Why does rough cost almost as much as commercially cut stones sometimes?
Ever notice that some commercially cut gemstones are the same price cut as the rough is, especially in small sizes?
Yes you are right, they are often that way. Think that the cutting houses are getting the rough a lot cheaper than you can? Sometimes… But there are a few things that you are missing.
Sometimes the rough is cheaper at the supply source (mine). This applies in particular if you have the money to buy in very large quantities. But often it is not any cheaper. The mines know the going rates and being in business to make money, they try to get the best profit they can.
For example – Sapphire is always expensive, period. No, you will not find any good rough either, unless you just happen to get lucky. You are more likely to be struck by lightning. Sapphire rough in any commercial colors, if you find it will be at least as expensive as the cut stones are wholesale. The market is so strong that nobody will sell the good clean commercial colored rough, they all cut it for the best profit (I cannot blame them, I would).
How do the cutting houses do it? What is their secret? The cutting houses have connections that nobody else has and they buy in quantities that most other people and dealers cannot compete with. They are buying hundreds of kilos at a time and spending millions of dollars. They are also often buying the entire mine run of the material produced, or at least a significant part of the rough being produced.
Cutting houses buy in bulk, we cannot compete with them on the smaller cut goods, under 2 carats, for example. Wonder why? One of the reasons is that they work so cheap. But the main reason is that they are cutting the small stuff and dumping it for whatever they can get. Then the larger stones they are selling for considerably more. Their plan is to buy everything, cut and dump the inexpensive stuff. They get the larger material because they are buying all of the production and make the money on the larger stones.
If they make a little money on the smaller stuff they count themselves lucky. Did you ever notice that the larger stones are usually the going rate? There is a reason that we can compete with them there. If you are a person that has the resources and contacts, that is.
I know several cutting houses well, and they often offer me small cut goods at way under what they paid for the rough. I know because we often buy the rough together or from the same sources. They figure if they break even or loose a little bit to get rid of the melee and included stones they are ahead. Because they get the larger material, that is often not available any other way when they buy everything. Of course this plan takes large sums of money.
Most American cutters are looking for larger stones to cut (over a carat finished). Well that is where the money is… for us.
Assuming that the large material costs the same as the small material is wrong. The cutting houses are maybe getting it cheaper by weight (they probably are) but they have to pay for all of the material that nobody else wants to buy. This actually impacts the true cost of the larger material, they are not making anywhere near the money that some people mistakenly think that they are.
If you just want to buy the good stuff, not mine run, then the prices go up a lot, it does not matter who you are. Nobody, including the cutting houses are buying large clean rough at cheap prices in the long run.
You either buy everything and take the loss of the small and poor material or you buy the larger better material and pay more for it. That is how it works.
Would you like to buy a kilo (this is what the cutting houses do) with 3 or 4 good stones in it and the rest melee for $5/gram at $5000/kilo or would you rather buy the 3 or 4 good pieces only for $40 or $50 a gram?
Do the math, if those peices in the kilo buy are 10 grams each and flawless (they usually are not, by the way), then you are into them for $50/gram. If you know much about mine run material then you know that the good material is often pretty low in most mine run parcels. Those of you that know mine run material, know I am joking a bit here.
Someone has to pay for the stuff nobody (at least here in the USA) wants.
Another thing that comes into play is that everybody knows what the going rate is on cut stones, including the miners. Wouldn’t you?
Nobody is going to sell a parcel of rough for a $1/gram when they know that the going rate for the cut stone is $100/carat. As some of you know, commercial cutting is only a few dollars per carat, it varies a bit depending. Why would anyone sell the rough cheap, when they can cut the good stuff and make more money?
Yes, I have seen stories of “evil” stone dealers buying stones from “poor” miners for pennies and selling those same stones for thousands of dollars. I have seen stories like this in many trade magizines and journels. The publishers and editors certainly know better in my opinion and are either playing politics or morons.
Those stories are mostly garbage and frankly make me mad when I hear them. There seems to be a “politically correct” crown of journelists that are… well idiots in my opionion pushing a political agenda. The people that write those stories are grinding political axes, are not informed, or something worse.
I buy from miners all the time and I quite often pass because the miners are asking so much for the rough that I cannot make any money on it. More often then not the “poor” natives are not poor and are sharp business people and more than able to take care of themselves. It is not unusual for the miners to be asking more for the rough stone than it will bring cut.
I will not say it never happens, but I will say that it does not happen very often. I have never seen it.
Here are my experiences. On commercial rough that has a big market (especially) like Sapphires. The miners are getting the going rate in the mining region. By the way they are usually asking a lot more than the going rate (out of their minds sometimes) and there is a lot of haggling before a price is agreed on.
The price is of course, not the going rate here. But if it is a special stone it may sell close to our retail here… there. Remember there are a lot of other people who will make a living in the process… that is why it is called a business.
Everybody along the way from the rough dealers, to the cutter, to the jeweler will make some money on this process. To assume that the person selling a Sapphire for $1000/carat, that was sold rough in Africa for $100/carat is making a killing is not correct. Everybody has hard costs and needs to make some money, it is the way the system works.
The going rates between the mine and retail can be substantially different (many times the cost) or just a few percent above cost. It is all rather random and not predictable.
But there are going rates and things tend to average out. Nobody is “stealing” anything, at least nobody that is honest. The crooks are another story all together.
It usually depends on how many people handle the stone(s) before it gets to market. The more commercially valuable the rough, like Sapphires and Tanzanite, the closer the rough will cost to retail (here or in any large market), in other words the smaller the percentage you will make on it. There is often not a lot of profit margin in some stones. No matter what some people think or political ax they want to grind.
Miners and people – I do not mean anybody in particular, there is always a whole network of small business people buying and selling stones in any mining area, and they are mostly local… living there, some are natives and some foreigners – who make a living buying from/with (the miners and middle man often work together and are blood related) the miners are all aware of what the going rates are for their stones, and are making a living selling their stones at those prices, or more if they can get it.
Does some swindling go on? You bet… both ways by sellers and buyers, and some things you have never imagined. It is buyer beware market. But on average people know what they are doing and make as much doing it as they can.. That is good business after all.
People usually do not believe me but you can often buy rough here cheaper than you can at the actual mining region.
Here is where the rub is… If we want to buy the good stuff to cut ourselves, then we will have to pay almost the going rate (wholesale) for the cut stones. Noticed, huh?
Why would people sell the rough for less than they can get for the cut stones? Would you? Cutting the rough is easy, remember they do not even have to cut the stones themselves! Just send them to a cutting house. Of course selling cut stones is a different market and when you cut them you have narrowed down your available customers.
Do dealers that buy large quantities get better prices? Of course… Ever hear the phrase… “It takes money to make money…?” Smaller dealers do not get as good a price as the cutting houses spending a lot more money and buying everything.
Remember that the miners would often just rather sell everything at one price and at one time with no hassle. Not having to deal with a person/dealer wanting to pick just the better material out of their parcels and leaving them with the rest, is pretty attractive to them. Usually the compensation for selling their rough to a dealer this way (letting them pick) is a higher price for it.
Are faceters going to have to pay the going wholesale rate for commercially viable stones? Or maybe almost what the commercial value of the cut stone is? Sorry, here is a little tough love for you all. The truth is… yes whether you like it or not. You are going to have to pay for anything that is commercially viable. Especially for material that is hot in the finished market, material like Sapphires, Tanzanite, Emeralds.
That is just how it is… The good news is that you enjoy the cutting and are getting a better stone/design than you could ever buy. Also, even if the rough is close to the wholesale cut value, it is still a whole lot cheaper than you would pay in any jewelry store. You are getting a bargain in a lot of cases.
There is still the “retail value” of the stone(s) which is usually a nice profit margin for anybody when the stone is sold. That is not counting the “custom quality” or uniqueness of our cutting that certainly has a market value, and very little competition.
I have mentioned before that most major rough dealers are commercial cutting a lot of their better rough. I am not one of them, the only cutting besides melee I do is my own. If you are not sure, just go look at their booth(s) in any major gem show, like Tucson in February. Their booths used to be almost all rough with just a few cut stones, but now they are almost all cut stones with a little rough.
Also, in case you are not aware of it (most people are not) most of the big names in the rough business have several booths in the Tucson show, and they usually have a whole lot more cut stones than rough. They have rough out at the “rough hotels”, but the other locations are almost exclusively cut gemstones. Sometimes under a different business name too.
In a lot of cases they have just a little rough in one booth and nothing but cut stones in their other booths, which they often do not really talk about. Some of the major dealers have many rooms of cut stones on the second floor or private rooms where they sell all cut goods to jewelry manufactures. Of course this is just smart business on their part. But be aware that there are a lot of things going on and a lot of them effect the price of stones, both rough and cut.
This trend of cutting most quality rough is going to get stronger. It is simple, they make more money that way. Be honest, wouldn’t you if you could? This trend is also putting a lot of pressure on the price of rough gemstones, maybe you have noticed?
My advise is to buy good rough and try to buy some quantity (parcels) if you can afford them, to get a better price.
Be happy that you can get good rough. There may come a day when most rough will be like Sapphires, not available rough at all. I hope this never happens, but I see it coming…