Cartel Cracks, But Will Prices? - prices for diamonds may fall in coming years as De Beers market share falls - Brief Article

Kiplinger's Personal Finance Magazine, Oct, 2000 by Sean O'Neill, Christine Pulfrey

GEMS | DIAMOND MARKUPS remain extreme, but new competition for market leader De Beers may burst the bauble bubble--eventually.

FOR DECADES, the South African mining and marketing giant De Beers has kept a tight ring around uncut-diamond sales by hoarding surpluses, buying excess stones from rivals, using mercenaries to choke off smuggling, and dictating prices by bankrolling the major diamond dealers. But De Beers's grip on market share has slipped from 80% in the early 1980s to about 65% today because of breakaway mines in Australia and Russia that now produce more than De Beers can buy up without hurting profits.

Recently, De Beers began unloading a $1-billion surplus of stones. But if you're postponing popping the question to get a deep-discount diamond ring, you should be prepared for a long courtship. These extra diamonds won't affect retail prices until they reach stores as mounted jewelry, possibly as late as 2002.

Even when they do arrive, it is unclear what the surplus will mean to, say, the average price paid for a polished, X-carat engagement ring, which currently retails for about $2,100. "No one knows because there hasn't been fair price competition since the 1930s," says Bobby Craig, a Merrill Lynch analyst in South Africa. Discounts of up to 25% are plausible, other analysts say.

Because Americans buy half of all diamonds, expect the U.S. to be ground zero in a price war. Look for billions of dollars worth of stones from Canadian mines being opened by De Beers's rivals. Also, figure that De Beers will likely undercut rivals, especially if suppliers in Russia break with the company, because De Beers's South African mines cost less to run.

Then there is the dot-com factor. Prices will fall if online stores dramatically increase sales of competitively priced jewelry from the $150 million in sales that are expected this year.

To combat the increased supply, De Beers hopes to increase demand by encouraging independent retailers to create brand-name goods. De Beers figures well-heeled consumers will pay more for jewelry with signature cuts and designs. Consumers split between those who care more about price and those who care more about a product's cachet, according to Rob Bates, editor of New York Diamonds magazine. While the status-conscious group may be barraged by advertising, analysts disagree about whether branding can stoke enough demand to support premium pricing.

If you are someone who buys jewelry not for a brand name but to get a good value, don't fall prey to diamond-industry hype that recommends you spend two months' salary on an engagement ring. The average couple spends about $2,100, of which between $300 and $500 is for the band, either gold or platinum, and for mounting and overhead.

Free price quotes for wholesale diamonds are available at the Diamond Registry site, www.diamondregistry .com. For example, a popular stone, several experts say, is a 3/4-carat round of good but not flawless quality (HVS1 is a typically sought-after gem code). Such a ring recently averaged about $2,500, including a gold band. Also, compare local prices with those from online discounters, such as Blue Nile.com and Diamond.com, which cut out the middlemen if not yet the diamond cartel.