Published on IDI Diamond Portal (www.israelidiamond.co.il)
What Determines Diamond Prices?
Diamonds are a unique product and as such, determining their buy and sell prices is different than setting the prices for other products. Diamonds are unique in that they travel through many stages of a pipeline from the mine in its raw form to being set in stunning diamond jewelry in its final polished form. As a result of this journey through the diamond pipeline the underlying fundamentals of diamond pricing are quite different to the pricing of other consumable goods.
Determining the price of a cut and polished diamond is relatively complex as the dynamic between the price of rough and the resultant polished diamonds is mutual and bi-directional. That is to say that the price of the diamond in its final cut and polished form is heavily dependent upon the price of the rough diamond from which it was fashioned, which in turn is itself is initially affected by the price of the intended cut diamond.
When determining the price of consumer goods, one must factor in the price of raw materials, labor, local taxes and various expenses. Consumer goods go through a marketing chain meant to ensure a profit margin is created during each stage of the value chain. The goods go from the manufacturer to the wholesaler to the retailer, who signs off on the final consumer price. Rules of supply and demand must also be considered, as they too affect the price.
Diamond prices are influenced by more variables than consumer goods. A diamond's marketing chain is considerably longer, since it goes through it once as a rough gem and again as a polished one. Rough diamonds which are mined across the world enter a marketing chain that includes brokers, rough diamond wholesalers, rough diamond retailers and manufacturers, who turn it into a polished diamond.
Once a diamond leaves the polishing factory it enters another marketing chain, which includes cut diamonds wholesalers, brokers and retailers. The retailers are usually jewelry manufacturers or stores, which sell the diamond to the end consumers, set in a piece of jewelry.
A diamond follows a long and convoluted path before reaching the end consumer, but one must remember that diamonds are not subject to "shelf life" limitations like other consumer goods. A diamond really is – as the saying goes – forever.
The Pricing of Polished Diamonds
The price of cut diamonds is subject to two variables: on the one hand, the price is affected by the price paid to the diamond manufacturer, who polished it; and on the other hand, the price is affected by the price the polished diamond might fetch when it is sold to the end consumer.
A polished diamond's final price is affected by a number of factors. Consumer trends are constantly analyzed, as are statistics, consumers' geographical and socio-economic segmentation and naturally – fashion trends. Another factor which affects the final price is the price of the metal used in the jewelry.
The past few decades have seen the formation of various price lists for polished diamonds. These lists are a main indicator for wholesale diamond trading and are considered the foundation according to which rough diamond price lists and end consumer prices are determined. The primary criteria used in these lists are the 4Cs – cut, color, carat and clarity.
The Pricing of Rough Diamonds
There is a difference between determining the price of a polished diamond and determining the price of a rough diamond. The setting of the price of a rough diamond, takes into consideration the wholesale price of the polished diamond and correlates with it, albeit not always fully.
The price of a rough diamond as determined by a mining company includes production costs, but also takes into account the price that a polished diamond manufacturer can get from the polished diamond wholesaler.
The basic pricing of a rough diamond factors in the depreciation of the manufacturing process as well as costs. Rough diamond producers also perform a price assessment in order to decide what price they can charge polished diamond manufacturers (known as "current market value," or "spot"). Diamond mines' output is usually sold through a tender or by contacting the various manufacturers directly, according to their area of expertise.
Under certain circumstances, a diamond mine's output will be sold for a lower price, although the latter would still be higher than the production costs. The rules of supply and demand come into effect at this point as well, as they do in all stages of the marketing chain.
The price of rough diamonds, therefore, is affected by the price of polished diamonds. The correlation between the prices is not complete, because sometimes the price of rough diamonds is higher than the price of their polished counterpart due to higher demand by diamond manufacturers and traders.
A diamond's path from the time it is mined to the time it reaches the end consumer is lengthier and more complicated than that of other consumer goods. A polished diamond's price will be determined at the meeting point between the diamond manufacturer and the polished diamond wholesaler; and both the wholesaler and the retailer must consider the price the end consumer will be willing to pay.
The basic price of a rough diamond will be determined by the price paid by the wholesaler for the manufactured product, while factoring in depreciation and costs, as well as the rules of supply and demand.
Since diamonds are not considered consumer goods, their price is often affected by factors which are not directly related to production or manufacturing. Diamond prices are also sensitive to the psychological effects of rumors on an impending supply shortage or surplus.
Any fluctuation in metal prices, used as raw materials in jewelry manufacturing, also impacts on diamond prices; as does the political and financial situation around the world, stocks and bonds' trading rates, etc. These factors affect the levels of supply and demand in the diamond industry and translate into the price lists.
It is clear that the rationale behind determining diamond prices is different than that of consumer goods - which probably explains the origin of the old adage "Think like a diamantaire."
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