The Ehud Laniado Equation
Incorrect valuations of diamond prices can have a devastating economic impact. If a diamond is over-valuated at a tender, the manufacturer could lose money, because the price of the resulting polished is low compared to the cost of the rough. Undervaluation at a tender can also be hurtful because the rough diamond might go to a higher bidder who assessed the diamond correctly.
This why Ehud Laniado developed a simple equation that every player in the industry should remember it by heart:
The fair price per carat of a rough diamond = the total price of its polished output divided by total rough weight in carats minus polishing costs and margin.
All of the miscalculations have led to a disconnect between the cost of rough diamonds and the transaction price of polished diamonds.
This disconnect leads to lack of credibility in the eyes of bankers, who may feel the value of an inventory is wrong. The result is a hesitance to finance new rough diamond purchases. This misassessment of values complicates valuations of inventories for profit and loss accounting. And above all of this looms the issue of a fairly rigid primary rough diamond market with a speculative secondary market that has varying premiums, with all the problems that encompasses.
The outcome is worrisome: a market where many buyers don't examine in depth the rough (and at times don't examine it at all). Most prefer to buy a brand from certain producers according to varying valuation methodologies, and add a premium that changes according to traders' moods, without any direct correlation to the value of the diamonds that will be polished from them.
If rough diamonds are valuated correctly – and experience proves time and again that Ehud Laniado's formula works – then the wide discrepancies in the valuation of rough diamonds can be dramatically reduced. We have knowledge accumulated over generations and great expertise. We must harness this and learn how to continuously improve. Using this professional know-how in combination with my methodology could bring greater financial success to the diamond pipeline, mostly to anyone who deals with rough diamonds as part of their daily diamond activity. Doing so will increase our capital, improve our ability to find bank financing, and result in a much healthier business environment that will allow us to extend our trade into other areas.
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