Diamonds are considered to be one of the most durable, if not perfectly durable, consumer goods. Because diamonds are highly durable, and thus are typically purchased only once by an individual over a long period of time, the demand for diamonds depends on consumer expectations about future prices. Presumably, a prospective customer who expects diamond prices to decrease over time would be willing to wait to make the purchase – so long as the gain from price decrease is greater than the opportunity cost of waiting.
Historically, the diamond industry worked to combat this issue through clever advertising and rigid supply control. Consumers were slyly coerced into collectively sharing artificially inflated valuations of diamonds. Diamonds were marketed as scarce, precious, and exceptionally valuable. They were tied to the concept of love and marriage, in effect magnifying the opportunity cost of waiting to make a purchase. Diamond producers followed predetermined price progression strategies, raising price by a few percent each year. These tactics, for a long time, worked to keep diamond prices high.
Today, diamond prices are driven by market forces, and this has proven problematic for the industry.
Reduced demand amid slowed economic growth has sent tremors through the global diamond pipeline. Chinese diamond purchases decreased significantly amid the country’s short-lived stock market surge, with consumers pouring money into equities instead of jewels. Following the economic downturn, Chinese consumers, who represent the second-largest market for diamonds, have been understandably reluctant to spend disposable income on diamonds. Low oil prices and a weak ruble in the Middle East and Russia have also contributed to the decline in global diamond demand, resulting in significant price decreases for diamonds around the world.
According to the Rapaport Diamond Trade Index, one-carat polished diamond prices have fallen 27% on average from their high in mid-2011, while larger 3-carat diamonds are down 23% over the same time period. Consulting firm Bain & Company estimates that diamond prices fell 25% in 2015. Inflated expectations for future growth in demand were not realized, resulting in excess stock accumulation for several of the world’s top clearinghouses.
So what happens when diamond prices fall?
The problem lies in the diamond industry’s deeply tangled supply chain. Consumers aren’t taking the bait on lower prices, and retailers have found themselves stuck with high levels of inventory. As a result, they have begun to cease purchases from wholesalers, sending the ripple further upstream. De Beers and other prominent industry players have been forced to close mines and factories in countries such as South Africa and Botswana, putting thousands of miners, cutters, and polishers out of work. Consolidation at the midstream level of diamond production has intensified due to the high level of business closures. Developing nations whose economies depend on the diamond industry are particularly feeling the adverse effect, seeing sharp cuts in GDP. Anglo American, parent company of the famed De Beers, saw its shares hit a 15-year low in August of 2015.
Perhaps, the immensely successful marketing tactic behind the diamond has lost its charm. Or, more likely, the diamond industry is suffering the effects of a lag in the pipeline, and prices will eventually bounce back.