26 May 2020
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The Importance of an Earnest Price List
The diamond industry without a benchmark price could lead to confusion. What it really needs is a price list that is backed by solid data arrived by studying the actual deals made over a period of time
By: Vijetha Rangabashyam
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May 7 2020 8:26PM
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Reference: 24907  

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There is very less information on how diamonds were traded in the pre Rap List era. All we know is that handshakes were made based on price per carat and a general worthiness of the stone. However, since 1978, the year Rapaport Diamond Index was established, the way diamond industry functioned changed overnight. A weekly price list (which has now become monthly) generated keeping the actual asking prices as a baseline for top-quality one-carat stones became an industry standard. Manufacturers, wholesalers, dealers and retailers everywhere in the world have been using this proverbial list to buy and sell their goods. You would be hard- pressed to nd a dealer who does not have the bright red Rapaport price list on his workstation.

So, since the late 70s – early 80s, the industry has been following a set international price for diamonds (Rap List), something that the colour gemstone industry has not been able to replicate. Agreed, adopting a benchmark has helped bring in more transparency in the pricing system and garner more consumer confidence but not without a tradeoff – what is supposed to be eternally rare and valuable has been commoditized so to speak. Gold as a commodity also follows market price, but while every ounce of gold is the same, no two diamonds are the same. The Rap List, since its inception has posed two problems – one, it generates its prices based only on carat, colour and clarity, but diamonds are beyond those parameters of grading, there are other intrinsic values in a diamond. Anybody who has been in the industry long enough would know that different diamonds of the same grade can look very different. The second and more prominent problem with the Rap List, something that most dealers resonate with is the monopoly and controlling of diamond prices for several decades. When the Rap List alters, it impacts diamond prices all over the world. Rap List, which is also presumably based on the simple economic law of supply and demand, decided to drop the prices recently, when there was absolutely no business happening around the world, which led to the industry’s furor. A benchmark price list that has had the ability to make or break businesses with its decision to alter prices based on a methodology that has hitherto been ambiguous, has led many to reflect on the problems associated with the current system and a fair way of arriving at benchmark pricing.


Lior Eshed, Eshed Diamonds

"I don’t have any argument about the need for a price list. The need for a price list is well preserved. This is what the industry has been used to. My main concern is – what is the basis of this price list. The basis of the benchmark (per carat price) that is unknown, far from the eye and not transparent is not something that can be relied upon" - Lior Eshed, Eshed Diamonds

Does the industry need a benchmark price list?

In the luxury industry, no one dictates how Louis Vuitton should price their bags or no one controls how Cartier should price their watches, then why must the diamond industry follow a benchmark price? “I don’t have any argument about the need for a price list. The need for a price list is well preserved. This is what the industry has been used to. My main concern is – what is the basis of this price list. The basis of the benchmark (per carat price) that is unknown, far from the eye and not transparent is not something that can be relied upon. The decision making process and the criteria of changes in the price list should be transparent, objective, unbiased and correct. We have to remember that at the end of the day, prices are determined by the supply and demand rules. The price list is just a benchmark,” says Lior Eshed of Eshed Diamonds. The industry has been acclimatized to a price list for 40 years and more importantly, with grading systems having evolved, pricing has also become very scientific. “I believe it is vital to have a universal price list. It makes the process of valuation/appraisal, buying and selling diamonds more efficient,” says Hamesh Seth of Excellent Diamonds. Earlier, there were no certi cates – D,E, F were categorized as “collection colours” and I,J were “commercial” colours. But today, a nuanced grading system that is so accurate calls for a pricing system that is fair and transparent. “It is definitely helpful to have a common ground where buyers and sellers meet and have a starting point to begin the negotiation. A universal price gives the industry a common language to speak and communicate,” says Simit Parikh of Sim Gems Limited.

“There is surely a scope for more structured universal pricing. The mechanism of single pricing system is always good for the diamond industry establishing a benchmark for everyone to follow. Possibly if a World Diamond Council can collaborate with all the stakeholders including traders, governing bodies and manufacturers and device a neutral platform, then that can be a better actuator,” says Sanjay Kothari of KGK Group. Consumers also use a price list to buy diamonds, especially in the U.S. where a majority of the demand for diamonds come from. “In the late 1970s, diamond prices experienced wild uctuations, and an industry price guide was urgently required to stabilise the market and regain customer confidence. Rapaport did that. The diamond industry has grown tremendously in the last four-decades. I think it has given a great platform between buyers and sellers. Consumer con dence increased and at the same time it has helped retailers to build credibility with the end-user,” says Gaurav Nigam of Oriental Gemco. The problem has never been with following a price list, but it has been about how it has been maneuvered and whether or not it genuinely represents the market realities.



There is surely a scope for more structured universal pricing. The mechanism of single pricing system is always good for the diamond industry establishing a benchmark for everyone to follow" Sanjay Kothari, KGK Group

The optimum method to come out with a benchmark price list

The common parlance used in the industry is “back off rap”, “15 back” or “plus 10” meaning the diamonds are traded at a discount to Rap – normally x% on the asking price. “The price should be based on actual deals and invoices. Meaning that an item base price should be based on similar items that were sold during a speci c period of time. It is very easy to analyze the data that is being accumulated today. The big manufacturers and wholesalers have been accumulating this data. Based on an average of actual sales of each item, this data can be analyzed and a trustable benchmark could be produced. This is a fair, correct and logical system anyone could trust,” says Eshed.




I believe the industry needs a price guideline, not necessarily a list, preferably based on actual deals on relevant items in question Shai Schnitzer, S.Schnitzer Diamonds

Price list must be derived from the collection of B2B data and even B2C data of at least last 12 months and it should be analysed at every quarter says Pratik Shah of DiaSense. “I must add that data analysis alone cannot justify the polished price list. The mechanism must be transparent to all B2B segments and must be approved/veri ed by the industry as well, especially by manufacturers and traders including sight holders, SMEs and even small traders,” he adds.

However, some suppliers believe that a price range would work better for the industry. “The price list should be in accordance with supply chain management. Also a price range is a better pick than a fixed price,” adds Kothari. A transparent way of coming out with a benchmark for pricing involves months of studying and analyzing the actual deals that are made. “A system that wants to dictate the price rather than following or reporting the price is a problem. A correct system would act as follows: if a price of 30 deals of 3ct round G VS2 was priced at “$xp/c”, than the benchmark should be based on an average of these historical deals (let’s assume a period of 2 months). Now, assuming we agree that the “average trade level” is at 50% discount from the benchmark you can easily create a gure based on the actual deals. This way, once everything is known and transparent, whoever is using this benchmark, can trust the basis of the benchmark,” adds Eshed. There are also other comprehensive factors based on which the benchmark should be arrived at. “I believe, the price list should re ect the comprehensive research and analysis of database on mining, availability of rough, production capabilities, stock availabilities on the market, and, most importantly, demand and supply. All calculations must be made by a theoretical system, and using artificial intelligence (AI), keeping the above factors in mind,” adds Nigam.

More than calculating on the average of actual deals, stakeholders in the diamond industry need to give their inputs on the price list. “The single most important factor in determining the price list is data collected from actual sales of polished diamonds as well as procurement situations of rough diamonds. This list should re ect insight from miners, diamantaires, bankers, manufacturers, traders and retailers, and market analysts worldwide integrated,” adds Hamesh.

Get Diamonds recently launched by WFDB guarantees that it will be different. “It is working on a format which looks good and suitable for the market but we still don’t know the correct picture. Let’s hope it is a good replacement for Rapaport prices,” says Chirag Shah of Anita Diamonds.

 
The price list should re ect the comprehensive research and analysis of database on mining, availability of rough, production capabilities, stock availabilities on the market, and, most importantly, demand and supply," Gaurav Nigam, Oriental Gemco

Where’s the question of “misleading” buyers when it’s all about supply and demand?

“Only the supply or demand rules will control the price paid. For example, if a supplier is asking for his goods $1000 per carat he is free to do that, but if for the same goods, 50 other suppliers are selling at $900 per carat, then I guess he would have a problem selling his goods, because market is at $900 per carat,” adds Eshed. The fundamental issue in the diamond value chain is that rough and polish are two very different markets, prices being exponentially different from each other. If a supplier paid a certain amount on the rough, which gives him a certain polished goods, then it is only logical that he trades the goods over and above what he paid. It is a business at the end of the day built on a capitalist model. “Buyers are smart. They eventually find the right product at the right price,” adds Simit. At the end of the day, the data collected based on actual deals, and therefore supply and demand should and will protect the interests of both suppliers and buyers. “Eventually, market dynamics and trading platforms will create equilibrium among buyers and sellers,” adds Schnitzer. According to Hamesh, altering pricing for no rhyme or reason, without credible data to back the same only leads to loss of con dence. “As long as the market stakeholders are working together and using actual sales data, the supply and demand, and pricing will naturally nd equilibrium. Making erratic and frequent changes in the price list will result in loss of con dence amongst all members of the trade; from miners to consumers. This hinders businesses from engaging in long-term business strategy, as the merchandise prices are unpredictable,” he says.


"Making erratic and frequent changes in the price list will result in loss of con dence amongst all members of the trade; from miners to consumers. This hinders businesses from engaging in long-term business strategy, as the merchandise prices are unpredictable," Hamesh Seth, Excellent Diamonds

Could we go back to per carat pricing?

Going back to old time pricing (price per carat without a guideline) though not impossible would create a lot of confusion in the industry that has been following a price list for many years. It is not something the industry entirely supports, however, what they need is a credible price list that is based on supply and demand and nothing else. “Abandoning the price list will be a nightmare and is not practical at all. Currently, Rapnet is playing its imperative part and is being followed by every individual in the diamond industry. One can switch to any other format, only if it exists and is globally acclaimed and accepted. But no price list will only lead to a greater chaos,” says Kothari. The truth is, no body in the industry today really knows what the per carat price of a diamond is, Rapnet price minus discount is the standard way of pricing. “The diamond world got used to a certain reality, which creates some exibility between wholesale and retail environments. Time will tell whether this system will survive the new reality within the market,” says Schnitzer. The price per carat has been working for the colour gemstone market but insiders will tell you how unorganized the market is and it is also often shrouded with a veil of ambiguity. “Fancy diamond and colour stone dealers don’t work on a price-list. It regulates on its own as per demand and supply. An illusion is there, which ensures a fair margin to all. But it works well in this segment. Even in loose diamonds, parcel prices are decided by the supplier based on his cost and demand from buyers. However, a fair mechanism to run and manage the pricing of diamonds helps to build consumer con dence and retailer credibility in retailers. Also, it gives a smooth platform to do fast transactions between suppliers and buyers,” adds Nigam. Going back to per carat pricing would be certainly tough, but the idea is not something we can entirely dismiss.

What’s the verdict?

Over the years, the diamond industry has structurally changed in many ways. It has become more organized and there is more transparency in the system, with a lot of information available to all stakeholders in the pipeline. Undoing what the industry has followed for many decades could pose a lot of problems. Given the current scenario where there’s already a lot of uncertainty, functioning without a benchmark for pricing could be dif cult. Especially in a world where the end consumer is far knowledgeable and wants to know why he is paying a premium on certain goods, having a price guidance is necessary. However, supply and demand arrived by calculating the average on actual deals made in addition to taking into account the sales data of rough and polish, along with insights from all the stakeholders in the diamond value chain is the only way to come out with a fair, transparent benchmark price list. Instead of questioning the existence of a price list, the industry should work together in coming out with one that is comprehensive, scientific and completely transparent.


"The whole market is following the list of 6th March 2020. We are buying and selling at the same level and the industry is adapting to it. For many years we are used to selling to discount prices but now there are going to be many platforms, so following price per carat is easier," Chirag Shah, Anita Diamonds

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