Why Are Diamonds Expensive?

There’s no doubt about it. Diamonds are expensive. Diamonds cost more than gold or platinum. A lot more. So why are diamonds so expensive? I know there are a lot of blog posts out there saying that it’s all a conspiracy by big bad De Beers and jewelers who mark up diamonds 200%. I hate to break it to you but neither one of those things are true.

A nice quality diamond is $5000 a carat. That’s $777,587 per ounce! They aren’t the most expensive substance on earth (that would be antimatter, which costs roughly $500 million per carat) but they are in the top five.

De Beers mines less than 50% of diamonds today and doesn’t control anything about diamond prices. And the retail mark-up on diamonds today is generally just 5-10% not 200%. (Have looked at how amazing RockHer’s diamond prices are? Thank you internet!)

The diamond conspiracy-theory bloggers are quoting one book by David Jay Epstein from 1982, which may have been only slightly exaggerated then but is ridiculously out of date 36 years later, like harvest gold refrigerators and leg warmers.

It’s time to set the record straight. Here are the six real reasons why diamonds are expensive.

1. Mining Diamonds Costs a Lot

Diamonds are rare. All the gem-quality diamonds ever mined would fit in one London double-decker bus. Many jewelers have never even seen a D Flawless diamond in person.

There are only 53 places in the world with enough diamonds for commercial mining. The last one was discovered 20 years ago. That’s why mining companies are willing to invest millions of dollars in setting up mines in crazy remote places like under a lake in the Canadian tundra, in the middle of the desert in Botswana, or on the ocean floor off the coast of Namibia.

These are fantastically expensive to operate a mine: all the workers need to be flown in, housed and fed. The lifespan of many mines is a decade or two (before it becomes too expensive to go deeper.) There is a long list of mines around the world that are no longer profitable to operate.

Even in the most productive diamond mines, companies need to search through about 250 tons of rock to find a single carat of diamond. And most of the diamond mined around the world isn’t good enough quality to be used in jewelry.

2. Diamond Rough Yield is Low

Once you move tons and tons of rock and find that one sparkling carat of rough diamond, you’ve got it made, right? Wrong. The yield for diamond rough is usually around 30%. A one-carat rough diamond will cut a one-third carat polished stone.

The yield depends on whether the rough is makeable rough, which means it will be polished into one stone; sawable rough, which will be sawn in two before polishing; near gem or cleavage rough, which needs to be cleaved into two or many more pieces before polishing, and last (and least) industrial grade diamond rough that will be cut into tools or crushed into powder. Rare octahedral crystals can have a yield as high as 70 percent when cut into two princess cuts (which is why that shape is more affordable than round brilliant diamonds.) But most of the carats of gem quality diamonds mined each year end up as dust, polished away during the cutting process.

3. Financing Inventory Adds to the Cost of Diamonds

Miners need huge amounts of capital to develop mines. Cutters need millions of dollars to buy rough to keep their cutting factories going. Jewelry manufacturers need to buy diamonds and gold to create jewelry. And retailers need to have inventory sitting in cases waiting for people to buy it (and often require the vendor to provide these goods on consignment.) Every single step of the diamond pipeline requires a huge amount of capital. And the banks aren’t lining up to lend the diamond business money because they don't know enough about diamonds to evaluate the collateral. Financing is a huge crisis in the industry and it is becoming more expensive every day. Of course, this is true in every industry. But the raw materials in the diamond business cost more than in any other industry. It’s like taking out a mortgage every week. The interest adds up.

4. Sorting and Cutting is Difficult

Because diamond rough is so expensive and yields can be so low, sorting and evaluating each piece of rough requires real expertise. Each lot of rough must be carefully evaluated by experts to assess its potential.

The cutters have to make decisions on how to extract the most value from every piece of rough. Should you cut one large round that will sell for more per carat but wastes more of the rough? Two smaller pears that sell for less but waste less rough? What will give you the best yield? These are complicated calculations, even today when machines like the Sarin allow for precise measurements and three-dimensional visualization.

Then once the decision is made, the rough may be sliced by lasers, preformed, then finally polished. (Which requires using diamond powder: nothing else will cut a diamond.) Cutters make mistakes: sometimes things don’t go according to plan and an expensive rough diamond cracks or shatters. These experts spend hours (and for large gems even weeks) on each diamond. That adds to the cost.

5. The Grade Determines the Price

Now that expensively-financed diamond inventory needs to be graded by the GIA. That adds $120 and a few more weeks of financing to the cost of a one-carat diamond. But more importantly, that grading report sets the price of your diamond. Even if you paid more for the financing, the rough, the sorting, and the cutting, you are competing with everyone else in the world that has a G color, VS2 clarity, excellent cut grade diamond.

Grades make it easy for diamond professionals to communicate precisely about diamond quality. But they also make the business ruthlessly competitive. Today, dealers and retailers both mark up diamonds very little. There is less mark up in the system than ever in history and diamonds move faster around the world.

6. People Around the World Want Diamonds

Now that De Beers only accounts for half of the diamond production around the world, the company no longer funds consumer marketing to help drive demand for diamonds. A whole generation of consumers have grown up without seeing any generic diamond advertising. And yet people all around the world still want to buy diamonds.

While once most diamonds were sold in the United States and Europe, today developing markets like China and India are growing rapidly. Demand for diamonds will continue to increase as these markets become more affluent.

However despite sales growth, there is so much competition at every stage of the distribution channel that the diamond industry itself is shrinking and consolidating: one mistake or a loss of financing can mean a company goes out of business. There are fewer survivors: fewer retailers, fewer manufacturers, fewer diamond wholesalers (most diamonds today go directly from the cutter to the retailer), and fewer rough dealers. Diamond production is falling as mines reach the end of their productive life.

Diamonds are expensive because they cost a lot to bring to market, there’s a limited supply of fine quality gems, and people around the world want to buy them. It’s simply supply and demand.

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