A fall in demand in China and India, the two most important markets for diamonds after the US, coupled with banks' growing reluctance to provide finance to the precious gemstone trade, has led to a decline of about 15 per cent in rough diamond prices since the beginning of this year. The fall for five consecutive quarters happens to be the longest stretch of a decline in the value of diamonds in a decade. But, prices of the commodity are yet to hit the bottom.
Trade officials say prices of roughs have to fall another 20 per cent to make downstream operations, from cutting and polishing to making and selling of jewellery, viable. Groups involved in post-mining operations are encouraged by De Beers' head of strategy Bruce Cleaver's statement that the "time is right for us to try and help boost confidence in the industry". Even while its share of global supply of rough diamonds is down from a high of 90 per cent in the 1980s to about 30 per cent now, the company's readiness to help change the market in favour of the sector is likely to encourage other miners.
This is evident in two ways. First, De Beers sprang a pleasant surprise by scaling down prices of rough diamonds by 10 per cent at a recent auction. Second, somewhat taken aback by a six per cent demand squeeze in China and India, the company is spending a lot in market promotion to bring sparkle back to the gemstone. None knows how to use advertising to manipulate market demand as well as De Beers. Its slogan 'A Diamond is Forever', created in 1947, is credited with cementing a strong bond between the gemstone and women. The slogan is universally acknowledged as one of the 20th century's best.
Jewellers say a sustained De Beers media campaign through the decades has helped create such interest in the gemstone among Americans that growth in sales in the US continues, while shrinking in Asia's two biggest markets.
In fact, a rise in demand in the US is the reason behind the two per cent increase in global diamond sales so far this year. In 2010-2014, diamond sales in China rose at a compounded annual rate of 14 per cent. During that period, demand in no other country, including the US, which has a share of 33 per cent to the global diamond jewellery market of $80 billion, was anywhere near China's. From oil to steel and aluminium, price falls, in some cases wiping out nearly half the value, are linked to loss in Chinese appetite. An economic slowdown and a fall in stock markets are denting demand for diamond jewellery in China. Indians, too, aren't splurging on the luxury item, a departure from the past. No wonder Indian jewellery houses are offering discounts on diamonds at increasing frequencies, with little success so far.
Now, discounts are a global phenomenon, as attempts are made to liquidate inventories. A recent Financial Times report says miners, despite pressure to cut rough prices, have "long-term confidence in stronger demand", based on "China's rising wealth". Miners are betting on demand improvement "by 2017 at the latest". An inventory rise at all points, as well as price falls, has led to miners becoming more accommodative of the profit needs of their handpicked customers. In the recent past, leading miners from their position of strength went on squeezing the margins of these customers by arbitrarily reducing the spread between rough and polished diamonds.
But now, miners are likely to concede a healthier price differential. Twice this year, a grim price outlook led De Beers to cut its production target, first from 34 million carats (mc) to 32 mc and then, to 30 mc. Indians figure prominently among the handpicked customers. Even while China is emerging as a major diamond cutting and polishing centre, Surat remains the world's biggest hub.