By Paul Ziminsky
Diamond pricing is a vaguely understood process that typically results in very high retail prices, and then shockingly low resale prices. Here, we delve into polished diamond pricing and the recycled diamond segment. This two-part series should give you a better understanding of how diamonds become so expensive and how their market value plays out in their life cycle. For a visual summary, see our infographic at the bottom of this post.
Pricing Diamonds: From the Mine to the Jeweler
There are three primary segments in the diamond industry:
All three segments create value and in aggregate determine a diamond’s final sale price at the retail level.
The upstream segment of the industry encompasses the process of producing naturally occurring rough diamonds through mining. Diamond mining can range from simple small-scale non-commercial artisanal mining to sophisticated large-scale commercial operations.
The majority of global rough diamond production comes from large-scale commercial mines. However, there are currently less than 100 large-scale diamond mines in the world today due to the rarity of economic deposits. The process of exploring for diamonds, making an economic discovery, and then building a large-scale mine can take decades and cost billions of dollars.
Diamond mining companies profit by unearthing diamonds and then selling them to rough diamond wholesalers, cutters and manufactures. If a mining company cannot sell its diamonds for more than the total cost of producing it’s diamonds, the economics of the project can no longer be justified and production will eventually be halted and supply disrupted. To maintain production a miner needs to maintain a sustainable profit margin.
De Beers once controlled the majority of global diamond mining and supply and discretionarily set rough diamond prices. However, a series of events over last 25 years, including new diamond discoveries, competition, and antitrust action, has transformed to the modern diamond industry into one that is now controlled by multiple entities. Rough diamond auctions and tenders and the market’s supply and demand currently have a greater effect on global diamond prices than ever before.
Of the diamonds produced by the upstream industry, only about half are considered gem-quality or diamonds fit for use in jewelry. The balance of the diamonds are typically considered industrial-quality, primarily used as abrasives, although some high tech industries are now beginning to use diamonds for other applications such as processing chips.
The midstream segment of the diamond industry typically includes the process of transforming diamonds from rough to polished state and finally a retailable diamond product. A midstream participant’s objective is to increase the value of a rough diamond by optimally sawing, cutting, polishing and manufacturing it into jewelry.
Its worth noting that when a diamond is cut, typically less than half of a diamond’s original rough carat weight remains. To remain profitable midstream participants need to purchase rough diamonds at a price that allows them to sell the final polished product for a margin that covers the price paid for the rough diamonds and also all associated operational and logistical costs.
Finally, downstream participants purchase polished diamonds, or completed jewelry from the midstream participant in hopes of making a profit by finding an optimal end-buyer of the diamond, typically a retail customer. The downstream segment is typically comprised of polished diamond wholesalers acting as a middleman, and retailers selling to the public.
While the markup of a diamond between the midstream participant and downstream participant’s final retail price can be significant on a percentage basis, the markup encompasses an aggregate of the downstream participant’s operational costs, which can be proportionately significant.
A diamond retailer’s operating costs can be substantial after property cost, labor costs, advertising cost, insurance costs and security costs are all factored in. Just like every other segment of the diamond industry chain, the downstream participant is only profitable if they can maintain sustainable profit margins.
Acknowledging the three primary segments of the diamond industry can help one understand what determines the final selling price of a diamond. The miner, the cutter, the wholesaler, the manufacture, and finally the retailer all create value but also incur costs that are passed along each step of the way.
Pricing recycled diamonds
Just as a downstream participant needs to buy a diamond from a midstream participant at a discount to maintain a profit margin, the same holds true when a downstream participant buys back a diamond from a customer; the participant needs to purchase the diamond at a discount to compensate for operating costs, risks, and other expenses associated with their business. When a diamond is re-sold by a customer, the diamond is often considered recycled because the diamond is being cycled through part of the industry chain a subsequent time. Just as the first time around, the industry segments involved create value but also incurs costs.
Read more about recycled diamonds in the second part of this series, Exploring Recycled Diamond Pricing.
About the Author
Based in the New York City metro area, Paul Ziminsky is an independent contributor to Worthy.com. Paul is a diamond industry analyst and consultant with over 10 years of experience in capital markets. Paul’s work on diamonds has been published in industry leading trade journals and his research has been used at top universities. He is regularly quoted by prominent business media outlets on industry trends. Paul is a graduate of the University of Maryland’s Robert H. Smith School of Business with a BS in finance.