 2005 they grew 11, 15 and 15 percent. On the other hand, in 2006 prices for diamonds with the same characteristics weighing 0.3, 0.5 and 0.7 carats dropped 6, 2 and 1 percent correspondingly, while in 2005 price for 0.3 carat diamonds decreased 1 percent, and for 0.5 and 0.7 carat diamonds the price didn’t change.

However, in spite of some resemblance in development of the situation with prices in the world diamond market in 2005 and 2006, there are significant differences between price movements within these intervals. If in 2005 the growth of diamond prices was determined by the growth of rough diamond prices and growth of demand for certain categories of diamonds, which are traditionally considered to be deficient (3 carats and more with good quality), then in 2006 this regularity was not observed – rough diamond prices did not grow.

On the contrary, as Yariv Segev notes [5], the February 2006 increase of DTC prices was cancelled in July when the company realized it was too early. Many De Beers sightholders couldn’t conduct trade under conditions of diamond price rises (in 2006 indebtedness of the world lapidary industry was about billion, which was equal to the world annual volume of diamond mining, and world stocks of diamonds left after 2005 (more than .5 billion) didn’t apparently decrease). Many lapidary companies reached a critical financial situation. Moreover, in the opinion of Yariv Segev “…from the buyers’ point of view, the 2006 holiday season in the USA was flat (the share of the USA in consumption of diamond jewelry is up to 52 percent). The USA economy appeared to be weakened, and buyers, in general, had little desire to spend money. Besides, financial problems at some large American companies should be taken into consideration, and it will become clear that demand for diamonds did not increase along with annual increase of prices” [5].

Table 2
Correlation of dynamics of prices change rate for diamond complex product in the world market (percent to the previous year). [Rapaport Diamond Report, Polishedprices.com ]

A more detailed picture of polished diamonds pricing policy in 2006 in the world market is analyzed in Polishedprices.com (pict. 2). Calculation of the Overall index, which shows weekly, monthly and annual change of prices for diamonds weighing 0.3 – 3.0 carats compared with the beginning of the year, allows the comparing of the average annual movement of rough diamond prices with average movement of polished diamond prices (tabl.2, pict.2). According to this factor, we can say that in 2006 the development of prices for rough and polished diamonds was coordinated – they were fixed (rough diamonds – 0 percent; polished diamonds - 1 percent growth). However it more likely testifies not to positive trends in the development of the world diamond market, but its stagnation.

Unlike 2005, when demand for diamonds was determined not by weight of a stone, but by characteristics of its quality (in 2005 in every category of weight diamond of the group Fine had the highest rates of growth of prices, while diamonds of the group Mixed had the most significant rates of prices decrease), demand for diamonds in 2006 was first of all determined by requirements for weight. 

Pict.2 Average prices of diamonds weighing 0.3 -3.0 carats, 2006 (percent to the beginning of the year) [Polishedprices.com]

It is particularly clear when analyzing table 3, in which negative factors of rates of prices change are marked with blue and positive factors are marked with red. So, we see that blue color is gradually changing to red depending on the transition from smaller category of weight (0.3 carats) to larger (firstly 0.5 carats, then 1 carat).

Within each category of weight price developed in accordance with the following trends:

0.3 carats: against the background of a general fall in prices for stones of this category of weight, the greatest decline took place in respect of the group Mixed (14 percent during one year, but during some periods (June and November) up to 29 percent compared with the beginning of the year). The lowest fall in prices was in respect of the group Fine (7 percent for one year, though during a long period an increase of prices for this category of goods was observed – a 4 percent rise within the period January-July);

0.5 carats: all quality groups of stones of this categories can be divided into two groups due to the price movement – diamonds with positive rates of prices changes (Mixed: a 2 percent rise compared with the beginning of the year) and diamonds with negative rates of prices changes (Fine: a 13.6 percent fall, Commercial: a 5.2 percent fall );

1 carat: the only category of diamonds under consideration in which prices didn’t fall in 2006, and maximum growth was typical to diamonds of the categories Fine (by the end of the year prices grew 19 percent). High rates of growth were typical for stones Commercial (a 9 percent rise), but during the year the rates of price growth fell sharply several times from +1.6 percent in July to +4 percent in April and September. The lowest price growth within the category under consideration was typical for Mixed. By the end of the year prices for this group grew 6 percent. But there was also fall in prices during the year (-2 percent in January and -4 percent in April).

Table 3
Average prices for diamonds during the year (percent from the beginning of the year). Based on [Polishedprices.com]

Open database of prices for diamonds Polishedprices.com allows defining one more important analytical factor – the price rage for different categories of stone which show the particularities of demand (tabl.4). Traditionally the widest price range is for goods with the best characteristics, in this case it is the group Fine of all categories of weight of polished diamonds, and min is typical of goods of the worst quality characteristics – Mixed, not depending on the category of weight. This regularity is obvious, and is determined by characteristics of goods themselves. In 2006 is was not shown up in full - on the one hand, max price range was typical for quality category Fine of all categories of weight of polished diamonds, but on the other hand min price range was typical for quality category Commercial of categories of weight 0.3 and 0.5 carats, and of the group Mixed 1 carat.

Table 4
Price range for diamonds of different characteristics of quality and weight, 2006. Based on [Polishedprices.com]

The analysis of seasonality of price changes for polished diamonds during previous years has brought us to the conclusion that prices experience several rises and falls within a year. Prices for all categories of polished diamonds reach max rates of growth in traditional for the diamond market periods of activity - May and October. However, in 2006 such a rise was observed only in October within a period of Christmas sales. Price falls took place in the period of summer vacations – in June and after the season of Christmas sales – second half of November/December (2006 didn’t differ in this respect from previous years).

At the same time, identification of seasonality in formation of prices for diamonds allows us to suggest that the most demanded category of polished diamonds was the group Commercial 0.50 carats, because the dynamics for this category of stones consist with the dynamics of prices for generalized group of all diamonds weighing 0.3-3.0 carats.