Profits being squeezed out of diamond companies as sales slump

By Leia Michele Toovey- Exclusive to Diamond Investing News

Diamond prices have held their own this year, despite the markets impetuous downward spiral.  Through the commodities price crash, diamond distribution companies have been making record breaking profits on sales of the gem. Although gross profits made the market appear strong, these profits came from the sale of top quality large gemstones, which have skyrocketed in value since 2007 due to impending supply shortages. Prices of top gems have been keeping the finances rolling while mid grade mass consumed diamonds sales slumped.

Now, as the crisis deepens, diamond prices are under pressure. Premiums for big stones are coming down with almost no trading as sellers refuse low offers and shocking financial market conditions create extreme uncertainty. The only sub-sector managing to hold up is fancy coloured stones.

On Sunday, The World Federation of Diamond Bourses issued a statement appealing to diamond producers to reduce supply to stabilize the market.  They pressured mining firms to cut back on the supply of unpolished gems to the market amid the world economic crisis. “The mining companies can enhance stability at this point in time by reducing the volume of rough diamonds they are supplying to the market,” Federation President Avi Paz said. “Such action is imperative and necessary not only for the diamond industry, but also the rough producing countries, the global banking system and the diamond mining companies themselves.” Diamonds are an attractive investment opportunity, especially in turbulent periods, but too much supply might erode values,” he said. The Belgium-based federation is an umbrella organization representing 26 member bourses that trade in rough and polished diamonds and precious stones.

The world’s biggest diamond producer, De Beers, has a different opinion on the current diamond economy. They released a statement saying that they regarded the prospects for rough diamonds as sound despite the financial crisis. Prices were forecast to end the year higher than in 2007, but they did not say by how much or whether they would curtail supply. De Beers, 45 per cent owned by mining group Anglo American Plc, has boosted rough diamond prices by 16 per cent by August 2008 due to strong demand.

Company news

Last Friday, Boteti Exploration received a 15-year mining license from the Botswana government for its proposed AK06 diamond project.  Boteti Exploration is a joint venture between De Beers (70 percent) and African Diamonds (28 percent).Production is scheduled to start in April 2011, with all of Boteti’s diamond production to be sold through Diamond Trading Company Botswana (DTCB).

Boteti said the mine development would proceed in two phases, running from 2009 to 2014. Once in operation the lifespan of the mine is estimated to be 10 year, with production starting at 600,000 carats a year in the first three years, and increasing to 880,000 carats yearly over the remaining years. Total carats extracted will be roughly 8.1 million.

The agreement ends one of most disruptive confrontations in the diamond industry, where junior partner African Diamonds effectively declared war on diamond giant De Beers. The dispute became public in July when African Diamonds announced it was taking legal action against De Beers. The junior miner alleged De Beers was looking to stall development of the mine because it had not been able to agree terms with government on the marketing of diamonds from AK06.The Government wanted the diamonds to be sold by auction in the country, separate from the De Beers Diamond Trading Company (DTC) marketing channel. De Beers denied this, stating its main concern was over the power supply to the mine, given future power supply constraints in southern Africa. Government rejection of De Beers’s retention license application is said to have left the diamond giant with little or no option except to bury the hatchet with African Diamonds and accept the mining license terms.