diamond pricing in india

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DYNAMIC CHANGES IN DIAMOND PRICING

Most diamonds are priced in groups. For smaller diamonds, each trader assigns his own price to each parcel. For larger stones, typically pointers and above which are sold individually the industry uses third-party price lists as a reference or a peg to price the diamonds. This dependency has its advantages and problems.

The recent protest by Indian diamantaires against a popular price list for reducing some prices highlights this dependency. The diamantaires' concern was mainly because it was a single large reduction over one week, while in reality prices fell more gradually To be fair to the price list provider, had there been an upward revision in the price of a similar magnitude, there would not have been too many protests.

Antwerp used to be the primary centre for these larger goods before the crisis, however over the last four years, this centre shifted to India. The protest is reminiscent of the protest in Antwerp in the fourth quarter of 2008, where a similar event triggered a similar response. The industry made attempts to avoid using the concerned price list provider, however one year later, it was back to business as usual. The emergence of India as a centre for these goods and the use of the price list in India ensured that now, the shoe is on the other foot.

The industry, however, is now a different place. Old hierarchies and ways of doing business are changing fast, though more so in rough diamonds with producers now taking a much shorter-term view to profits. All this has meant higher price volatility, even in polished. In this changed market scenario, the utility of using price lists needs to be questioned.

Most information providers publish two types of information. The first category is a price history and the other a price list. In common industry parlance, a price list is used interchangeably as both are typically presented in a similar grid format. However both are clearly distinct.

Price history

The price history reports historical or current prices either on the basis of actual transactions or asking prices of the diamonds. It is merely representing the data collected by the information providers, which is generally information at the wholesale level. The methodology of collecting this information varies and the parameters include the source of the data (single or from multiple companies), whether asking or trade prices, what quality variations are acceptable, frequency of data collection, etc.
These prices can then be combined to create indices. Most producers identify and publish multiple indices. Like in any equity market, these indices present a snapshot of how the broader market for diamonds has performed. They are supposed to merely reflect what has happened at a quick glance, rather than having to go through reams of information.

In diamonds, interest in historical prices and indices has increased in the last 5-10 years. as these have the potential to become the basis for launching financial products based on diamonds. Most financial markets rely on these indices to reflect what is actually happening to the prices of the underlying asset. As information providers hope to ultimately target this financial market, it would be rational to say that the collection of historical prices and their methodology should be consistent.
Financial markets also require independence from the trade apart from transparency and consistency right from data collection to the final index preparation. Unfortunately most information providers are not truly independent from the trade. Many of them are also involved in selling diamonds through tenders, both rough and polished. This can create a potential conflict of interest which might not meet the independence criterion.

In a sense, it is surprising that independent trade bodies entrusted with promoting the trade are actually hesitant to publish regular historical diamond prices and indices. A Bharat Diamond Bourse (BDB) or the World Federation of Diamond Bourses (WFDB) can easily publish this information for the wholesale trade. In this information age, truly independent price history helps establish transparency in the trade, which can only be positive for the industry growth.

Price lists

Prices on a diamond price list, on the other hand, as mentioned on the website of a prominent information provider is "a starting point for negotiations and a basis for estimating the value". Information providers clearly realise that the price list might not reflect real traded prices. However, such lists have a more serious impact on the industry as they are used to negotiate current sale prices, rather than just recording history.

This starting point, however, does have a few factors which vary significantly across providers. The basis for these price lists vary from estimates based on mathematical analysis, to actual transactions to simply opinions about the price. In either case, diamond companies use these lists to price future sales.

Price lists based on either opinions or estimates are on more shaky grounds. The recent Libor rate scandal in the UK has shown how even a relatively transparent system of collating estimates can be manipulated. If the price list is data based, then it would be dependent on historical or current prices. That is like trading stocks based on yesterday's closing value of the Sensex.

Some price lists used for polished transactions at a wholesale level are actually supposed to reflect retail prices. The crisis has shown us that wholesale polished and retail markets behave quite differently and have different dynamics. Such a "retail" price list can mislead the wholesale market as the prices cannot be substantiated with hard data. Unfortunately, the systemic flaw is that such price lists can be easily manipulated.

A curious fact is that all price lists, regardless of how they are constituted, try (though they may not always succeed) and ensure that the list prices are well above actual traded prices. This is purely psychological, where the buyer feels that he is getting a discount and the seller does not have to justify charging a price above the benchmark.

These benchmark price lists can work in a more benign environment. Before 2008, diamond prices used to be quite stable and you could have blindly projected an overall 3-4% increase in price. Price fluctuations were gradual and most diamonds sold without certification. Entire blocks of diamonds had similar discounts, which changed infrequently. The stability lulled the industry into "lazy" pricing where it became a price taker, with the price setting being "outsourced" to information providers.

Price takers or price setters

The crisis, customer preferences and emerging technologies changed the nature of trading in larger diamonds were increasingly certified and traded on their certificates, without physical inspection and on the internet. Pricing volatility meant that discounts were varied regularly and even by stone.

Currently, diamond dealers determine their own sales prices as they put their own discounts across each stone and category with respect to their preferred price list. When price lists change, discounts are also changed. Clearly companies have become more proactive in pricing of their diamonds. In effect, the industry is now actually setting its own price. It is a step in the right direction and shows that the industry is gradually maturing.

Active management of pricing also means that using a price list brings in an additional level of volatility. Companies need to now change their level of discount on their lists whenever the price list changes, while the actual effective price might not change.

The industry still continues to use price lists as they are still firmly entrenched in the minds of buyers who purchase diamonds for retailers. One reason is simply inertia but buyer price targets are also set as per what average discounts they need to meet on their purchases. However, when retailers need to achieve price points for their jewellery, an upward revision of the price list is not helpful.

Pricing maturity

Changing the entrenched dependency on price lists and moving to a more independent pricing mechanism where prices are quoted directly in dollars for polished wholesale trade, will be neither easy, nor will this happen overnight. Companies will change gradually as they realise the additional volatility and overheads. There will possibly be a period of co-existence where price list references are given to clients who desire them.

The current state of the industry is a step forward from 2007, when price changes were less frequent. Companies have already started monitoring prices more on their actual dollar values and varying them more actively. Apart from demand, progressive companies also monitor the replacement cost of producing the diamonds from the rough available in the market, which is showing in the maturity of the business. These trends will only accelerate over the next five years.

The diamond industry has entered a new phase where the only constant will be volatility on pricing, margins and volumes Using price lists for pricing adds one more level of volatility to the price. The industry needs to move to pricing based. Fundamentals rather than using an peg to cope with volatile times. Such signal the maturity of the industry which starts becoming a price setter.      More control of control of its own destiny.


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