At the recent Christie's Geneva auction there were a few surprises in terms of performance, particularly with that of the large diamond sector.
A 12.5 carat, D-colour, VVS-1 clarity, internally flawless rectangular diamond sold for only $68,000, a huge 27% of the original Rapaport List Price. Thomas Faerber, co-founder of the GemGeneve trade show said “Apart from the 77% depth, it was a beautiful stone, and I would have expected it to fetch around list price in a better market”. That better market does not appear to be on the horizon at present, and whilst the stone ha no-ideal proportions it was synonymous with the recent slow down in the big diamond sector.
His sale was not an exception, with people expecting the prices to come down further and delaying their purchases thus creating a vicious cycle. Major auction houses are now setting lower reserve prices than previous due to the current weakness of the market.
Prices of large stones have in fact been on the decline for six months, with discounted sales further impacting upon performance. The lager stones are in fact fearing worse the larger they get. The RapNet Diamond Index (RAPI) demonstrated a 12% decline in the first quarter of 2019 for the 3 carat stones, whereas the 1 carats were impacted by a less concerning 3.1%.
So what are the reasons for this recent decline? Experts and analysts within the Large Diamond Market have attributed this to four main factors.
Tight Liquidity
In the past six months, larger Indian companies have been offloading polished diamonds above 3 carats to raise capital. That has weakened sentiment in the market, and created expectations that prices will continue to fall. Retailers are reluctant to make purchases when they expect prices to further fall.
Large diamonds have been being offered a discount by a number of large players in the market, resulting in a loss of confidence in the product.
With the large diamond market being so small, just a few low value transactions can alter the true valuation of all diamonds within the market, with knowledge of new benchmarks spreading fast.
Stricter Compliance
Improved transparency is helping clean up the trade, but it has contributed in some respects to the high-end slowdown. Individuals who previously stored illicitly obtained wealth in diamonds are no longer able to do so with such ease. Governments are cracking down on the black market, and banks are asking for more documentation to prove the legitimate origin of goods and funds.
In particular, it’s become more difficult to trade with Hong Kong, as the municipality has stepped up its compliance rules in an effort to improve its global reputation. Meanwhile, US sanctions against certain individuals who previously bought diamonds have taken some important clients out of the market.
There’s is evidence of a direct connection between the compliance challenges and the price of large diamonds.
Reduced rarity
One influence is the success of mining companies being able to extract large stones in-tact. With so many large stones now being uncovered it obviously has an impact upon the rarity of existing stones within the market. Simple supply and demand analysis can therefore see this as a key factor in the current price decline.
Gem Diamonds found 15 stones over 100 carats at its Letšeng mine in Lesotho last year, beating its previous record of 11 in 2015. It also recovered 137 diamonds between 20 and 30 carats, compared with 113 in 2017. Lucara Diamond, another big-stone specialist, has unearthed 12 diamonds above 300 carats since commissioning new X-ray-transmission (XRT) technology at its Karowe mine in Botswana in 2015.. Lucara sold a total of 153 diamonds above 10.8 carats in 2018, compared with 115 in the previous year.
Economic uncertainty
The ongoing tariff dispute between the US and China although now looking better in outlook, has accelerated the decline in the past six to 12 months. People are looking to conserve their wealth, particularly in the US, on which the large stone market relies.
The public is now more aware of price “bubbles” after seeing what happened during the 2008 financial crisis, according to Elisabeth Austin, founder of Diamond Runway. “The only people in the US who are displaying things of high value are seemingly the rapper and reality-TV community, which the high-end people do not want to emulate,” Austin said. “So we’re still struggling to successfully represent high end to the high-net-worth individuals in the US.” The uncertainty has forced diamond suppliers to carry more large-stone inventory than they would normally want, she added.
When will the situation improve?
The market has some really difficult challenges to overcome that will see key buyers withheld from any large purchases in the near future. The recent agreement between the US and China to resume trade talks could boost the market a little but the real price improvements are much further down the line.
The key issue at the moment is one of supply and demand, if the market can find a way to better publicise the large diamond market to bring the demand in line with current supply lines then this will have a much greater impact upon rarity, consumer confidence and therefore prices.
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