Gem

Diamond Investing

Rapaport believes today’s low rough diamond prices are a problem and sees major diamond miners and banks as responsible.

About this time last year, analysts were calling for another quiet year for the diamond market. But as those who’ve been watching the industry are no doubt aware, that’s not exactly what happened. 
Far from staying steady, diamond prices have sunk fairly significantly in 2015. Currently, the Zimnisky Global Rough Diamond Price index shows that in the last year, rough diamond prices have fallen 13.14 percent. That figure lines up with other recent calculations — last month, Bloomberg placed the overall 2015 price slump for rough diamonds at 15 percent, while in September, Rapaport said that top-quality, 1-carat stones had seen their value fall by about 13 percent in the last year.
That’s not great news for those in the diamond industry, and for his part, Martin Rapaport, chairman of the Rapaport Group, has had enough. In an article published Tuesday, Rapaport, whose company is perhaps best known for creating the Rapaport Price List and RapNet®, the world’s largest diamond trading network, outlines why today’s low rough diamond prices are a problem and lambastes those he sees as responsible — namely major diamond miners and banks.


Rapaport’s in-depth article can be found here. For those who haven’t yet seen it, here’s a quick rundown of some of its key points:
  • Banks and diamond miners created a rough diamond price bubble — “The major mining companies and the banks have milked our trade dry [in recent years] by systematically supporting rough prices that were significantly higher than polished prices,” notes Rapaport. Essentially, banks “shower[ed] money” on diamond cutters, allowing them to purchase “unprofitable rough diamonds.” The end result was that “money was moving from the banks to the mining companies in a Ponzi scheme environment.”
  • That bubble has now burst… — Eventually, a “perfect storm” of macroeconomic events led that “Ponzi scheme environment” to become unsustainable. Those events, including the current slowdown in China, led to a “sharp decline in diamond demand” and prices, pushing banks out of the lending game and cutters out of business. Now, “[t]he proverbial poop is hitting the fan,” as per Rapaport.
  • …but that’s not necessarily a bad thing — The current diamond market situation is the “perfect opportunity to restructure the allocation of profits in the diamond trade,” states Rapaport. “By now, everyone, especially mining companies and banks, must realize that they can’t milk the diamond trade while starving it of generic advertising and strangling it with high rough prices that ensure no profitability.”
  • Miners need to take action — The diamond market may be ripe for restructuring, but it won’t happen without some work. Rapaport believes that one thing that has to happen is an “immediate” reduction in rough diamond prices by 30 to 50 percent. He provides counterpoints to two arguments against this idea.
  • Industry participants also need to take action — Rapaport isn’t certain that top diamond miners will move to reduce rough prices on their own. He believes “[i]t is time for [De Beers CEO Philippe] Mellier to go,” and encourages diamond market participants to reach out to Anglo American Chairman Mark Cutifani with their “concerns about profitability in the diamond trade.”

The article from Rapaport is lengthy, and it’s tough to identify which of his many interesting points is the crux. However, the major overall takeaway is perhaps a statement he makes in the article’s final section:

Diamond prices will recover depending on the level of demand and scarcity. But who will sell these diamonds once the trade has been destroyed? Who will romance diamonds and make them exciting? Who will design and delight with diamonds? Who will proudly show off diamonds in tens of thousands of showcases to millions of consumers? Who will make diamonds immediately available via next day shipping to thousands of retailers across the world?

His point is that current low diamond demand and low diamond prices won’t be permanent — they were created by the “perfect storm” of macroeconomic events mentioned above, and can’t continue forever. However, if miners fail to take this opportunity to restructure the diamond trade, the results may be more enduring: “[m]ore and more cutters will stop cutting, diamond supply will plummet, more dealers and retailers will leave the industry, forever.”
All in all Rapaport’s article provides an interesting look at the diamond industry from the perspective of someone involved in pricing and trading, not mining, the gems. Diamond investors keen to look at the space from all sides would do well to read the full piece.
 
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Related reading: 
Can Miners Buck the Diamond Price Trend 2015?

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