It
is important to dispel a popular misconception. Some diamond
retailers suggest that they buy their diamonds directly from
diamond mines and that this results in significant cost savings
to you, the consumer. In the first place, most of the retailers
who make this claim are not diamond cutters. They do not have
the capacity to manufacture finished diamonds from rough stones
produced in the mines. Also, for the most part, the distribution
of rough diamonds is strictly controlled. An international monopoly
known as the DeBeers Corporation buys and distributes approximately
60% of the world's uncut, rough diamonds and controls the prices
of the remaining diamond rough indirectly. DeBeers Corporation's "single-channel" marketing of diamonds determines the price
of rough diamonds and makes it almost impossible for diamond
manufacturers or others to "beat the system" by purchasing rough
diamonds at prices significantly below DeBeers' established
prices.
How
does DeBeers operate? DeBeers Corporation is an international
cartel that has controlled the price of diamonds since the mid
1930s. Anglo-American Corporation owns 45% of DeBeers; 40% is
owned by the Oppenheimer family, which established DeBeers monopolistic,
single-channel approach to rough diamond distribution; and 15%
is owned by the government of Botswana. DeBeers buys most of
the world's rough diamonds from diamond producing nations: e.g.,
South Africa, Botswana, Namibia, Zaire, et al. In addition to
purchasing diamonds from major diamond producing nations, in
order to maintain control of rough diamond prices, DeBeers purchases
a large percentage of the remaining rough diamonds throughout
the world from sources outside of the recognized DeBeers network
of diamond producing nations.
DeBeers
sells these rough diamonds to approximately 80 "sightholders"
(generally, major diamond cutting firms) which are the only
companies authorized to buy rough diamonds directly from DeBeers.
The sightholders are invited to attend a "sight" held at DeBeers
Central Selling Organization in London, England approximately
ten times a year (acceptance of the invitation is mandatory).
Each sightholder is given a box of diamonds. The price of the
diamonds is fixed by DeBeers and is not subject to negotiation.
Even rough diamonds marketed outside of DeBeers are priced in
accordance with the price structure established by DeBeers'
Central Selling Organization.
From 2002 through the beginning of 2005, DeBeers has reduced
the number of sightholders from approximately 120 to 80, as
a part of it's "Supplier of Choice" program. Under
this program, DeBeers will try to consolidate the diamond market
from rough production through retail, eliminating many of the
current participants in diamond production and sales. The impact
on the diamond cutting industry and jewelry retailers (among
others involved in the diamond trade) could be enormous. Does
this mean that the price of diamonds will come down? Not on
your life! It means that DeBeers and it's sightholders will
probably make a greater percentage of the total take from the
diamond market than it currently does.
Currently
there are three other major participants in the rough diamond
market. Canada, Russia and Australia all mine and sell all or
a portion of their own rough directly to manufacturers (i.e.,
independently of DeBeers). Canada and Russia (through the monopolistic
Alrosa) supply rough to cutters at prices which are in line
with DeBeers prices for rough diamonds (actually they tend to
be slightly higher). Australia generally produces lower quality
and smaller diamonds and does not have a significant impact
on the market for large, better quality stones.
A popular notion is that DeBeers and Russia retain huge amounts
of rough diamonds in inventory and only distribute a small portion
of these rough stones in order to support the high price of
diamonds. While DeBeers strictly controls the distribution and
prices of diamond rough, recent information suggests that the
inventory levels of DeBeers, Russia and other rough producers
are much smaller than previously supposed and that they have
been shrinking every year. Currently, diamond prices are rising
partly as the result of a genuine scarcity of diamond rough.
Retail Prices
One interesting aspect of the diamond business is that when
dealing in better quality diamonds small diamond retailers
are generally not at a competitive disadvantage to large jewelers
or department stores that purchase diamonds in bulk. In fact,
a small diamond retailer with low overhead has a distinct advantage
over most major diamond retailers.
Students who major in business administration are familiar
with the term "economy of scale."
This refers to the way that businesses that purchase large quantities
of wholesale goods
(like Wal-Mart or Costco, for example) generally receive substantial
discounts. This allows them to sell the goods at a discount
to the consumer. Companies that buy smaller amounts are generally
at a competitive disadvantage because they generally pay more
at the wholesale level and are unable to match the retail prices
of large companies.
That's not the way it works in the diamond business when
you buy and sell top quality diamonds.
Generally, large diamond retailers that purchase huge amounts
of diamond inventory at a discount receive "the run of
production" from a cutting factory or other wholesale vendor.
This includes all sizes, shapes and qualities of diamonds--
including large quantities of lower quality diamonds (e.g.,
diamonds of lower color or clarity) or unpopular goods that
are difficult to sell (e.g., unpopular shapes, shapes, or diamonds
that are cut improperly to save weight). These lower quality,
less desirable diamonds must sell in quantity at a discount
or they will simply accumulate in the cutting factory's inventory.
On the other hand, the cutters need to get all they can for
top quality diamonds, which they generally sell individually
or in small lots-- they do not discount significantly for bulk
purchases. Well cut diamonds with better color, clarity, and
desirable shapes (especially round brilliants, and other popular
shapes that are extremely well cut) comprise a very small percentage
of overall diamond production.
It doesn't make sense for diamond manufacturers to sell the
extremely limited amount of better quality diamonds that they
produce at a significant discount for bulk purchases-- these
stones are in short supply and in great demand.
Since better quality diamonds are scarce and tend to sell
in small lots, small diamond retailers generally have access
to the same prices as larger companies for these goods-- i.e.,
"economy of scale" does not generally benefit large
companies with huge purchasing power as it does when dealing
in other commodities. In fact, smaller diamond vendors with
low overhead, can actually have a competitive advantage over
larger retailers when dealing in top quality, desirable stones.
As
the proprietor of the Dimonz Company, I (Bill Bailey) do all
of the buying for my company. I am a Graduate Gemologist (G.I.A.)
with many years of international trade experience, buying diamonds
in Antwerp, Bangkok (for smaller diamonds) and New York. I know
the diamond market well. By paying cash for my diamonds (rather
than getting them on consignment as most retail jewelers do),
avoiding unnecessary middlemen, and buying from sightholders
and manufacturers, I am able to obtain substantial discounts
on the diamonds I purchase for resale. In most cases, I buy
well enough to offer diamonds to you at actual wholesale prices,
generally available only to people in the diamond trade.
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