In a state of flux: Manoeuvring the diamond industry’s ‘new normal’

by charlene_voisin | August 1, 2015 9:00 am

By Evert P. Botha

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Speak to anyone in the trade, and you will find jewellers from Victoria to Halifax are having a tough time adjusting to a new kind of normal. By that, I mean an apparent lack of ‘affordable’ diamonds. I use single quotation marks, as the word ‘affordable’ in the jewellery industry these days is a very broad, misused, misrepresented, and dare I say, misunderstood descriptive, especially when we’re talking about diamonds and diamond prices.

Pricing woes

It’s been a challenging year for many manufacturers, as the cost of rough diamonds continues to rise. Some sightholders even opted out of goods offered at De Beers’ March sight, with the mining company reducing prices at its May sight by an average of three per cent. The price of polished diamonds has been depressed (to say the least) and overall costs of doing business continue to escalate, particularly in the key manufacturing and trading centres abroad.

Back home, we’ve seen some of Canada’s longest established companies forced into liquidation, resulting in former competitors now distributing their lines, let alone the fact more and more jewellery manufacturers and brands are opening their own boutique locations or concept stores, effectively becoming competitors to their own dealers. In addition, more overseas manufacturers are setting up direct relationships with jewellers, putting pressure on importers, dealers, and traders to up their game substantially to remain competitive in an ever-changing landscape. I’ve lost count of the number of times I have received calls from jewellers looking for diamonds in certain price brackets, which often turns out to be less than half the cost of the prevailing list price.

Add to the mix Canada’s currency woes. Between July 2014 and March 2015, the loonie depreciated 21 per cent against the U.S. dollar, and despite some positive gains in the short term, Scotiabank’s economists are forecasting it to end the year at around $0.79. So even with this rollercoaster ride continuing into the foreseeable future, one thing remains certain: regardless of provenance or grade, your diamonds cost about 20 per cent more than they did a year ago. Gone are the days of parity—hello forward-buying and planning, all while banks and foreign exchange brokers charge service fees and commissions that eat into your profit.

Unsatisfied with certain diamond lists many consider out of sync with the cost of rough, some dealers, manufacturers, and traders have bumped up their asking prices substantially, even to full list price.

Making sense of the discounts

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This really got me thinking about the state of the diamond trade here in Canada, especially in light of the much-publicized events of late south of the border and abroad. As it turns out, retailers can and are being sued for selling overgraded diamonds, and as we’ve recently witnessed in the United States, settlements are likely to be costly. (According to National Jeweler, the plaintiffs in the action against a Tennessee retailer were very satisfied with the ruling.) It’s probably only a matter of time before we see a similar lawsuit in Canada.

There’s been a lot of back and forth as to who would be ultimately responsible when it comes to overgraded diamonds. Is it manufacturers, dealers, retailers, or grading laboratories (which, by the way, are the only ones protected by disclaimers) or is it in fact all of them? If these parties have taken the time to earn their credentials, selling these overgraded goods goes against everything they have been taught by the very institutions and associations we all hold in high regard.

Now that EGL International’s printers have all but ceased printing reports, many of these so-called deeply discounted goods seem to have disappeared from the various trading platforms (although some diamond houses still stick to their guns, claiming there is nothing wrong with the stones. They just have to meet the requirements for that grade category).*

It seems most of EGL International’s former clients (e.g. traders, manufacturers, wholesalers, etc.) appear to have switched to a multitude of other laboratories, which in itself is great for the industry in that more accurately graded diamonds will be on the market. Others, however, have elected to simply market, list, and sell these diamonds with overgraded reports as ‘ungraded’ for fear of being blacklisted and banished from various trading communities. The industry standard for grading tolerance is plus or minus one colour and/or clarity grade, but the question is, do these ungraded stones fall within that tolerance? Given the adverse publicity over the last year, one may even ask whether a one-grade difference is still acceptable.

Here’s something to ponder. A search of RapNet on May 7 for one- to 1.05-carat, D to F, SI1 to I1 ideal cuts (we’ll call this ‘Range A’) revealed an average discount of 23.4 per cent. Interestingly, there were only 23 diamonds in this bracket: 21 graded by AGS Laboratories and two listed as ungraded. Upon further refining this search to include all other cut grades, the number remained the same—23.

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Another search for one- to 1.05-carat, F to H, SI2 to I2 of any cut grades (‘Range B’) showed an average discount of 48.22 per cent. This selection increased substantially, totaling 3427 diamonds, 1112 of which were listed as ungraded. I refined my search to only include ideal cut grades (‘Range C’) and the list shrank down to 31 stones, this time, all graded by AGS Laboratories and carrying an average discount of 24.89 per cent.

So let’s say a year ago you could buy an affordable ‘Range A’ diamond with a report with a 55 per cent discount and (probably knowingly) pay too much for what would have been a solid ‘Range B’ stone. Today, an accurately graded ‘A’ is priced similar to a solid, accurately graded ‘C.’ What this tells me is that many companies have simply resorted to listing their goods as ungraded, while still offering steep discounts.

Accurately graded diamonds always command a premium, much like the finer makes of any product. What you’re paying for is the expertise of a master diamond cutter and the brands they craft. As for most Internet retailers, triple excellent is just not good enough anymore and for them, along with hundreds of independent jewellers, the ideal or AGS triple zero cut grade, which is assigned to only the finest, precision-cut and high-performance diamonds, has become the de facto standard, especially now that more and more diamond designers, cutters, and polishers are pushing these parameters for optimal light performance for their respective diamond shapes and brands.

It is the ‘ungraded’ category of inexpensive diamonds that we should be cautious about. Does it contain undiscovered treasures or is it a Pandora’s box of undesirable stones?

Staying a step ahead

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Understanding the different cut grades and grading systems is an integral part of the continued education of jewellery professionals. As a diamond manufacturer, I expect any of our customers or their team members to have, at the very least, a working knowledge of diamond grading essentials. With the wealth of information available on the Internet, it is time for independent jewellers to start effectively communicating their credentials and knowledge, and reclaim their position of authority when it comes to diamonds.

That’s one of the reasons diamond e-tailers are opening their own boutiques. Customers want to see, touch, and compare various diamonds. With all the advances in precision diamond cutting and polishing, as well as accurate diamond grading, consumers still need you to show them the difference.

So what’s a retailer to do? Invest in the five (or more) diamonds you need to have a complete master set so that when your customer walks through the door to look at diamonds, you’re equipped with the necessary tools to explain and illustrate colour and clarity. A selection of cubic zirconia will never match the experience of looking at the real thing. Even as consumers wade through lists of virtual inventory and dynamic visuals, they still crave a professional presentation. It is up to you and your key diamond suppliers to keep a range of sizes on hand to ensure your customers are not disappointed.

Your diamond sales pitch needs to be amazing—nothing less. If you haven’t developed your very own framework for these presentations—or for selling diamonds—you’ve already missed the boat.

Seasoned jewellers are learning the advantages of trading diamonds with customers (i.e. upgrades) or purchasing diamonds off-the-street. This ever-growing ‘mine’ ensures a steady supply of stones at prices pretty much dictated by you. Many of these diamonds (assuming they carry accurate grading reports) can be resold immediately, or in a lot of cases, sent to a trusted diamond cutter to be repaired or recut to maximize their value.

50 shades of J

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The diamond supply pipeline has become tainted with swarms of ‘peacocks’ from manufacturing centres in India and Israel. Despite tough economic sanctions on Zimbabwe enforced by Canada and the United States, these greenish and inexpensive goods are available at steep discounts and often priced in line with their Russian, Canadian, and Botswanan equivalents, further tainting the supply. The price of Canadian-mined goods has been holding (and rising) steadily. For consumers intent on buying conflict-free diamonds, the premium is worth paying. Who knows? Perhaps some of it may make it back into the coffers of the Ontario government.

With very few mines beyond our shores coming online in the next five years, diamond manufacturers have been bracing themselves for a time when the demand for rough exceeds supply. This is welcome news for Canada’s mining and exploration projects.

Currency fluctuations aside, we can all agree on one thing: a masterfully cut, accurately graded diamond is always going to outshine a lesser stone. Yet, in addition to presenting product in a skilled and knowledgeable manner, you need to connect with your clients’ narrative, their moments, and their memories (which these days are likely broadcast on social media). For a client who is prepared to spend a substantial amount of money on a piece of jewellery, remember that nothing matches the experience of spending time with a qualified, polished diamond professional. There’s only so much they can glean from the Internet. Shine on!

* Both Gemological Institute of America (GIA) and American Gem Society (AGS) Laboratories refer to diamond grading documents as reports, rather than certificates or ‘certs.’

Evert P. Botha is chief operating officer (COO) of Embee Diamonds in Prince Albert, Sask., a family-owned atelier specializing in cutting and polishing high-performance diamonds. Botha can be reached via e-mail at ideal@embeediatech.ca[6].

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