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Diamonds and Rapaport Report

Diamond Drama

Industry reacts to diamond price drop

By Deborah A. Yonick 

Diamond dealers have a love-hate relationship with the Rapaport Diamond Price List.

“The diamond industry is addicted to the Rap sheet, for better or worse,” says industry analyst Edahn Golan of Edahn Golan Diamond Research & Data in Israel. “Every price decline in this slim margin industry is tough to manage, which explains the events that unfolded on March 20th.” That’s the day the Rapaport Price List reduced prices by 7 percent on average for most polished diamond categories listed.

The perceived hit was so strong it whipped into action hundreds of diamond traders via social media vowing they were quitting on Rapaport. “It created a situation for them to disconnect,” Golan said, “which requires a revolution.” 

In an open letter to the diamond industry dated April 2, more than 150 diamond manufacturers and traders from major diamond trading centers worldwide signed on to announce they were pulling their inventories en masse from Rapaport’s trading platform, RapNet, to the tune of $6 billion, what they say represents 70 percent of the platform’s original polished diamond inventory. 

Their gripe is that the Rapaport Price List “should reflect actual trading in real time,” stated the letter, which expressed “shock”and “[extreme] disappointment” in the move. “Price changes in either direction should be a reflection of actual trading prices and volumes of polished diamonds bought and sold. [Rapaport Group’s] action March 20th was made without regard to either.” 

The letter attributed the current slow trade of polished diamonds to the crippling effects of nations worldwide under lockdown to mitigate the spread of COVID-19, and not because of supply and demand fundamentals. It stated that the March 20th price drop validates their long-held feelings that the Rapaport Group is not transparent in the methodology or rationale behind how prices are set.

As Ronnie VanderLinden, president of the International Diamond Manufacturers Association, laid out in a March 27th letter to his membership, prior to the release of the open letter: “We all strongly support an industry that is free from the pervasive and overpowering influence of any single market player. RG’s running the leading industry diamond guide, while at the same time earning profits from the millions of dollars in diamond sales generated from his various trading platforms, is nothing less than a serious conflict of interest.”

He described the decision of hundreds of companies to “de-list” from RapNet, his own included, as an industry “movement.”

Yet while the Price List is their major beef, these disgruntled diamantaires are not abandoning it just yet. Rather, they resolved to use as a reference the March 6th Price List “until a new, independent, non-biased and transparent reference would be presented to the diamond industry.” 

On April 6th, the World Federation of Diamond Bourses (WFDB) announced it was adopting Get-Diamonds (which had been run by the Israel Diamond Exchange) as its official diamond-trading platform.

WFDB President Ernie Blom said at the time that the organization was funding the platform’s development and preparing a business model to sustain a “state-of-the-art, cross-bourse” trading platform for the diamond industry and trade at large. Blom told JCK in an April 8th article that the new exchange would be an “independent nonprofit entity” governed by a board including bourse presidents, top manufacturers, and independent experts. He said the organization has not made a decision whether it would develop its own price list.

“About $4 billion worth of polished diamonds were listed on Get-Diamonds, as traders moved away from RapNet,” Golan said in late April. But he noted that some dealers from the boycott were already back on RapNet. “Many are happy to trade on RapNet with less competition.” 

Rap Response

Martin Rapaport, CEO of the Rapaport Group, maintained in an interview with MJSA in late April that he had no choice but to lower prices when he did. He underscored that the List sets benchmark prices that are substantially higher than actual transaction prices so everyone can use it. The easier it is to sell a diamond, the lower its discounts to the List. Hard-to-sell diamonds often trade at large discounts. The discounting Rapaport was seeing was “unprecedented.”

“Suppliers like a benchmark price that gives them a 45 to 50 percent profit, but not when the prices go down,” Rapaport said. “It’s vital that the List reflect the realities of the market, even when they are unpleasant.”

He said he feels compassion for diamond suppliers who are in tremendous pain right now, and understands their reaction is emotional and that people are afraid. But he underscored that this is not about him.

Rapaport noted that buyers use the List, too, and require and expect it to reflect the lower price realities of the market. “We cannot misrepresent prices for the benefit of sellers, and we must not mislead buyers. How can we maintain our credibility if we protect the market from price changes? We have an obligation to say what’s happening. We are going to stand for what’s honest and right.” 

He said Rapaport reviews what’s happening on RapNet and many other platforms, including consumer sites such as Blue Nile.

Golan suggested that the Price List is not updated often enough, resulting in a lag. But said traders should be better at communicating this to their clients. “After all,” he said, “traders have been reducing prices for a while. In February alone, prices were down an average 2.9 percent. Dealers don’t want a price list to understand price. Mainly they want it to serve as a basis for negotiating price.”

Publishing the Price List for 42 years, Rapaport said he doesn’t take the task lightly, noting that he lowered prices seven times in 2019. “We wait and watch the market. We don’t jerk prices around.” But he believes that one would have to have their head in the sand not to see diamond prices going down. 

Rapaport also rejected the notion that there was no trading being done leading up to March 20, and underscored the craziness of the times, posing the question: “Who would’ve thought oil prices would drop below zero?”

The industry had problems before COVID-19, Rapaport said, with slowing demand and increasing supply.

“Manufacturers bought large volumes of rough between December and February, anticipating strong inventory replacement after a good U.S. holiday season,” he said. “De Beers’ rough sales exceeded $1.3 billion preceding the pandemic, while Alrosa’s reached $1.1 billion. De Beers canceled its March sight, and Alrosa allowed customers to defer their allocations in April. Rough prices are expected to decline when sales resume. Prices at the March rough tenders slid 15 to 25 percent. Meanwhile, production at the major mining companies has continued, adding to the inflated inventory they held at the beginning of the year.”

In the March 20th Price Index Rapaport announced it was moving from publishing weekly to monthly, beginning May 1, a first since its inception in 1978. He said the new frequency would “give the industry time to react to changes” and interact with the Rapaport Group about them. Subscribers will still receive weekly “Rap Trade Sheets” listing actual discounts.

Rapaport underscored that his price sheet is just his opinion, and he welcomes anyone to establish a competitive list or trading platform. 

With regards to the boycott’s impact on RapNet, he noted that “a lot of diamonds are off the site.” But as long as he stays true to his values, Rapaport said the platform should survive. 

Moving Forward

As Rapaport sees it, price isn’t what ails the industry. “Honestly, me dropping prices by 7 percent is the least of the diamond industry’s problems,” he said. 

“Don’t focus on price, focus on creating liquidity,” he continued, noting that he sees tremendous opportunity to sell for those who keep on trading. “Create a bid market that creates liquidity, even in corona-times.” 

With that in mind, the Rapaport Group is conducting more auctions with recycled diamonds and estate jewelry, and is launching an “instant inventory” component to help jewelers sell diamonds online. “Don’t freeze up, keep moving,” he said.

In two webinars in March, Rapaport told sellers to be comfortable selling diamonds at prices below what they paid for them. “Sellers can sell existing inventory at a profit above replacement cost, then replace what they’ve sold and come out ahead.” A diamond in inventory at a cost of $10,000 can be replaced for $7,000. If you turn around and sell it for $8,000, you end up with the same inventory position and $1,000 trading profit. 

Market analyst Richard Drucker, president of Gemworld International in Glenview, Illinois, said he doesn’t believe a reduction in polished prices, as reflected in the March 20th Rap Price List, will create demand, noting that he does not support boycotts and threats.

A Diamond is Forever ring image

Perhaps the bigger issue for the diamond industry is not the price of diamonds on any given day, but what its marketing message will be now and post pandemic.

Drucker said that he does not believe polished prices are tanking. “They might go down when business resumes and new rough at lower prices enters the market, but for now there are no transactions to offer reliable price data supporting change. With the mines closed, a drop in rough prices might be offset by less supply in the future. If demand picks up and supplies are short, prices might go up. All unknowns.” 

He recognized that there is downward pressure that would motivate any dealer to sell some diamonds at a lower price to raise cash. But Drucker questioned if dealers could stay in business long term selling below cost.

Although sales were almost nonexistent during the first quarter of 2020, said Golan, polished diamond prices remained stable. “Not surprising, considering the diamond industry is very small and tends to protect itself from price fluctuations. In past crises, such as the collapse of Lehman Brothers in 2008, polished diamond prices fell less than most other commodities and products.”

Golan expects diamond jewelry sales to rebound quickly on the other side of COVID-19, based on past crises such as 9-11 and the 2008 recession. While weddings may be postponed or downsized, diamond jewelry is unlikely to take a hit. “Following hard times that include a real threat to life, we tend to wake up from our hesitance, remember that life is short, and rush to bond.” 

The only outlier between 2008 and 2020 is wide-scale marketing. “In 2008, the ‘A Diamond Is Forever’ campaign was still running, and De Beers reran its ‘Hands’ campaign from 2006, replacing the dramatic string quartet soundtrack with a more appropriate cover of ‘Stand by Me,’” Golan said. “The following year, the company ran the ‘Journey’ design promotion, which further promoted diamond jewelry sales. Today, such promotional efforts are missing.”

Perhaps the bigger issue for the diamond industry is not the price of diamonds on any given day, but what its marketing message will be now and post pandemic.

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