The Fairest Price Possible

The financial crisis embittered the discussion about pricing principles on the world diamond market. The position taken by De Beers and ALROSA, the biggest producers of rough diamonds, which announced a significantly scaled down supply to stabilize prices, got under the lash of well-known expert Chaim Even-Zohar (ROUGH PRICES MUST BE ALLOWED TO REACH TRUE MARKET LEVELS, Chaim Even-Zohar, 30 October 2008). Essentially, Even-Zohar’s criticism boils down to defending the classic liberal thesis saying that the only fair pricing mechanism is the balance between demand and supply on a free market and any deviations from this concept are negative since they aggravate the risk of monopolization. Monopolies are evil a priori for the essence of this evil’s existence lies in robbing other market participants. Of course, the pithy rhetoric of Even-Zohar may well arouse tender emotions on the part of now sparsely numbered worshipers of Karl Marx, but it seems unlikely that this expert addressed his text to such a specific audience, which is, alas, so infinitely aloof from the realities of the diamond market. However, those who are tied to this market are at least perplexed by Even-Zohar’s stance.

Let us imagine for a minute that the argumentation offered by Even-Zohar is impeccable and the market has immediately decided to follow his manifesto: diamond-mining companies do not decrease their supply, while cutters and dealers buy rough and choose the grades they need at the current time; prices are set by free bidding; and the market is free of any regulators. There is hardly any doubt that in this case prices for rough diamonds will fall and their decrease will most probably go like a landslide down to what is evidently the “true market levels” in Even-Zohar’s view.

On such an immaculately free market the fate of mining companies looks unenviable, but cutters and dealers on the face of it will thrive and finally diamond consumers will go lace-curtain too. “The lower the prices, the greater the demand” – this is simple like a hip-hop tune. Indeed, if you now drop the prices for, say, Volkswagen products by 30-40%, you will see queues instead of a sale crisis. But such an attractive logic stops working if you remember the specific features of diamond as a commodity.

If diamond prices at boutiques will go down, they will not remain the same for diamond jewelry owned by those millions of consumers who bought the “eternal value” before. Who can guarantee that this process will not linger for a long time? Lower prices for oil will bring about, for instance, lower prices for kerosene which in the end will facilitate the development of air carriage; but what will facilitate a decrease in diamond prices (moreover, a sharp decrease)? It will entail only one thing – the shaping awareness in consumers that the “eternal value” is able to go cheap and in this sense it is not eternal and hence not at all a value. Thus, if lower prices for diamonds may spur this market, it will be only for a very brief lapse of time – before its dissolution.

Today we are observing the powerful efforts of national and transnational regulators aimed to overcome the financial crisis. This attempt to offset the consequences of accumulated managerial and political errors does not evidently fit well into refined perception of market economy. But what would happen to the Russian stock market if there were no impact of regulators? During September – October the value of blue chips slumped by 50-70% and if there were no numerous suspensions in dealings and no ban on short positions and no multi-billion injections of budget funds, the market would just cease to exist. The capitalization of largest companies would be close to zero (on the background of their quite good economic performance), but the principal balance between demand and supply for their securities would be observed and the impressive “true market levels” achieved. Even if in defiance of common sense.

Diamond will remain diamond only until its price is high and will be higher in the future. If prices for rough diamonds will go down, and they will go down if Even-Zohar’s demands are laid to heart, there will be not a single cutter left untempted to lower prices in the hope of quick and lavish gains. It will happen due to the simple reason that exactly in this part of the diamond pipe there is no and cannot be any regulators because this part is ruled by tough competition in its classic shape and any attempt to maintain diamond prices having cheap rough is doomed from the very start. This is well recognized at the World Federation of Diamond Bourses (WFDB) and India’s Gems & Jewellery Export Promotion Council (GJEPC), whose representatives appealed to the mining companies to cut their rough supplies to maintain diamond prices.

The current crisis cannot but affect the rough and polished diamond market. Despite the cautious optimism of recent days due to lower rates offered by the FRS and ECB, a lower LIBOR level and some positive political news, the situation on financial markets remains extremely complicated. After hitting the crediting segment, the crisis is shifting into the real segment of economy, and the probability of a lower purchasing capacity of the population in the major diamond consuming countries is high. Under the circumstances, the pace-setting diamond mining companies act as the only reliable mechanism hedging the major risk of this market – the risk to lose confidence of diamond consumers.
Historically, the price for rough diamonds lies between a short-term gain followed by chaos and a coordinated support of the century-old framework having an enormous development potential. Can there be any doubt as to which of these limits is indeed the “true market level?”