What's Happening in the Diamond Industry?
Blog - Deep Dive
September 15, 2024
| The price drop’s been calamitous, but the more serious problem is liquidity |
The rapid drop in diamond prices over the last several years has been well covered by everyone, in the consumer, trade, and business press. The very short version is that after a dramatic rise in 2020 to early 2022, prices have plummeted. At the end of 2023 it seemed a floor was hit, and a slight rise followed. But it turned out to be temporary, and the downward trend continued. (See graph from IDEX)
What’s not been well-covered is what’s happened to liquidity in the trade. It’s dropped far more than the price itself. And for those who wish to sell, that’s a serious problem.
Most investors are sophisticated about economics, and they understand markets. Sure, prices go up and down. But there’s always a price. Or is there?
Let’s start with what we mean by that word. A “market price” is the one at which—other factors equal—a willing buyer and a willing seller are likely to agree on a transaction.
But what if there is no willing buyer?
Consider the market in real estate. Imagine a house that would sell for $500k between a willing buyer and a willing seller.
If you have such a property and want to sell it, you’ll have to list it for some amount of time before a buyer comes along and pays the “willing buyer” price. You might wait a month, or even a year.
If the market is unusually hot, not only are prices rising, but so is liquidity. In that case, a buyer might accept your asking price within 24 hours of listing.
But what if liquidity is low (there are few buyers) and you’re not willing to wait? What if, for whatever reason, you need to sell immediately. In that case you’re not talking willing-buyer price, you’re talking an immediate liquidation price. That’s the situation when the buyer isn’t “willing.” They don’t want to own the house, but at a low enough price, they’ll buy on speculation.
How much lower is the liquidation price to the willing-buyer price?
That differential itself can vary hugely.
Imagine a normally functioning real estate market. The differential between the two price levels might be as low as ten percent, or perhaps as high as thirty percent.
But what if the market’s in a huge downturn? Not only have prices fallen, but there are few buyers. In that case, the differential might be far more than even thirty percent, to achieve an immediate cash sale.
Everyone understands this. Now let’s apply these concepts to the current diamond market.
As mentioned above, prices have dropped severely. But what’s really plummeted is liquidity. As we saw with our real estate example, when prices fall the differential between the willing-buyer price, and the liquidation price, typically increases.
I heard a story of one wholesaler who—this last summer—went over thirty days without selling a single diamond. (A wholesaler would typically be selling dozens a day.)
Not surprisingly, the differential in the diamond industry, between the wiling-buyer price and the liquidation price, has become extreme. Let’s say the willing-buyer price in aggregate has dropped by 35% in the last 2.5 years. But what if you need to sell that diamond and there is no willing buyer?
You’re now going to experience a drop not of 35%, but of possibly twice that. Prices themselves haven’t dropped 70%. But price-drop + liquidity-drop together mean that forced liquidation price could be as low as 30% of x.
As CEO of Icecap, this has been indescribably frustrating, and of course far more so for many of our customers. Icecap offered a revolutionary way to trade diamonds, in which “value index” pricing was used to create what we called “virtual fungibility.” This went a long way towards making diamonds far more liquid. Until the market reversed, in April 2022, Icecap was arguably the most liquid marketplace in the entire diamond industry. Stones offered for sale—priced at the top of the value index—were snapped up in hours and sometimes minutes.
The value-indexing concept worked, and worked extremely well, in a normal functioning marketplace. It would have continued working well even in a normal downturn.
However, today’s diamond market is not normal. There is no trading platform in the world that can deliver liquidity if there are no buyers for the product—even in the trade.
What does this mean for Icecap customers?
Fortunately, most are not in a position where they have to liquidate. But those who must will see a liquidation price level that takes into account both the diamond price drop itself, and also the differential-drop between willing-buyer price, and liquidation price.”
And that could mean an extremely large loss.
A final note. Icecap provides its customers what we call “portfolio sheets” that include the basic details of their current diamond holdings: what was purchased, when, at what price, etc. One of the columns is something we call: “Equivalent Price Today.” That column is an attempt to show the change in the willing-buyer price level, compared to the price at time of purchase. We use industry-standard sources for showing that price. But, as explained above, if there are only “liquidation-level” buyers today, that column isn’t particularly useful, as it represents a willing-buyer price estimate.
Icecap customers are invited to reach out to me at any time for further discussion.
-Jacques Voorhees, President (jacques@icecap.diamonds)
Useful links:
https://fortune.com/2024/06/05/lab-grown-diamonds-price-sunk-6-percent/
https://rapaport.com/news/diamond-industry-under-pressure-amid-slow-sales/
https://www.jckonline.com/editorial-article/current-state-diamond-market/
https://www.bcg.com/publications/2024/future-of-natural-diamond-industry
https://www.gemsociety.org/article/state-of-diamond-market-2024/
https://fortune.com/2023/11/11/diamond-industry-faces-price-plunge-gen-z-uncertainty/
https://nationaljeweler.com/articles/13021-de-beers-rough-diamond-sales-sink-31