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.

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De Beers sparkles in first half of 2010

Most people in the diamond business take a fairly casual interest in the ups and downs of De Beers.

Gone are the days when De Beers accounted for 80% or 90% of global rough diamond supply (it’s around 40-45% today), and in fact most people in the world of diamonds and jewellery don’t actually do any business with De Beers anyway.

That’s because the diamond mining giant sells its rough diamonds to a limited number (less than 100) of diamond cutting companies who then distribute the polished diamonds on to jewellers and retailers around the world.

But my background at De Beers means I still pay more attention than most, so when De Beers published their interim results for 2010 last week I took some time to study the results and to read the extensive press coverage that they generated over the weekend.

Rightly or wrongly, the result that usually leads the story is the top line number for Sales.

2009 was something of an annus horribilis for De Beers and for many in the diamond business (De Beers almost stopped mining for a while: diamond production dropped by over 90% in the first three months of the year), so analysts were looking for something of a rebound in 2010.

And as the chart below shows, sales of rough diamonds by De Beers did bounce back well in the first half of 2010. They’re not yet back to the $3+ billion figures seen in the pre-crisis years of 2006-2008, but 2010 is a marked improvement on the disastrous sales result from early 2009.

De Beers H1 rough diamond sales 2006-2010; source www.debeersgroup.com

On the back of improved sales over the last six months De Beers also pumped up its diamond production, which leapt from 6.6 million carats in H1 2009 to 15.4 million carats in H1 2010.

Looking forward, much now depends upon how those diamonds move through the ‘diamond pipeline’ – they still have some distance to travel once they’ve left the vaults at De Beers.

Diamonds often take months to cut & polish, and then there’s onward trading of polished diamonds (they can change hands several times), setting into jewellery, international distribution, more trading… all before they appear for sale on retailers’ shelves in time for the key Christmas season in the USA – the world’s largest diamond market.

So improved sales for rough diamonds in early 2010 is an encouraging portent as the industry restocks with diamonds following last year’s slump, but that optimism will be tempered by caution and anxiety about just how strong the recovery will prove to be at retail/consumer level.

Uncertainty over the recovery of demand in the US is offset by optimism about sustained demand growth in emerging markets such as India, and more particularly, China. But only up to a point: the US accounts for around 50% of global diamond consumption, and China might be growing fast, but it’s not yet even 10% of global demand.

Back to De Beers. I was impressed by something else in the figures: Net Earnings.

De Beers has cut its costs aggressively over the last 18 months and this has shown up in the figures in a striking way. Net Earnings (before special items) for the half year were regularly topping $300 million before the financial crisis took hold, but in 2009 earnings almost completely dried up – they were just $3m for the first half of the year, as shown below.

De Beers H1 Net Earnings 2006-2010; source www.debeersgroup.com

But look at the impressive rebound in 2010: Net Earnings are back up to $300m+, and those earnings have been generated from a fairly modest (in historical terms) sales figure.

So the tough medicine of slashing costs has worked: De Beers is generating cash once again – impressive cash for its current level of sales – allowing it to pay down some of its considerable debt and to begin to repay the shareholder loans that it took on to survive through the darkest days of last year’s slump in demand for its product.

The financial crisis took De Beers to the edge of the abyss, but it’s done what all good businesses should do in such circumstances: it turned the crisis into an opportunity. De Beers grasped the opportunity to look at its costs and it’s emerged from the crisis leaner, fitter, and better able to compete as the recovery gathers pace.

De Beers CEO Resigns

Perhaps even more eyecatching and surprising than the upbeat results last week was the news that De Beers CEO, Gareth Penny, is to step down by the end of the year.

Penny has been at De Beers for 22 years and has run the company for the last 5 years. I should declare something of a personal interest here: I worked for Gareth for most of the last decade and I acted as his personal assistant for a period in 2003-2004.

The diamond industry has – in my experience – always been fairly conservative, traditional, and family-based (De Beers is still part-owned and run by the Oppenheimer family). In some ways of course, that’s a strength rather than a weakness.

Change tends to come slowly to De Beers and to the diamond industry. Perhaps that’s inevitable in a business that deals with a product that’s up to 4 billion years old: A diamond is forever, after all.

But the rate of change within the diamond business has increased over the last decade. Not everybody signed up to the changes – they never do – and no doubt some wrong turns were taken in the chaos and upheaval created by the new environment.

Gareth Penny has been at the forefront of the changes that have come to De Beers and to the diamond industry in recent years.

He led a major strategic review at De Beers a decade ago – a review that guided De Beers out from behind the iron curtain of monopolistic practices – and the repercussions of that review are still being felt by the company and by the industry.

For the industry, it meant that many diamond businesses were encouraged to turn around, to look downstream to face consumers rather than upstream to worship at the feet of De Beers.

As a result, lots of money was wasted on ill-conceived marketing initiatives: not every business can or should be involved in consumer marketing. Many businesses in the middle of the diamond pipeline know that their strength is in understanding the needs of their immediate customers rather than trying to understand and reach consumers half a world away.

But lots of money is wasted on ill-conceived marketing initiatives by lots of companies in all industries. And just because some diamond companies invested in some pretty dodgy marketing schemes completely lacking in consumer appeal – well, let’s just say that it became a little too easy, predictable and routine to blame De Beers for one’s own strategic errors.

For De Beers, Gareth Penny’s legacy has included a much greater focus on social responsibility (which in turn changed the broader industry, although there is much still to do, viz Zimbabwe), and also a newfound zeal for legal compliance which led to important deals with the European Commission and the US Department of Justice (although class action suits continue to cause trouble for De Beers in the US).

Penny played a major role in dragging a monopolistic 120+ year old company into the 21st century, and his policies changed not just De Beers but also impacted upon the wider diamond and jewellery industries.

His last couple of years at De Beers were dominated by steering the company through the financial crisis, something he seems to have done remarkably well, but I suspect he would rather be remembered for the profound strategic changes that he launched a decade ago than for the cost-cutting of the recent past.

Well, we can’t always choose our legacy, and in any event, Gareth Penny has chosen to quit whilst he’s ahead, and that’s not a bad thing to do.

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With diamonds, size is important, right?

We hear often that someone's been told they 'must' get a diamond that's at least 1 carat (or whatever...) but how about going to the opposite end of the scale?

Well that's what a diamond cutter in India set out to do recently by cutting & polishing the world's smallest diamond.

Surat-based Bhavani Gems have unveiled a diamond that weighs just 0.0003 carats, or 0.00006 grams. They've called it the Bhavani Mikro diamond.

One can imagine an unveiling ceremony: a stage with a plinth illuminated by brilliant lighting... dramatic music... and then the curtain is lifted to reveal... well, nothing really. Or nothing very visible, anyway.

For this diamond is about the size of a grain of sand, and yet it has been cut with the same number of facets - 57 - that you'd see on a conventional 'round brilliant' diamond of 1 carat or 100 carats.

The diamond has even been certified by the IGI (International Gemological Institute) - a neat self-promotional trick by them. Diamond grading laboratories usually certify diamonds starting at around 0.20-0.30 carats.

In my previous life at De Beers I had the pleasure and privilege of visiting a number of Bhavani Gems' diamond cutting factories - I actually did a tour of northern Gujarat with their charming founder and CEO Manjibhai Dholakia some years ago - and can vouch for their amazing skills in cutting really small diamonds.

Normally diamonds don't come much smaller than around '1 point' (one hundredth of a carat), but the Swiss watch industry and some other jewellers use diamonds of around 0.002 to 0.005 carats (when they get this small they are referred to as 500 per carat or 200 per carat).

Using the same terminology, this diamond is an incredible 3333 per carat - meaning that you'd need 3333 of them to make up a 1 carat diamond ring!

Rather than producing thousands of such small diamonds to set into diamond rings, I expect that this is a bit of a one-off exercise, designed to showcase the expertise of Bhavani Gems in cutting very small diamonds for the diamond watch industry.

Original post here.

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