The biggest sore points for contract customers — high rough prices and weak profit margins — are intrinsically linked to the complex question of customization.
Ask a De Beers or Alrosa contract client about the biggest problems with the miners’ age-old systems for selling rough, and the answer will probably include a comment on prices.
High rough prices relative to polished have squeezed diamond manufacturers’ profit margins for years. But there’s a more complex issue behind the complaints: the lack of customization.
The two mining giants sell most of their goods to fixed lists of customers that commit to buying certain quantities of rough in return for guaranteed supply. The stones traditionally come in prearranged boxes that clients can either take or refuse.
Usually, each assortment contains diamonds the client wants and others it only buys to fulfill its contract. While De Beers and Alrosa have introduced some flexibility, the core reality remains: To get their hands on profitable rough, midstream players have to buy other goods that lack sufficient value.
“[The] number-one [issue] is customization. And second is pricing,” an executive at a contract client of both Alrosa and De Beers told Rapaport News earlier [in August].
These two factors are closely linked. Customers have to consider not just the price of the goods they want, but also of those they’ll end up storing in a safe or reselling on unfavorable terms.
The problem is less acute for rough dealers that make their money trading the goods on the secondary market, as they are generally happier buying and reselling large volumes, sources explained. However, that model doesn’t work for most cutting firms, which focus on polishing specific categories. Rough they can’t process — either because it’s not their specialty or because it’s unprofitable — is almost useless to them.
