Many of my customers think that diamond prices always increase. And for much of the history of the diamond industry, that was pretty much true. When I first started in this industry in 1992, Debeers controlled about 80% of all the rough diamonds coming into the market. For decades,it was Debeers company policy to manage the supply of diamonds to the trade, increasing it sometimes and withholding at others, in order to maintain stable and modestly growing diamond prices. The reason the Hull Loan System accepts only diamonds as collateral on loans is that, historically, diamond prices have been very stable, which is what you want in collateral: stable value.
But now, the three largest diamond mining companies, Debeers, Alrosa and Rio Tinto together only account for about 60% of the rough coming into the market. There are more players and more competition. In many ways, 2014 was a very different year for the industry. Demand slowed, especially in China (a big emerging market) resulting in increased competition among manufacturers to sell their inventory and declining prices as a result of that competition. At the same time, the diamond banks tightened credit terms to the diamond manufacturers, insisting on greater financial transparency and less casual accounting practices from them, and refusing to finance 100% of their rough purchases as they have in the past.
As a result, Rapaport magazine reported that polished diamond prices fell for the 3rd consecutive year. The RapNet Diamond Index for a laboratory graded 1 carat diamond fell 8.7% in 2014; prices for a 3 carat fell 6.6%. Smaller diamond prices declined too: 0.30 carat by 6.5%.
While the 1st quarter of 2015 was better, the decline resumed in the 2nd quarter as reported by Rapaport: “RAPI (price index) for 1 carat diamonds fell 1.6% during the second quarter of 2015 and was down 15.3 percent from a year earlier.”
This discussion relates entirely to interdealer markets: where wholesalers and retailers buy from manufacturers, not to retail prices. But it is these markets, the prices that retailers, especially, have to pay to acquire inventory that determines loan value.