Diamonds In A Rough Patch As Recession Deepens

on Jul 24, 2012

In a pretty clear sign that the global economic recession has yet to run its course, diamond miner De Beers has reported first-half 2012 sales down a full 50 percent on the same period last year. The downslide in demand has been such that De Beers has been obliged to provide its ‘sightholders’ – the 75 diamond traders to whom De Beers sells uncut stones under long-term contracts – with a break on their contractual obligations. As reported by the Financial Times, De Beers CEO Philippe Mellier explained that the purchase holiday was a “way to demonstrate that De Beers is acting responsibly to what sightholders are experiencing”. Which is a worldwide slump in demand for diamond jewellery and other precious stones. And at the beginning of June, Graff Diamonds – the London-based mega-jewellers – pulled its initial public offering on the Hong Kong stock exchange as the deadline loomed with just a 50 percent take-up on the $1 billion equity offering.

Diamonds are of course famously fickle and the current slump in sales can’t in any way be seen as indicative of what lies down the track. For its part, De Beers is using the lull for some house-keeping, spending $180 million on cleaning up its mines in South Africa and Botswana and doubtless getting them shipshape for the changing of the guard. At some date before the end of this year, the Oppenheimer family will walk out of the elegant De Beers headquarters in Johannesburg, handing over the company to Anglo American (AAL) for the cool $5.1 billion agreed last November.

!m[](/uploads/story/189/thumbs/pic1_inline.png)De Beers doubtless has the wherewithal to weather this particular fall-off in the diamond trade but for many further down the food chain the pressure on cashflow is becoming intense. Toronto’s Harry Winston Diamond Corp (HWD) is one of the major players grappling with unsold inventory and falling prices. The high-end retailer, with stores in fashionable places across the globe, told stakeholders earlier this month that it would likely not sell all of its Q2 production and that it expects to have higher-than-normal inventories as diamond cutters encounter difficulties arranging affordable financing. The cutters – ‘diamantaires’ as they’re known, who buy rough stones largely on credit and sell polished gems into the retail trade, are being squeezed by the withdrawal of Euro-denominated funding as the fallout of the Eurozone crisis extends ever further.

Diamonds are of course forever, but not necessarily the enterprises which trade them. De Beers itself, once a virtual monopolist in world diamond supply and able to set prices at will, has had to contend with inroads from Russia – the state-owned Alrosa now commands roughly a third of the world diamond trade – opening up the market to all-comers.

The new money in diamonds is in China and India. It was De Beers which turned both peoples, and especially the Chinese, on to diamonds as an expression of love and – critically – as a token to be given on marriage. But the heady surges in sales of diamond rings to love-struck young Chinese men has also run into the recessionary wall. Forbes reported in June that one of China’s richest men, jeweller Cheng Yu-tung, had lost $4.3 billion of his wealth with the plunge in the share price of Chow Tai Fook Jewellery (1929). Listed in Hong Kong in December, by June the world’s largest retail jeweller was 40 percent off its list price.

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Meanwhile, it seems the Oppenheimers have had enough of diamonds. Patriarch and outgoing De Beers chairman Nicky Oppenheimer, aged 66, told South African media that “the Oppenheimer family has a really exciting role to play in Africa . . .  We have quite a few different irons in the fire.” And no doubt a few uncut diamonds salted away for a rainy day.

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