Sparkling price hike for yellow diamonds

Gem Diamonds has negotiated a sparkling price hike for its ‘fancy’ yellow diamonds with key customer Tiffany & Co.

Rough yellow diamonds; image by Gem Diamonds

The London-listed diamond mining company this week announced that it has struck a deal with international jewellery brand Tiffany & Co in which the parties agreed to a 25% price increase for their exclusive assortment of rare fancy yellow diamonds from Kimberley’s Ellendale mine in Western Australia.

The price increase comes into effect on 1 October 2010.

Diamonds come in all sorts of shades and colours, with ‘white’ diamonds being the mainstream choice, and the whiter they are the better.

Hence D,E,F colours (actually ‘colourless’ diamonds) are generally more expensive than G,H,I,J colours (‘near colourless’), which in turn are generally more expensive than K,L,M colours (‘faint’), and so on.

The relative expense of colourless diamonds is down to their scarcity in nature – they are simply more rare (although fashion/convention plays a part too, but this is still driven by the underlying scarcity).

But further down the colour spectrum of diamonds colours become rare again, and beyond a certain point – where a tint has become a distinctive colour – diamonds are described as having a ‘fancy colour’.

The rarest (and most expensive) of these natural colours are the reds, pinks, and blues.

But fancy yellows are also in demand and in recent years they have become more fashionable, often set alongside white diamonds which can accentuate their canary yellow colour, with ‘intense yellows’ and ‘vivid yellows’ being especially sought after.

And it’s this demand which is driving up the price of the best of the fancy yellow diamonds from the Ellendale mine in Australia, a mine which Gem Diamonds claims is the world’s single largest producer of rare fancy yellow diamonds.

As well as the underlying demand for such diamonds, there’s another good reason why Gem Diamonds can ask 25% more for these diamonds & the customer is prepared to pay more – that reason is the customer, and the needs of this particular customer.

Tiffany & Co needs no introduction: it’s one of the world’s great diamond & jewellery brands, and as such it can command premium prices for its beautifully-designed and manufactured jewellery product.

But it’s likely that Tiffany are also willing to pay more for these diamonds because of their impeccable source in a ‘first world’ country where consumers will have confidence that first world standards in place in terms of social, environmental, and ethical practices.

Tiffany & Co understands the importance of responsible sourcing (they refer pointedly to ‘Tiffany’s Higher Standards‘) and they know this is an issue which will become increasingly important to their customers around the world: if it’s not important to them already then Tiffany know that it will be.

So sourcing diamonds in this way is a smart move for Tiffany, and if they have to pay a bit more to secure long-term diamond production from a specialist source like the Ellendale mine in Australia, then so be it.

And of course every rare diamond which Tiffany can secure for itself is a diamond denied to its competition…

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Rio Tinto's pink diamonds and commoditisation

Mining company Rio Tinto last week launched their annual Argyle Pink Diamonds Tender, a collection which showcases pink diamonds from their Argyle diamond mine in the East Kimberley region in the remote north of Western Australia.

Now in its 26th year, the 2010 sale presents 55 pink diamonds produced by the mine and cut into polished gems. Following a viewing in Perth last week, the collection will tour to Hong Kong, Shanghai, and New York over the next couple of months.

2009 Argyle Pink Diamond Tender; photo courtesy of Rio Tinto Diamonds

The tender is said to include many more “vivid pinks” than in previous years, with individual highlights including a 2.02 carat round brilliant fancy vivid purplish pink diamond, a 1.43 carat fancy purplish red square shaped diamond, and an “exquisite” 0.50 carat fancy purplish red round shaped diamond.

Other ‘fancy’ colours in diamonds are caused by impurities – boron makes them blue, nitrogen yellow, for example – but the origins of pink & red colours are less clear.

It’s thought that pinks & reds are caused by plastic deformation in the crystal structure as the diamonds formed perhaps a billion years ago, but what is known is that the physical conditions that give rise to these colours are very unusual because pink and red diamonds are extremely rare.

And it’s that rarity, of course, which gives them their high value: diamonds of this colour can sell for more than US$1m per carat.

What interests me most about the press release announcing the sale is the fact that these diamonds are being marketed – in part – for their investment value.

Major diamond producers such as Rio Tinto (and even more so, De Beers) have traditionally been reluctant to talk about diamonds as vehicles for investment.

But I reckon Rio Tinto are taking the ‘investment diamonds’ positioning to new levels with this collection.

For example, they talk about the “increasingly rare opportunity” to acquire these diamonds, but if a diamond is beautiful and it appeals on an emotional level then it shouldn’t matter that similar diamonds will become increasingly rare.

Pink diamonds are extremely rare even in a steady state of constant production – hence their great value – but the life of the Argyle mine is limited (current estimates forecast its exhaustion in around 10 years), so these diamonds are running out, and it’s that concept of increasing scarcity which Rio Tinto hopes is a strong motivator to acquire one now in the expectation that its value will increase in the future.

Rio Tinto spell it out fairly explicitly; their press release talks about the “appreciation of the increasing rarity and investment potential of Argyle Pink Diamonds”, and refers to the “increasing propensity for affluent investors and collectors to diversify their portfolios through acquisitions of rare diamonds”.

They go so far as to publish a document which “places this rarity in the context of global supply and demand and the resulting strong price appreciation” [my italics].

Crikey. That sounds to me almost like a promise! Perhaps there should be a disclaimer at the bottom of the page: “Warning: diamond prices can go down as well as up…“.

I can’t recall a major diamond producer going quite this far in terms of talking about diamonds as an investment.

De Beers and others have been reluctant to go down this path because of the fear that it leads to commoditisation, i.e. the idea that people buy might diamonds for their intrinsic value and in the expectation that that value will increase, rather than for their beauty and associated emotional reasons – most obviously in the form of a diamond engagement ring.

Can you imagine a De Beers diamond ad that offered investors the opportunity to ‘diversify their portfolios‘ by buying diamonds? Probably not.

I happen to believe that diamonds can and perhaps even should be treated and traded as a commodity, not least because that would lead to increased transparency in the world of diamonds (especially in terms of pricing) and I think that would be in the consumer’s interest, which in turn would be good for the diamond business as a whole (although less good for many of the middle men within the diamond business).

In addition to the speculative behaviour of investors, there’s another very good reason why diamond miners might not want to talk up diamonds as a commodity: a more liquid and transparent market for diamonds would lead to an increase in diamond recycling.

Imagine all the estate diamond jewellery that would appear from people’s dusty old jewellery boxes if there was a reasonable expectation of getting a good price for those diamonds and a regulated, trusted platform (akin to a stock exchange) to facilitate transactions.

When they say that ‘A diamond is forever‘ they’re not just referring to the lifetime commitment that you’re making to your partner; they’re also making sure that you hang on to the diamond forever because of its emotional meaning, gently steering you away from thinking about its financial value and selling it back into the market in a year or two.

If you and millions of others did that then they wouldn’t need to dig up so many ‘new’ diamonds each year…

Diamond producers and marketers will have their own views on commoditisation, but what’s really prevented it from happening is the lack of benchmark standards for diamonds and a trusted, transparent pricing mechanism.

In other words, we can’t all agree on exactly what constitutes (for example) a 1.00 carat, F colour, VVS1 clarity, Excellent Cut diamond, and we certainly can’t agree today’s price for that exact diamond.

And if we can’t agree on those things within the diamond industry then we don’t have much chance of persuading outside investors to buy derivatives, forward contracts etc. for diamonds, or even to buy physical diamonds in the expectation that they can look up the value of their investment in the FT over breakfast each morning.

All of which is a long way from Rio Tinto’s press release about their extremely rare pink diamonds from Argyle in Australia.

But if major diamond producers like Rio Tinto and De Beers are going to start talking up diamonds as an investment opportunity then perhaps they should also consider the corollary: how benchmarks might be applied to diamonds so that investors can have confidence in diamonds as an investment category.

Read the original post on the Diamondthrills Blog here

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