This is a zero-sum game in which the profit of one party is formed at the expense of the other party

I often think about how consumers - whether they live in New York, Hong Kong, Shanghai or elsewhere - make decisions. Obviously, they determine the price for both diamonds and diamonds (indirectly). It is the consumer who decides whether it is possible to offer him a diamond at some price and whether he needs him at all. Each supply chain is assumed to operate in accordance with this assumption. When a consumer decides that he wants or can pay a sticker price for a particular diamond, he thereby sets the price for this diamond. This, in turn, determines the price of the diamond (from which this diamond was made). The difference between these two prices is the gross profit of the supply chain: diamond mining companies, cutters,

In my previous articles, I argued that, in the light of the current crisis, the diamond and diamond sector will never return to its previous structure. Even if we can solve existing problems in the foreseeable future (for example, the issues of high diamond prices, profit margins, stocks, marketing, etc.), these will be only temporary solutions. From my point of view, these same problems will appear again later. All this allows me to conclude that there is a need for a deep, fundamental change in the industry. Only a significant change will stabilize the trade in diamonds and diamonds and make it profitable. This should be a change that benefits all participants of the industry, and a change that primarily focuses on the consumer.

Complex circumstances

But before I move on to what changes are required, we need to consider the circumstances that led the industry into the current situation.

Fragmentation . "Pie" of the diamond sector is divided between a huge number of companies. The small share that each company receives, if it receives it, reduces the profit of the company, hinders the accumulation of capital, makes it difficult to preserve the value of diamonds and undermines the company's ability to effectively trade this luxury product, as it was in the past (see reference). Many of the players in the diamond sector rely on "cheap labor" and seek to compete with each other in order to sell at any price, including making deals without any return on investment (see reference) or even at a loss to themselves, Just to keep the business and maintain its vitality. In this situation, prudent diamond companies would translate their profits into investments in other sectors.

Oligopolistic regime of suppliers of rough diamonds. This situation leads to contradictory methods of work, which completely lead to defeat in the most important struggle: the struggle for the consumer. Such methods of work include: temporary improvement in the coloring of diamonds, including non-documented synthetic diamonds; The use of uncertainty between the estimated demand and the volume of final transactions; Lack of transparency and misleading consumers using the "4 C" characteristics (color, cut, weight, cleanliness), etc.

These methods of work destroy profitability, damage the reputation of the industry, harm the consumer and force financial institutions that could contribute to the growth of the industry, take their business to other areas. These problems are exacerbated by the constant struggle for market share, which makes buying diamonds at any price.

All of the above can be seen on the chart below, prepared by the consulting firm Mercury Diamonds, and he speaks for himself.

The blue line, reflecting the price of diamonds, is almost always above the red line denoting the price of diamonds. All the rest is clear.

The movement of prices for diamonds weighing 0.01 - 2.49 carats and prices for diamonds weighing 0.01 - 0.99 carats

Synthetic diamonds: a hidden advantage

So far we have dealt with the structural aspects of the diamond industry and their impact on the current situation. But there is another aspect: how consumers perceive the value of diamonds, that is, marketing. The industry should wake up and search "non-stereotyped", because the hope for the fantastic slogan of De Beers "The diamond is forever" does not work any more. Industries need to understand what everything is going to. The rapid rise of synthetic (grown in the laboratory) diamonds poses a significant threat to the demand for natural diamonds, and this growth is intensifying.

But this does not necessarily represent a threat to the industry. Conversely, the growth of synthetic diamonds can open a new era for the industry if we manage to work on it and turn it from weakness to strength. But how to do that? It is necessary to realize that we are dealing not only with a luxury and excellent product, but also with a very unique product belonging to a group of products for which the main feature is the "economy of rarity".

What is the "economy of rarity" and how are we associated with it? First, I would like to clarify the terms "scarcity" and "rarity", which some appear in the context of the "rarity economy" and sometimes confusion occurs. Deficit refers to the lack of something that can be filled at the cost of expense or with time, but, ultimately, will be replenished. Unlike the deficit, rarity refers to a commodity that is not often found in nature. These products are available in limited quantities in nature, and their resources can not be reproduced. In other words, the more they are produced, the more their shortage becomes, which can not be filled. This is a zero-sum game in which the profit of one party is formed at the expense of the other party, so that the amount of profit and loss of both sides is zero.

To return to our industry, it is necessary to consider that documented synthetic diamonds belong to a scarce economy, as they can be mass produced, and the capacity of enterprises is not limited. The more these laboratories become and the more complex means of production develop, the lower their price falls. This is not an unlimited resource, but rather an industry.

Conversely, natural diamonds can be considered and are considered a rarity - a product that can be extracted only to a limited extent, and the availability of which is reduced over the years, despite the development of new methods of exploration and large investments. Other factors also affect the rarity and economic value of natural diamonds. These include tightening the regulatory requirements of the Kimberley Process Certification Scheme, state assessment, customs clearance, the short term of raw material conversion to diamonds, and careful documentation of the final product. Natural diamonds are subjected to very strong regulation in order to maintain quality and provide the customer with a system of multiple levels of security when buying these stones.

Diamonds, like fine works of art, rare cars and fine wines, will always have a stable demand curve. Collectors, investors and market participants will always look for special prestigious products - these exclusive, rare precious stones that are not considered a commodity. This situation increases the demand for this product and, therefore, usually should lead eventually to an increase in prices for it and increase its value.

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