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By Leia Michele Toovey-Exclusive to Diamond Investing News ^[2]

The diamond market is a complicated one; with prices dictated not just by supply and demand- but also influenced by emotion. Market sentiment directs prices by inciting dealer's actions.  If dealers think that values are going to go up, they buy at higher prices. If they think values are going to go down, they sell at lower prices or hold. The downfall with the market sentiment's leverage on prices is that trader bias can lead to excessively volatile market conditions that fail to take into account underlying fundamentals.

This indisputable fact has led to some questions. Is the 50 per cent drop in rough diamond prices since 2008 Q3 justified? Or, is poor economic sentiment pushing prices lower? To play devil's advocate, the converse question should also be raised- were prices over-inflated before all this mess started?  Diamond prices, especially for larger stones, went on a rapid ascent in 2008 as the industry kept pointing out that less and less stones of appreciable size and quality were being unearthed. The average cumulative increase in DTC ^[3] rough diamond prices in the beginning of 2008 was 16 per cent, with high quality larger stones appreciating by up to 40 per cent.

In early 2008 diamond market sentiment was extremely positive, resulting in booming prices for large stones that traded at huge premiums to the Rapaport Price List ^[4]. Today, we have the reverse. Market sentiment has crashed, along with prices. But, can we choose which picture is more reflective of the true situation?  In truth it is impossible to control dealer emotions, and as long as these emotions influence prices we can expect wide swings in both directions; whether or not fundamentals support them.

In 2008, as the bleak economic outlook deepened, there were significant repercussions for the diamond industry.  Early on in the downswing it seemed that the industry would withstand the economic current. However, under close examination it was apparent that a storm was brewing. Sales of mass produced, mid grade diamonds took a dive, however, sales and profit figures were at all time highs. The drop-off in sales of mid grade products was compensation for by continuing sales of higher grade diamonds at premium prices. The diamond industry collectively held its breath, hoping the economy would take a quick rebound. This never happened. Instead economic conditions worsened and even the uber wealthy tightened their purse strings. This resulted in a sales plunge of top grade diamonds.  Evolution Securities analyst Charles Cooper expects prices to fall at least another 10.0 per cent in the next couple of months. "Diamonds tend to follow gross domestic product, and the main market tends to be the U.S., where GDP has fallen off a cliff."

As a sign of the times, De Beers halted production at its diamond mine venture in Botswana since the start of the year due to slumping sales. The mines, the source of half of De Beers' supply of rough diamonds and almost a quarter of the world's by value, sold no diamonds in November and "very little" in the following two months. Sheila Khama, chief executive officer of the company's Botswana business couldn't say when the mines would resume production, adding that demand may recover in 2010 ^[5] and costs are being cut. De Beers expects trading conditions to remain challenging through 2009. "The global economic crisis is having a significant impact on sales of retail diamond jewelry, liquidity and demand for rough diamonds," DeBeers said when releasing its annual results.  

CEO of International diamond-miner, Petra Diamonds ^[6] (AIM:PDL), Johan Dippenaar is optimistic about his company's ability to survive, and thrive, in this time of economic uncertainty. Speaking at the BMO Global Mining and Metal's ^[7] conference, Dippenaar said his company would "weather the present market circumstances" and benefit "strongly" when the diamond market recovered. The reason his company is so well positioned? The fact that has Petra Diamonds has the leanest operations in the industry.  Dippenaar commented that the group had a strong foundation and remained focused on low-cost production. In addition, it was also expected to benefit from its production base, which it said had been enhanced through the acquisitions of the Kimberley underground mine, in South Africa, and the Williamson mine, in Tanzania.

In the six months ended December 31, 2008, the group recorded a net loss of $88-million, compared with a net profit of $8.2-million the year before, as a result of a number of expenses and charges. However, Petra's revenues had increased by 5 per cent to $33.8 million, compared with $32.1 million. Diamond production was up by 444 per cent to 550 413 ct, compared with 101 213 ct the year before. Meanwhile, the group had also cut its exploration budget by $25-million during the six months in order to focus on the development of its cash-positive South African producing operations.