The street is packed with diamond and jewellery shops, but I found it to be a profoundly depressing place. It does our beautiful product no justice whatsoever.

West 47th Street: Pile 'em high!

Diamond jewellery is piled up high with all the sophistication of apples being hawked from a market stall, and merchandised with all the romance of a 99 cent store.

Aren’t diamonds meant to be rare and precious miracles of nature? Here, they seem about as rare and precious as hens’ eggs.

There was almost no acknowledgement of the reasons why people buy diamond jewellery – the motivation that comes from a special occasion or the season.

There was no attempt to be seen to be selective or discriminating in any way, to ‘curate’ pieces into themed collections.

There was just the most basic acknowledgement of function: rings for fingers, pendants for necks, bracelets for wrists. That’s it.

I believe that part of the art of retail is to be selective, to put some thought into product pre-selection for the customer.

This is especially true with fine diamond jewellery, because (a) it’s something people buy very infrequently – perhaps just once in a lifetime – and too much choice is bewildering in unfamiliar product sectors; (b) it’s very expensive, so holding masses of stock doesn’t seem to make much sense for the jeweller; and (c) there isn’t much space available in a congested, expensive place like central Manhattan, so limited space should be used wisely, not with the wanton abandon of an out-of-town supermarket.

But there’s something worse: trust, or rather, lack of it. As I walked down West 47th Street I was assaulted from all sides by pushy salesmen and by people beseeching me to sell them my unwanted gold or jewellery.

Some of the behaviour reminded me of rather unsavoury ‘street businesses’; I felt like I was among pushers and pimps, or perhaps ticket touts/scalpers.

Now that sounds terrible and I hate saying it about this business, but I was actually looking to buy something so I was a genuine customer, and if I got that impression then I’m sure that other visitors will have the same reaction.

It doesn’t have to be this way. I happily turned my back on 47th Street and walked up Fifth Avenue, surrounded by fabulous emporia of fashion and, in some cases, fine jewellery (I checked out Cartier, Tiffany & Co., and De Beers).

Why is the jewellery business of 47th Street stuck in what appears to be the 19th century (actually, in some ways, several centuries earlier)?

Some industry people will say that it’s because they don’t have the margins to invest in fancy marketing and retail space. But you don’t need to invest anything to clear out the clutter – on the contrary it can release cash which is tied up in inventory. Lots of independent retailers create a really nice environment without spending a fortune – it can be done with little more than an ounce of imagination.

I think it’s more profound than that. It’s a trading/dealing mindset, the inability to sell on anything but price. It’s so primitive that it belongs to a time when sales and marketing meant the same thing.

Others say that it’s because of fragmentation – too many small businesses – which in turn is a symptom of an industry of family-run businesses which has never been rationalised by merger and acquisition.

Well, maybe, but I think there’s something else: the diamond business as seen in 47th Street (and to some extent in Hatton Garden in my own fair city of London) has blurred the line between B2B (business-to-business) and B2C (business-to-consumer).

It seemed to me that many of the buyers in 47th Street were not retail consumers at all; they were other diamond/jewellery people, i.e. traders, looking for something on which they could turn a profit.

Nothing wrong with that – all industries have B2B marketplaces – but perhaps the mistake in 47th Street is that the curtain is pulled back so that the wider public gets a glimpse of distinctly unromantic B2B trading behaviour which does nothing for the ‘myth & magic’ of diamonds.

Whatever the reason, it’s sad to see. I can’t imagine that it’s a pleasure to go shopping for diamond jewellery in the West 47th Street bazaar. In the end Tiffany won my business.

As I made my way further up Fifth Avenue the retail landscape improved, and at the corner of Central Park it reached its zenith: the Apple ‘Cube’ store. Now that’s retail.

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There’s a website called Verichannel which styles itself as ‘The Jewelry Industry Search Engine’. It’s a B2B diamond trade/industry thing, but unlike regular search engines, you have to pay to access its services.

Anyway, one of their services is listing diamonds which have just been graded by major gemological laboratories including GIA, IGI, AGS and HRD. It describes these gems as “Fresh Diamonds“.

That sets up a fabulous contradiction – well, it does for me.

Diamonds are arguably the least fresh thing on the planet.

They have been around for a minimum of 990 million years and possibly up to 4.25 billion years (according to De Beers). On average diamonds are likely to be something like 3 billion years old – around two-thirds the age of the planet.

Diamonds are older than almost all life on Earth and older than the surface materials from which they are now ‘liberated’ by mining companies.

A diamond is not just the oldest thing you will ever own, it is the oldest thing which you will ever touch or even see (OK, apart from the sun and other stars).

So, not very ‘fresh’ then?

Of course, Verichannel aren’t referring to the primitive ancient history of diamonds. For them and for most diamond industry professionals, life begins with certification of the polished gem: that’s when the diamond’s attributes, its ‘4Cs‘, become defined by an independent third party. It’s these attributes which determine a diamond’s all-important value.

Despite the unmatched geological age of diamonds and the extensive stock which already exists in the trade, there’s still something important – for the industry – about the ‘freshness’ of diamonds.

When we see a diamond accompanied by a certificate which is a year or two old (they’re dated) we can’t help wondering, “What’s wrong with it? How come it hasn’t sold until now?” Many diamantaires will send an ‘old’ diamond back to the Lab just to get an updated (literally) certificate. They might not always get the same result, but that’s another story…

And of course diamonds are relatively scarce, especially in top colours and clarities and in larger sizes, so there is some advantage to be had by being first to sift through polished diamonds coming off the production line, as it were. That’s the advantage which Verichannel provides and explains its apparent success and rapid growth within the trade.

Perhaps consumers would also like to think that they are getting a crisp, new, ‘fresh’ diamond, but I’m not sure that they are quite so bothered.

‘A Diamond is Forever’ is a forward-looking statement linked to the idea that love is timeless – it will last forever – but it also carries the implication that a diamond has been around forever: it has a timeless past as well as future.

I think that flirting with the idea of diamond ‘freshness’ is risky. It undermines the core message of A Diamond is Forever, and promotes the idea that last week’s diamond is somehow better than last month’s or last year’s.

Oh, and one more thing. There is a much truer sense in which a diamond can be described as fresh: it could be a synthetic/lab-grown/cultured stone, which really might have been created last week. Such a ‘diamond’ comes without 50% of that A Diamond is Forever story: the past.

When I hear ‘fresh diamonds‘, that’s what I think about: synthetics. As if they weren’t a big enough challenge already…

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Diamondthrills has been roughing it for the last three months.

Yup, we’ve been moonlighting on the elemental dark side of diamonds: the world of rough, or uncut, diamonds.

Let me explain.

The primary business of Diamondthrills is hiring out diamond jewellery for weddings and other special occasions here in the UK.

But that doesn’t mean that we can’t play away once in a while and we (well, I) took the opportunity to accept a consultancy assignment over the last three months which has kept me very busy and in India for about a month. Hence my blog-silence since April.

So what’s the deal with rough diamonds? Well, they are mined and sold by a handful of major diamond producers plus quite a lot of smaller ‘junior’ mining companies.

Leading diamond producers include De Beers Group, Alrosa, Rio Tinto, BHP Billiton, Harry Winston, Petra Diamonds, and Gem Diamonds.

Each of these companies has their own way of selling rough diamonds into the market, and the total value of all rough diamond production in 2010 was probably around $12 billion. De Beers continues to be the biggest player, selling around 40% to 45% of the total.

My role over the last three months was to advise a number of ‘diamantaires’ – the businesses which buy rough diamonds from these producers and others – on how to make their application to De Beers (actually a London-based subsidiary of De Beers Group called the Diamond Trading Company, or DTC) for a three-year contract as buyers of their rough diamonds.

That’s right: De Beers gets to choose its customers. To be fair, the same sort of thing applies to other diamond sellers – they select their clients – and this is because diamonds are a natural resource for which demand generally exceeds supply; if you don’t have enough of something to sell to everyone who wants to buy, then you have to make choices about to whom to sell.

That’s a nice problem to have.

There are two main ways of making these choices. One way is to make an assessment of applicants and to judge their worthiness as customers: “this one is better than that one so he gets the diamonds“. The other way is to use price as arbiter: “he who pays the most gets the diamonds“.

De Beers/DTC adopts the first method: they ask applicants for lots of information about their business, then they get into a huddle to make a comparative assessment of all applicants in order to create a list of clients for 2012-2015, together with a sales plan outlining dozens of categories of rough diamonds and the value allocated to each client per annum.

Applicants compete for specific types of diamonds, so if Applicant A asks for large white ones and Applicant B asks for small brown ones, then they’re not really competing against each other but against other applicants who asked for the same category.

The final outcome will depend upon how much of each category De Beers expects to have available to sell, almost all of which is still buried in the ground where it has lain quietly bothering nobody for couple of billion years, so they have to predict what they will dig up over the next three years. De Beers has had over 120 years of practice so they’re quite good at that.

Still with me? Good. If all this applying and assessing and predicting sounds complex and demanding then, well, it is.

But when you think about the size of the prize it doesn’t seem so unreasonable. De Beers/DTC is likely to sell around $18-$20 billion of rough diamonds between 2012 and 2015 (at current sales volumes and allowing for some price inflation).

They currently list 107 clients in London, Botswana, Namibia, South Africa, and Canada, but that includes some double-accounting because most of the local clients in places like Botswana are actually part of one of the ‘international’ diamond businesses based in India, Belgium, Israel, New York, etc.

Let’s use 100 as a nice round number of clients, so the average client might buy $200 million of rough diamonds from De Beers/DTC over the three year period.

How much effort should go into winning $200 million of (almost always profitable) business? Well, if you had a team of five people working flat-out for three months, including travel etc, to make the application, then the total cost might be $100,000 to $200,000.

Is it worth investing $200,000 (that’s just 0.1%) to secure $200 million of profitable rough diamond supply over three years? In the diamond business, where securing reliable and consistent raw material supply is of paramount importance: yes, it is.

And in any other industry (construction, say) it would be normal practice to invest quite a lot of time, effort & money in preparing a bid to win a $200 million contract.

Of course the other model is to just sell on price. No need for all these complex & intrusive assessment systems (which may not always lead to the ‘right’ outcome), just sell the diamonds to the highest bidder in an auction or tender. A tender is usually confidential and may involve considerations other than price, whereas an auction has a degree of transparency of prices being bid.

Auctions in particular have been recently finding favour, and diamond producers – large and small – have been developing online auction sales models for a few years now. Even De Beers is getting involved, selling a part of its production (up to 10%) by auction through its Diamdel subsidiary.

The alleged downside of auction/tender sales models is that they can be volatile, both in terms of pricing and volume.

Diamond miners like to have a plan which is built upon reliable revenue forecasts (especially true in a country like Botswana where so much of the national economy is dependent upon diamond revenues), and diamond buyers/manufacturers also like the certainty of knowing that they have supply secured for months or years into the future, enabling them to invest in their business and to cultivate client relationships with jewellery manufacturers or retailers.

Auctions and tenders introduce more uncertainty, and can lead to an increase in damaging speculative behaviour where the price of diamonds shoots up in the expectation that the price of diamonds is going to, er, shoot up. This market froth has little to do with underlying consumer demand and can lead to the instability of a market bubble: there are some signs that a rough diamond bubble has been inflating for most of 2011.

Conversely, in a poor market such as the one we saw in late 2008 and into 2009 when the post-Lehman financial crisis hit the diamond business hard, if you relied upon auctions or tenders to sell your diamonds then you probably had no buyers turn up, or you had to sell at rock-bottom prices (but then the major Producers selling in the traditional ‘planned’ way also struggled to sell anything during that period).

So, that’s a bit about how the rough diamond market works. My role has been to help a number of major Indian diamantaires make their application to De Beers/DTC for rough diamond supply from 2012-2015, working towards the immovable deadline of 7th July – i.e. last week.

De Beers will now do its thing, handing down its solemn judgement to all its eager applicants in December. Whatever happens, I don’t expect that we’ll all be doing the same thing in three years’ time; I have a feeling that we will be playing by rather different rules by then.

As for the ‘selective distribution’ of planned rough diamond sales versus auction/tender models, well, perhaps there’s another way. Actually, I have a rather cunning idea, a radically different way to sell rough diamonds, but I’m keeping that under wraps for now…

It’s good to be back.

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So I was interested by some numbers recently produced by (or about) the world’s largest diamond mining companies.

In the diamond mining jungle there are two alpha-male gorillas: one name we all know – De Beers – and another name largely unknown to young couples out browsing for engagement rings: Alrosa, the (mostly) state-owned Russian diamond miner with operations in Yakutia, north-eastern Siberia.

Russian diamonds (c) Alrosa

Between them these two Lords of the Rings unearthed around 67 million carats of rough diamonds in 2010, and we reckon they sold about 70% of the world’s rough diamonds by value.

Much has been made - not least by the Russians themselves - of the fact that Alrosa produced more carats in 2009 and 2010 than De Beers: in 2010 Alrosa recovered 34 million rough carats whilst De Beers managed only 33 million carats.

Reports have breathlessly labelled Alrosa the “world’s biggest producer of diamonds” in advance of a possible 2012 flotation.

I find it ironic that one of the world’s most glamorous products is routinely talked about in terms of carat volume rather than dollar value or (even better), profitability.

Then again, whilst more sophisticated marketers of diamonds and diamond jewellery take fright at anything that hints at commoditisation, wholesalers of rough diamonds are not so squeamish.

But if we’re all being invited to buy shares in Alrosa next year then we’d better have a closer look at those numbers.

As we’ve seen, in 2010 Alrosa and De Beers mined a similar volume of rough diamonds, but De Beers posted rough diamond sales of $5.08 billion, with Alrosa trailing by quite some distance with sales of around $3.4 billion.

Profitability is hard to assess because we’re not really comparing like with like. Those Alrosa numbers include some sales of polished diamonds, and De Beers’ profitability is only expressed for the whole Group, which includes a further $800 million of sales from its non-rough diamond businesses: Element 6, De Beers Diamond Jewellers, and Forevermark.

But the difference between the two businesses is further highlighted by what we know (or is reported) about sales in the first quarter of 2011, just ended.

Alrosa reported Q1 sales of $953 million (again, including some polished diamonds), but De Beers has just completed its third monthly ‘Sight’ (rough diamond sales week) of the year, and one report estimated Q1 sales at $1.75 billion, almost double the Alrosa number.

Alrosa might have been digging up more carats, but on current form De Beers appears to be bringing home the dollars, and in the world of diamonds, it’s also got the ultimate brand name.

So which company would you buy shares in?

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It’s a couple of years since I was last here, but India seems as beautifully chaotic as ever.

After a few days in Mumbai I travelled this morning to the city of Surat, a 3+ hour train ride north and into the state of Gujarat on the excellent ‘Shatabdi Express’ service.

Surat is a diamond city. In fact in many ways Surat is the diamond city.

More than 90% of the world’s diamonds are cut/polished in India (probably 60-70% of all diamonds in terms of value) and most of them are cut in and around Surat.

I first came to Surat in 1999 when I spent a couple of months here (in the very soggy local monsoon) completing my 4-year De Beers apprenticeship in diamond processing and cutting.

A decade ago a good rule of thumb was that India had around 1 million workers in the diamond industry.

That number has contracted quite a bit since then, in part thanks to increased automation, but more recently during the global financial crisis, when tightening finance together with fears that consumers would stop buying luxury goods led to a precipitous drop in demand for rough diamonds and therefore in work for diamond cutters.

It’s estimated that as many as 450,000 workers left the Indian diamond sector in 2008-09, around half of them in Surat.

Business has recovered and in fact it seems to be booming once again with what could be described as irrational exuberance (the diamond industry is somewhat prone to volatile highs & lows of sentiment).

Location of Surat in India; image by Google

But many of those workers who left the industry have gone back to their villages and they’re proving difficult to coax back to Surat and to diamonds, even though wages have risen by 40% since the pre-recession period in 2008.

Surat’s population is approaching 5 million – similar to Singapore and double the size of Paris – but it’s hardly known outside India. Today it’s the commercial centre of the Indian state of Gujarat, and as well as diamonds it has major textile and chemicals industries.

But in the past Surat enjoyed a more illustrious role in Europeans’ experience of India.

In the 16th century the Portuguese controlled the local sea trade, and they were followed by the English who first docked in Surat in 1608 where they established the first foothold in India for the British East India Company. The Dutch also established a factory in Surat in the early 17th century.

Decline and fall followed for Surat when the British East India Company moved its operations to Mumbai (Bombay) to the south, and the population of the city fell by 90% from 800,000 to just 80,000 by the middle of the 19th century.

Today Surat is a buzzy, business-like sort of place – cleaner, brighter and less frenetic that Mumbai. It modestly gets on with processing over 90% of the world’s diamonds with a likely value of as much as $15 billion.

So here’s to Surat and its industrious diamond workers. I would raise a glass but it’ll have to be a metaphorical glass because Gujarat is a dry state, so alcohol is off the menu for now.

Additional information from Wikipedia

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We predicted strong 2010 figures from De Beers, so I’m not going to comment much further on the headline numbers. Instead I want to look beyond the headlines at a couple of other things buried away in the press release and accompanying presentation.

Diamonds Migrate East

Unusually, De Beers included a chart showing the breakdown of diamond demand around the world.

They measure this using what they call “PWP” – Polished Wholesale Price – i.e. the wholesale value of the polished diamonds within jewellery rather than the complete retail value of jewellery (including gold, platinum, other gems…).

Anyway, it’s no surprise to see India and China doing well, but their rate of growth compared to more traditional markets is still striking. Here’s the De Beers chart:

source: De Beers Group

Going back a few years it was always a pretty good rule of thumb that the US accounted for half of all diamond demand. Technically this was 50% of diamond jewellery demand, rather than just diamonds, but the rule still worked pretty well.

But look at the US now according to the De Beers data: it’s declined to 38% – nearer a third than a half.

Last time I looked, India and China were around 4-5% or world demand, but now they’re in double-digit market share territory and still growing fast. De Beers reported demand growth last year in China and India of 25% and 31% respectively (or as their results presentation put it, “respectfully”).

It seems apt that China is now level-pegging with Japan at 11% of world demand: this week China was reported to have overtaken Japan as the world’s second-biggest economy, and we have little doubt that China (with Hong Kong) will be consuming more diamonds than Japan from this year.

The other striking thing about the chart is that Europe has gone missing. Italy always used to fly the flag for Europe in these global league tables for diamond/jewellery demand, but no more: it’s dropped off the map.

And even if London was described rather breathlessly as the “world capital of diamonds” by a local BBC report this week [may not be available outside the UK], that’s not enough to propel the UK diamond market onto the De Beers chart.

Despite having Europe’s biggest economy, the Germans have never been big diamond buyers (or indeed, buyers of big diamonds), hence the absence of Germany from the chart.

So diamonds are heading East, away from the old money of Europe and the traditionally dominant US market, and they’re being acquired by new wealth (and as an investment) in places like Hong Kong, Shanghai, Mumbai, Dubai… De Beers signpost the rise of the East quite clearly in their comment below the chart.

De Beers (sort of) diversifies

Some years ago (in my day) De Beers went on a bit of a purge of non-core businesses. It sold off or shut down various appendages and focused on finding, digging up, and selling rough diamonds.

But one or two ‘adjacent’ businesses survived the cull or have been developed over the last decade, and I’m interested in the impact that those businesses are now having on the company’s figures.

De Beers’ total 2010 sales were $5.877 billion, but Note 1 in their Consolidated Income Statement tells us that ‘Total sales of natural rough diamonds‘ were $5.082 billion.

That’s a gap of $795m, nearly $800m of sales of other things besides natural rough diamonds. Since 2004 De Beers ‘other’ sales have been in the range $607m to $786m, so we reckon that last year’s level of $795m is probably a record high.

What is this ‘other’ stuff that De Beers sells?

Well, for one thing it’s finished diamond jewellery, through its retail joint venture with LVMH, De Beers Diamond Jewellers, now a decade old and retailing through its network of around 40 boutiques in the US, Europe, Middle East & Far East. They report that sales were up by 44% last year, but De Beers have always been quite coy about sales figures for the LVMH joint venture (we guess that it’s probably around $250-300 million).

Another new revenue stream for De Beers is their proprietary diamond brand, Forevermark, now available through 348 stores across Asia, and (possibly) planning a US launch within the next 12 months. Unlike the De Beers Jewellers retail stores mentioned above, De Beers doesn’t own Forevermark product, so its revenue comes from licensing of intellectual property (plus grading – for an additional fee – diamonds which pass through the programme).

Total Forevermark retail sales since the 2008 (re-)launch were reported last October to be $200 million, but De Beers only collects a percentage of this value, probably somewhere between 5% and 10% depending upon their agreements with specific retailers and the number of Forevermark diamonds which are graded as a part of the brand.

So if Forevermark retail sales last year were – say – $150 million, then the contribution of Forevermark to total De Beers Group sales was probably in the range $10-20 million.

Lastly, and most significantly, De Beers has a subsidiary called Element6 (or E6), its business which manufactures and sells industrial diamond ‘supermaterials’, used in applications such as cutting, grinding, drilling, shearing and polishing.

According to the company, total Element6 sales in 2008 approached $500 million, but fell back by 34% in 2009. We learnt from last week’s results that 2010 was a year of ‘accelerated recovery’ for E6, with profits exceeding expectations and an EBITDA of $86 million, so it seems fair to assume that E6 is once again ‘approaching $500m’, or perhaps even exceeding that number.

So what? Where does this take us? Well, I like to think that it points to the future, or at least to one possible future.

Like all businesses, even 120+ year old businesses, De Beers wants to grow.

Growing the diamond mining business requires either (a) finding new mines; or (b) getting higher prices for diamonds from existing mines; or (c) extending existing mines, or (d) buying diamond mines from others.

De Beers can’t buy diamond mines from others for competition/anti-trust reasons, so that rules out (d), and they’re already doing what they can to maximise revenues from (a), (b), and (c), although some would argue that they can increase prices further by selling in a different way, i.e. tendering or auctioning (which they do a bit of already – very successfully -  through their subsidiary, Diamdel).

So how else to grow?

Well, those new opportunities are the obvious things to look at. Building brands takes a long time and is expensive, but both De Beers Diamond Jewellers and Forevermark might be capable of delivering hundreds of millions or even billions in revenue in the years ahead.

Certainly the De Beers Jewellery model is more easily understood than the Forevermark model, but (somewhat counter-intuitively and for legal reasons) the obvious synergy that exists between owning diamond mines and selling diamond jewellery cannot be exploited by De Beers – they have to buy their polished diamonds on the market just like most other jewellers. (By contrast, Tiffany & Co, Graff, and Harry Winston all have the advantage of being able to do deals directly with diamond mining companies – which they have done).

My bet for future De Beers growth is Element6. Its products are genuinely revolutionary in some fields (eg. optics & electronics) and there’s no doubt that it’s the world leader in manufacturing diamond material for industrial applications.

The former CEO of E6 said in early 2008 that E6 aspired to be generating $1 billion in revenue growth in the ‘next few years’. Knowing Cyrus Jilla (E6′s current CEO), he will be even more ambitous for the business.

The one giant unspoken opportunity for E6, and hence for De Beers, is laboratory-grown ‘diamonds’ for gem jewellery. They have world-beating technology in this area, and of course the wider De Beers Group knows a thing or two about marketing diamonds and diamond jewellery. Other players are ramping up in this space, and who better than De Beers, via Element6, to maximise its potential?

But there’s a problem of course: the perceived conflict of interest between diamond mining in places like Botswana, with all the revenue that diamonds bring to that country, and the emergence of a major new source for ‘diamonds’: the laboratory.

Also, De Beers and the wider diamond industry worries about confusion amongst consumers, especially if (ie. when) undeclared synthetics are passed off as the natural product. The risk is that consumers would take fright and stop buying diamonds of any kind.

But these problems can be solved, and if De Beers can’t find any new natural diamond mines, then how about a synthetic ‘mine’ that it already owns?

That’s a difficult question for De Beers, but we expect that it’ll be excercising the company’s new CEO whenever he or she is finally in place.

Now if that new CEO were to be Cyrus Jilla, current head of E6, well, that really would generate some feverish comment about the direction in which De Beers might travel…

Last week saw a new Asian record with the sale of a 14.23 carat rectangular-cut ‘fancy intense’ pink diamond, known as “The Perfect Pink”, for $23.17 million.

(Actually that diamond is VVS2 in clarity, so calling it ‘Perfect’ is stretching things a little, but we’ll let that pass… I guess it’s just perfect enough for someone to pay $1.63 million per carat, making this the most expensive gem ever to be sold at auction in Asia.)

This week the spotlight moved to New York where Christie’s held their New York Jewels sale yesterday, and the star of the show was once again coloured pink.

This gem is a modified rectangular-cut Fancy Vivid Purple-Pink diamond weighing 6.89 carats, set in a rose gold ring and surrounded by small pavé-set pink diamonds.

Christie’s were too shy to publish a pre-sale estimate for this lot (lot number 212, a nice touch: area code 212…) so we didn’t know quite what to expect, but the market for the best fancy-coloured diamonds, especially pinks, has been sizzling recently and so it was no surprise to hear this morning that an anonymous buyer had paid nearly $7 million for it (actually $6,914,500, including buyer’s premium).

That’s almost exactly $1 million per carat, which is starting to seem like the minimum price payable for high quality pink diamonds of a certain size. Just before last week’s $1.63 million per carat ‘Perfect Pink’ in Hong Kong, we reported last month on the sale to Laurence Graff of a 24.78 carat pink in Geneva for a whopping $46 million, or $1.85 million per carat.

Well this diamond is a modest 6.89 carats compared to the 14+ and 24+ carat sizes of those other two pink gems, which perhaps explains why it ‘only’ achieved $1 million per carat.

Anyway, enough words and numbers, let’s have a look at this pink peach:

Images courtesy of Christie's (c)

6.43ct fancy vivid pink diamond ring; image courtesy of Sotheby's

The total auction was expected to fetch around US$47 million but came in 15% ahead of that target with total sales of $54 million – breaking Sotheby’s own record for such a sale in Hong Kong, set just this Spring.

The headline lot was a 6.43 carat Fancy Vivid Pink diamond ring by Van Cleef & Arpels (pictured right), bought for over HK$60 million or around US$7.7 million.

The price paid (excluding buyer’s premium) by a private collector exceeded the magical US$1 million per carat barrier. In general, only very rare fancy colour diamonds – pinks, reds, and blues – sell for more than US$1m per carat.

Other notable lots from the HK auction (all pictured below) included:

– a fancy vivid yellow diamond (5.14 carat) and diamond (0.95 carat) ring; sold for US1.05 million, the second highest price per carat for any fancy vivid yellow diamond at US$204,000 per carat;

– an exquisite fancy intense purplish pink diamond of 4.10 carat set in a diamond ring; sold for US$2.6 million to Moussaieff Jewellers;

– a perfectly matched pair of 10.88 carat unmounted brilliant-cut diamonds; sold for US$4.82 million – a world record per carat price for any white round diamond, according to Sotheby’s (US$221,649 per carat); the ’88′s in the weight will have helped to sell these diamonds in Hong Kong: 8 is a very lucky number for the Chinese;

– a spectacular pair of fancy vivid yellow diamond and diamond pendent earrings, with fancy vivid yellow diamonds of 21.17ct and 20.77ct; sold for just under US$5 million.

Notable lots from Sotheby's Hong Kong auction; images courtesy of Sotheby's

Rough yellow diamonds; image courtesy of Gem Diamonds

The London-listed diamond mining company this week announced that it has struck a deal with international jewellery brand Tiffany & Co in which the parties agreed to a 25% price increase for their exclusive assortment of rare fancy yellow diamonds from Kimberley’s Ellendale mine in Western Australia.

The price increase comes into effect on 1 October 2010.

Diamonds come in all sorts of shades and colours, with ‘white’ diamonds being the mainstream choice, and the whiter they are the better.

Hence D,E,F colours (actually ‘colourless’ diamonds) are generally more expensive than G,H,I,J colours (‘near colourless’), which in turn are generally more expensive than K,L,M colours (‘faint’), and so on.

The relative expense of colourless diamonds is down to their scarcity in nature – they are simply more rare (although fashion/convention plays a part too, but this is still driven by the underlying scarcity).

But further down the colour spectrum of diamonds colours become rare again, and beyond a certain point – where a tint has become a distinctive colour – diamonds are described as having a ‘fancy colour’.

The rarest (and most expensive) of these natural colours are the reds, pinks, and blues.

But fancy yellows are also in demand and in recent years they have become more fashionable, often set alongside white diamonds which can accentuate their canary yellow colour, with ‘intense yellows’ and ‘vivid yellows’ being especially sought after.

And it’s this demand which is driving up the price of the best of the fancy yellow diamonds from the Ellendale mine in Australia, a mine which Gem Diamonds claims is the world’s single largest producer of rare fancy yellow diamonds.

As well as the underlying demand for such diamonds, there’s another good reason why Gem Diamonds can ask 25% more for these diamonds & the customer is prepared to pay more – that reason is the customer, and the needs of this particular customer.

Tiffany & Co needs no introduction: it’s one of the world’s great diamond & jewellery brands, and as such it can command premium prices for its beautifully-designed and manufactured jewellery product.

But it’s likely that Tiffany are also willing to pay more for these diamonds because of their impeccable source in a ‘first world’ country where consumers will have confidence that first world standards in place in terms of social, environmental, and ethical practices.

Tiffany & Co understands the importance of responsible sourcing (they refer pointedly to ‘Tiffany’s Higher Standards‘) and they know this is an issue which will become increasingly important to their customers around the world: if it’s not important to them already then Tiffany know that it will be.

So sourcing diamonds in this way is a smart move for Tiffany, and if they have to pay a bit more to secure long-term diamond production from a specialist source like the Ellendale mine in Australia, then so be it.

And of course every rare diamond which Tiffany can secure for itself is a diamond denied to its competition…

Now in its 26th year, the 2010 sale presents 55 pink diamonds produced by the mine and cut into polished gems. Following a viewing in Perth last week, the collection will tour to Hong Kong, Shanghai, and New York over the next couple of months.

2009 Argyle Pink Diamond Tender; photo courtesy of Rio Tinto Diamonds

The tender is said to include many more “vivid pinks” than in previous years, with individual highlights including a 2.02 carat round brilliant fancy vivid purplish pink diamond, a 1.43 carat fancy purplish red square shaped diamond, and an “exquisite” 0.50 carat fancy purplish red round shaped diamond.

Other ‘fancy’ colours in diamonds are caused by impurities – boron makes them blue, nitrogen yellow, for example – but the origins of pink & red colours are less clear.

It’s thought that pinks & reds are caused by plastic deformation in the crystal structure as the diamonds formed perhaps a billion years ago, but what is known is that the physical conditions that give rise to these colours are very unusual because pink and red diamonds are extremely rare.

And it’s that rarity, of course, which gives them their high value: diamonds of this colour can sell for more than US$1m per carat.

What interests me most about the press release announcing the sale is the fact that these diamonds are being marketed – in part – for their investment value.

Major diamond producers such as Rio Tinto (and even more so, De Beers) have traditionally been reluctant to talk about diamonds as vehicles for investment.

But I reckon Rio Tinto are taking the ‘investment diamonds’ positioning to new levels with this collection.

For example, they talk about the “increasingly rare opportunity” to acquire these diamonds, but if a diamond is beautiful and it appeals on an emotional level then it shouldn’t matter that similar diamonds will become increasingly rare.

Pink diamonds are extremely rare even in a steady state of constant production – hence their great value – but the life of the Argyle mine is limited (current estimates forecast its exhaustion in around 10 years), so these diamonds are running out, and it’s that concept of increasing scarcity which Rio Tinto hopes is a strong motivator to acquire one now in the expectation that its value will increase in the future.

Rio Tinto spell it out fairly explicitly; their press release talks about the “appreciation of the increasing rarity and investment potential of Argyle Pink Diamonds”, and refers to the “increasing propensity for affluent investors and collectors to diversify their portfolios through acquisitions of rare diamonds”.

They go so far as to publish a document which “places this rarity in the context of global supply and demand and the resulting strong price appreciation” [my italics].

Crikey. That sounds to me almost like a promise! Perhaps there should be a disclaimer at the bottom of the page: “Warning: diamond prices can go down as well as up…“.

I can’t recall a major diamond producer going quite this far in terms of talking about diamonds as an investment.

De Beers and others have been reluctant to go down this path because of the fear that it leads to commoditisation, i.e. the idea that people buy might diamonds for their intrinsic value and in the expectation that that value will increase, rather than for their beauty and associated emotional reasons – most obviously in the form of a diamond engagement ring.

Can you imagine a De Beers diamond ad that offered investors the opportunity to ‘diversify their portfolios‘ by buying diamonds? Probably not.

I happen to believe that diamonds can and perhaps even should be treated and traded as a commodity, not least because that would lead to increased transparency in the world of diamonds (especially in terms of pricing) and I think that would be in the consumer’s interest, which in turn would be good for the diamond business as a whole (although less good for many of the middle men within the diamond business).

In addition to the speculative behaviour of investors, there’s another very good reason why diamond miners might not want to talk up diamonds as a commodity: a more liquid and transparent market for diamonds would lead to an increase in diamond recycling.

Imagine all the estate diamond jewellery that would appear from people’s dusty old jewellery boxes if there was a reasonable expectation of getting a good price for those diamonds and a regulated, trusted platform (akin to a stock exchange) to facilitate transactions.

When they say that ‘A diamond is forever‘ they’re not just referring to the lifetime commitment that you’re making to your partner; they’re also making sure that you hang on to the diamond forever because of its emotional meaning, gently steering you away from thinking about its financial value and selling it back into the market in a year or two.

If you and millions of others did that then they wouldn’t need to dig up so many ‘new’ diamonds each year…

Diamond producers and marketers will have their own views on commoditisation, but what’s really prevented it from happening is the lack of benchmark standards for diamonds and a trusted, transparent pricing mechanism.

In other words, we can’t all agree on exactly what constitutes (for example) a 1.00 carat, F colour, VVS1 clarity, Excellent Cut diamond, and we certainly can’t agree today’s price for that exact diamond.

And if we can’t agree on those things within the diamond industry then we don’t have much chance of persuading outside investors to buy derivatives, forward contracts etc. for diamonds, or even to buy physical diamonds in the expectation that they can look up the value of their investment in the FT over breakfast each morning.

All of which is a long way from Rio Tinto’s press release about their extremely rare pink diamonds from Argyle in Australia.

But if major diamond producers like Rio Tinto and De Beers are going to start talking up diamonds as an investment opportunity then perhaps they should also consider the corollary: how benchmarks might be applied to diamonds so that investors can have confidence in diamonds as an investment category.