In 2012, Russia announced the discovery of the Popigai impact crater—a diamond deposit that was first identified in the 1970s. The mine is located within a meteorite crater over 100 kilometers in diameter in eastern Siberia, with reserves estimated to exceed one trillion carats—enough to meet global gemstone market demand for 3,000 years. 。

De Beers CEO Philippe Mellier is highly confident in the Chinese market, stating, “Diamond demand will grow more strongly after the second half of 2015 than it did previously.”

The Antwerp Diamond Center handles diamond transactions worth billions of dollars each year. According to statistics, eight out of every ten rough diamonds in the world are sent here for processing, and 80% of the world’s rough diamonds and 50% of the finished diamonds pass through Antwerp. The Antwerp diamond industry directly or indirectly provides 34,000 employment opportunities.

“A diamond is forever—yet one can bankrupt you.”

As Zhuang Xiaohé reached the intersection of Fifth Avenue and 56th Street in New York, she was drawn to a storefront: “Shaded by lush greenery, it exuded quiet sophistication.” To the left of the entrance stood a golden plaque bearing the store’s name—“Harry Winston.” Stepping into the lobby, she quickly recognized, from the items displayed on either side, that this was indeed a jewelry boutique. Summoning her courage, Zhuang Xiaohé asked about the value of one of the loose diamonds. The clerk’s reply instantly brought to mind the opening line she’d read earlier.

Yes, in this issue, we’ll analyze the investment value of diamonds. As a precious metal, after several years of robust growth, diamonds have begun to decline this year. Is this merely a brief correction in value, or the start of a prolonged period of bottom-fishing? And what are the distinctive features of the Chinese diamond market? Of course, we’ll also delve into a thorny issue that has been troubling the industry: Why is it so difficult to launch diamond futures products?

Which nationality has the strongest purchasing power?

The top five diamond markets— the United States, China, India, Japan, and the Middle East’s Gulf region— are viewed by Europeans as places where diamonds are purchased because they can be passed down through generations. It is precisely because of this custom that the European diamond market is significantly smaller.

A diamond is simply a piece of polished diamond. It’s difficult to mine and complex to process. Typically, a diamond’s grade and price are assessed using the “4Cs”—color, clarity, carat weight, and cut.

According to De Beers’ annual global sales report, global demand for diamond jewelry rose by 3% in 2014, reaching a new high of US$81 billion—a growth that Merrieh described as “strong.” In the top five diamond markets— the United States, China, India, Japan, and the Middle East Gulf region—demand for diamonds showed positive growth when measured in local currencies.

Among these markets, the U.S. replaced China as the fastest-growing market in 2014, with a year-on-year increase of 7% reaching US$37 billion; China grew by 6%, with a total size of 62 billion yuan; the Indian market returned to positive growth, increasing by 3% year-on-year, but due to the depreciation of the rupee against the U.S. dollar, its growth rate in U.S. dollar terms was -1%; the Japanese market exceeded expectations, growing by 2%, yet its growth rate in U.S. dollar terms was -11% owing to the sharp depreciation of the U.S. dollar against the yen; meanwhile, the Gulf region saw only a modest 2% growth, driven by a decline in tourist numbers and weaker spending by Russian and Chinese tourists. These five major diamond markets account for 75% of global demand.

Philippe Merier pointed out that although Europe’s economy is experiencing low growth, this has led to a decline in demand for diamonds. Moreover, in the eyes of Europeans, buying diamonds is motivated by the fact that diamonds can be preserved within families for a lifetime and passed down through generations as heirlooms. Precisely because of this tradition, the diamond market in Europe is significantly smaller.

“Most diamonds in Europe are purchased by tourists—especially those from China. Take Paris as an example: 30% to 50% of luxury goods are bought by Chinese tourists. Europe isn't a key market for De Beers. For us, the most important markets are the U.S. and China, which account for more than 50% of our sales,” said Philippe Merier.

How weak is the rough diamond market?

In the first half of 2015, the global average price of rough diamonds fell by 3.4% year-on-year. The market’s most optimistic forecast predicts that by 2018, the supply of rough diamonds on the market will face a shortage.

The diamond market gained momentum during the financial crisis, when consumers viewed diamonds as a safe investment with significant potential for appreciation. After four years of rapid growth, however, diamond prices are now experiencing a sustained decline. According to the latest data released by Zimnisky, a diamond industry research firm, the average global price of rough diamonds fell by 3.4% year-on-year in the first half of 2015, and the cumulative decline over the past 12 months has reached 9.4%.

In particular, the rough diamond market has seen relatively weak demand. Data shows that in the first half of 2015, global sales of rough diamonds fell by 26% year-on-year. Earlier, Petra Diamonds, a South African diamond mining company, reported that as of July 2015, its fiscal-year revenue had declined by 10% year-on-year to $425 million, citing “lower diamond prices impacting sales performance.” De Beers, the world’s largest diamond supplier, forecasts that its first-half profit will plunge by 23% year-on-year. At the same time, De Beers has once again lowered its full-year production target.

In the Indian market, as diamond prices have fallen, diamond traders’ profitability declined significantly in the second quarter of this year, prompting traders to join forces with diamond mining companies in devising appropriate measures. Recently, Indian diamond traders decided to continue implementing their November 2008 decision: “to ban the import of rough diamonds.”

The traders also decided that, on the one hand, they would nominate representatives to meet with bankers who are reviewing the miners’ situations, striving to secure increased bank financing; and on the other hand, they would promote certain promotional activities, working together with other miners and parts of the industry to jointly boost demand for diamond jewelry.

“In India, mid-level traders are facing rising bank financing costs due to declining demand for polished diamonds and the lack of profitability in the diamond manufacturing sector. However, miners have not reduced the prices of rough diamonds; on the contrary, prices have already risen by 0.5% to 1%. As a result, mining companies are reluctant to sell us rough diamonds,” said Mavji Patel, Managing Director of Kiran Gems.

Sobolev, First Vice President of Alrosa Diamond Company—the world’s largest diamond producer—said, “Over the past four years, all major diamond mining companies have stepped up their mining activities.” However, due to a combination of factors—including weak market demand, difficulties in securing financing, and an imbalance between rough diamond prices and polished diamond prices—diamond traders have become less willing to purchase rough diamonds. This has led to a decline in rough diamond prices. Nevertheless, “by 2018, the market is expected to face a shortage of rough diamonds.”

What is the current situation of the Chinese market?

The slowdown in economic growth has led to a decline in demand in the first half of the year. However, China’s “demand growth after the second half of 2015 will be stronger than before,” and “it is expected that, starting after 2016, diamond demand in the Chinese market will grow by at least 6%.”

In the Chinese market, the volume of rough diamond purchases has also declined sharply. Mavji Patel said that diamond traders in China have seen profits fall by 10% to 15% compared to the same period last year. “As miners with relatively small volumes of rough diamond purchases, we anticipate a demand reduction of 10% to 15% compared to the same period in the previous fiscal year.”

De Beers said that Chinese retailers have diamond inventories that are even larger than they had previously anticipated.

Philippe Mellier, CEO of De Beers, stated that there are two factors contributing to the decline in demand in the Chinese market: First, China’s macroeconomic growth is slowing down, leading to an overall reduction in consumption; the second and equally important factor is the downturn in the Hong Kong market after the second half of 2014. It is reported that Hong Kong accounts for 1% to 2% of global market demand.

Commenting on the downward trend in diamond prices, Liu Xiangdong, an associate researcher at the Economic Research Department of the China Center for International Economic Exchange, told reporters that most diamonds are priced in U.S. dollars. As the U.S. economy steadily recovers and the U.S. dollar continues to strengthen, commodity prices tend to decline. At the same time, the primary investment value of diamonds lies in their ability to hedge against risk. Given the Federal Reserve’s repeated hints about expected interest-rate hikes within the year, the investment value of U.S. dollar assets has far surpassed that of precious metals, thus reducing demand for diamond purchases.

However, China has become the world’s second-largest diamond consumer market. Although demand in the global diamond market is currently slowing down, most traders remain optimistic about the future of the Chinese market.

As the person with the greatest influence in the global diamond industry chain, Merlier is highly confident about the Chinese market. “Diamond demand will grow more robustly after the second half of 2015,” he said, adding, “We expect China’s diamond market to expand by at least 6% or more starting from 2016.”

What should be noted when investing in diamonds?

Diamonds under 1 carat are unlikely to appreciate in value; it’s best to choose those with strong international liquidity. Clarity is the most elusive quality of diamonds, and naturally, such diamonds have higher investment potential.

In the 2012 study “The Global Diamond Industry,” published by the Antwerp World Diamond Center (AWDC) and Bain & Company Ltd., consumers were asked: “Have you ever considered diamonds as an investment?” The responses revealed that in the United States, 15% of diamond consumers said they had considered this option; in China and India, the figures were 45% and 50%, respectively. In other countries, such as Russia, the figure was 25%; in Italy, 20%; in the UK and France, both at 15%; and in Germany, only 10%.

This report also examined the priorities that consumers in various countries place on diamond selection: U.S. consumers place the greatest emphasis on design, mainland Chinese consumers place the greatest emphasis on carat weight, and Indian consumers place the greatest emphasis on diamond clarity—“the latter two countries are more closely aligned with investment objectives.” Comparing mainland China and India further reveals that India itself is a major diamond-producing country, and its consumers typically rank clarity as their top priority, precisely because clarity is the rarest and most difficult to achieve among the four C’s, naturally endowing it with greater investment potential.

However, in China, investors currently place greater emphasis on carat weight and are not yet paying much attention to the other “3C” concept. According to diamond investment experts, Chinese consumers’ interest in diamond investing is 30 percentage points higher than that of U.S. consumers. As investment priorities become clearer and knowledge about the diamond industry spreads more widely, diamonds with rarer specifications will have even greater investment potential in the future.

A survey and interview conducted by reporters among ordinary consumers revealed that the biggest concern for consumers is: “Diamonds are expensive when you buy them, but they’re not worth much when you sell them—how can their investment value be realized?”

An analyst revealed to a reporter from the International Finance News that, even when investment is the premise, transparency and reasonableness of both costs and selling prices are of paramount importance.

The diamond market is an international marketplace, so when selecting diamond specifications, it’s best to choose those with strong international liquidity. Diamond market analysts recommend that, in addition to considering international liquidity when choosing specifications, potential buyers should also be aligned with global market standards. Only then can the market’s reach be broadened, which in turn will boost trading speed.

“When it comes to investment purchasing channels, the vast majority of people can only access retail outlets—such as jewelry stores, branded diamond retailers, or department stores. Naturally, buyers have to pay a higher price to cover costs like design, craftsmanship, materials used for the ring setting, store rent, staff salaries, and brand marketing expenses.” A diamond market analyst cautions investors that although buying loose diamonds directly from wholesalers can bring prices closer to a fair, easily resalable value, making it more suitable for investment purposes, this approach is not easy to achieve, especially for novice investors.

Jay Jhaveri, Co-Director of online diamond retailer Hayden Diamonds, says, “Investment-grade diamonds are typically white, round brilliant-cut stones with the highest grades for color and clarity.” Jay Jhaveri cautions that diamonds under 1 carat rarely have much potential for appreciation in value—so if you’re considering investing, be sure to keep this in mind.

Will diamond futures be launched?

From a value-trading perspective, diamonds meet the basic definition of a commodity. However, product design is extremely challenging—factors such as size, clarity, and purity are difficult to standardize. Moreover, given the inherently limited production volume, it’s hard for individual mine producers to coordinate effectively.

Speaking of the true price of diamonds, it’s essential to mention the International Diamond Price List, which is provided weekly on Fridays by the New York Diamond Exchange to jewelers, diamond dealers, and diamond-cutting factories worldwide. This list serves as the basis for transaction prices. The price of a diamond equals the listed price multiplied by 100, multiplied by its weight, and then further adjusted by the exchange rate.

Shanghai also has a diamond exchange. A relevant official told a reporter from the International Finance News, “The Shanghai Diamond Exchange does not base its quotations on international diamond price lists, nor does it have a unified pricing system. The prices listed on the exchange’s official website are each company’s own quoted prices.”

Although the price of a diamond is linked to the “4Cs” criteria, each merchant’s costs still vary somewhat. According to what our reporter has learned, the international diamond quotation lists provide only estimated prices based on fixed weight, color, and clarity. Merchants, however, arrive at their final quotes by factoring in their own costs as well as an appropriate profit margin—resulting in a noticeable brand premium. Within the Shanghai Diamond Exchange, each merchant offers different diamond prices, and some quotations even differ significantly.

According to the International Gem Society, diamonds are among the most popular and widely available gemstones. They share certain investment characteristics with gold and have become a key trading activity in the era of consumerist globalization. Diamond trading has long been particularly active among the emerging and middle classes. If diamonds are indeed to be regarded as a commodity and an investment, then establishing a diamond futures market would be well worth the effort.

In this regard, industry insiders believe that before introducing diamond futures trading, one crucial issue must be addressed—whether diamonds qualify as commodities. From the perspective of value-based trading, diamonds meet the basic definition of a commodity: they are useful or valuable items traded for the purpose of buying and selling.

The question that arises next is how to design such products. After all, it’s difficult to standardize diamond characteristics such as size, clarity, and purity. According to Rapaport, standardization is the threshold for diamonds to become a commodity.

Even if these issues are resolved, investors may still wait and see before a diamond futures market is established. Raypott & Co. notes that since diamonds produced by mining companies come in various specifications, the diamonds they hold and sell are somewhat more complex compared to GIA-certified polished diamonds used for trading.

Of course, anything is possible. If this trend comes true, the diamond market will once again take on a whole new look.