This is a volatile time for markets across the world, as we’re sure you’ve heard. If you are considering selling diamond jewelry to help boost your financial situation at this time, it’s important you understand how diamonds are priced, knowing all the factors to consider. Don’t worry, we’ve made it simple to understand because who needs a complicated graph right now?
-The Worthy Staff
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 should give you a better understanding of how diamonds become so expensive and how their market value plays out in their life cycle.
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.
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.
Now let’s explore further recycled diamonds, a burgeoning part of the industry and a key stage of the diamond life cycle.
A diamond is classified as recycled when it is sold back to a retailer, wholesaler, or even a third party. Some recycled diamonds are sold in their settings as a whole piece, and some are sold loose after being re-cut or re-polished. The buy-back prices of these diamonds can fluctuate depending on a number of factors outlined in the rest of this piece.
When a retailer or wholesaler 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. See figure 1 in this hypothetical example, the diamond is bought back at a 67% discount to the price originally paid at the retail level as the buyer needs to compensate for costs that will be incurred before the diamond is resold to another customer at the downstream segment of the industry.
When purchasing a recycled diamond, a buyer needs to consider the condition and shape of the diamond. A recycled diamond may need to be recut, repolished, or reshaped by a midstream participant in order to extract optimal value out of the diamond.
Regardless of a diamond’s astounding hardness, which is quantified as 10 out of 10 on Mohs scale of mineral hardness, diamonds can still be scratched or chipped, which would justify recutting or repolishing. Additionally, a recycled diamond may be reshaped, for example from an old-fashioned miner’s cut to a currently more popular round cut, if the relative value increase is justified.
Recycled diamond buyers will value a particular diamond based on its cut, size, quality and condition, just as they will when buying a mined diamond from a mid-stream participant or wholesale market. The value of a recycled diamond will also depend on current market conditions, which are constantly fluctuating due to supply and demand dynamics.
Most downstream industry participants historically have preferred to buy diamonds from a trusted midstream participant or wholesaler rather than buy-back diamonds directly from their customers. Given the uniqueness of each diamond with regards to its individual value-determining characteristics, the process of buying a recycled diamond can be complicated, risky, and too costly for a lot of downstream participants, which has historically limited the size of the market. Options for re-selling a diamond used be relatively confined to pawn shops, diamond districts, and few licensed retailers that would buy back diamond from their customers.
However, in recent years the recycled diamond market has grown as new technology has more easily allowed for the pairing of recycled diamond buyers and sellers on a global scale. In addition, Internet retailers have made global diamond pricing more transparent than ever before. Together these industry advancements have led to an increase in the size of the recycled market, leading to more competition and more competitive prices for customers re-selling their diamonds.
As the recycled diamond market continues to grow and become more widely available to customers wishing to sell their diamonds, price transparency will also continue to increase as well as competition among recycled diamond buyers.
By understanding the basic workings of the primary and recycled diamond market, one is better equipped to understand how diamond prices are determined. In the simplest context, the price of a diamond increases as it passes through each segment of the industry chain as value is created and costs are incurred (see figure 1). It’s important to keep in mind that when reselling a diamond one is not directly selling to an end customer but to an industry participant that will incur costs until another final customer is found.
After an industry participant buys a recycled diamond, the diamond is returned to a segment of the industry, either the midstream or downstream segment. The diamond will be recut, repolished, reshaped, or remanufactured, or sent directly back to a downstream participant where it will be resold at the retail level in the current condition.
The less time a recycled diamond spends back in the value chain, the more a diamond is worth to a buyer. The condition of a diamond, the quality, the size, and the shape will determine how far back the diamond needs to go in the value chain, and thus how much a buyer will be willing to pay.
Current market conditions driven by supply and demand as well as the size of the market will also influence the price a buyer is willing to pay for a recycled diamond. Typically reselling a diamond into a market with multiple buyers will result in a higher offering price for a seller as more buyers are competing for the diamond.
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