Traders, cutters, and retailers are all warning that the diamond business’ struggles will cause a restructuring of the entire industry. Diamond expert Martin Rapaport says top-end demand from the rich and super-rich has dried up completely and only smaller gems for engagement rings are keeping the market alive. The sector’s debt is a “clear red flag,” bearable with current low interest rates, but not if they creep high. One broker said that trade is at one tenth of the usual levels.
The lack of equity world-wide is especially nerve wracking for the diamond industry. The diamond business is centered on debt, even when times are good. Due to the high value of even a small amount of diamonds, large loans are taken out to front the costs. Normally, handsome profits are made when the goods are sold, and then the loans are easily paid back. Now, this is not the case. Not only is a lack of demand preventing sales, plunging prices have left many companies uncomfortably overdrawn. The global industry’s debt peaked at $14-$15 billion in mid-2008 according to banks and industry groups. Cut and rough prices have fallen by around 15 and 50 per cent respectively from mid-2008 peaks so anyone holding diamonds as prices collapsed is facing problems.
Many will not be able to last much longer. “The market will be smaller and debt will have to fall,” said Victor van der Kwast, international diamond and jewelry group head at ABN AMRO, one of the main names in the business. He said a 30-40 per cent market contraction was possible. RBC Capital Markets analysts Des Kilalea and Patrick Morton said in a report last week that De Beers’ sales for the first two months of this year were about $200 million, well below the $1 billion recorded in the first two sights of last year. Industry website Polished Prices, which publishes a daily and weekly index of prices for diamonds between 0.3 and three carats, said in its latest weekly update the index was 13.2 per cent lower than a year ago and had slid 5.5 per cent since the beginning of this year.
Consumers now need convincing to buy a diamond. Many say business is at its worst at least since the early 1980s when a speculative bubble burst, prompting a wave of bankruptcies. However, the current situation is worse when you add the global panic facing consumers. Consumers are simply not buying anything, especially diamonds. In the United States, some 80 per cent of the working population is worried about losing their jobs. This concern has forced them to snap shut their purse strings.
An unprecedented joint effort is underway to coax consumers to open their wallets. Producers De Beers, Russia’s Alrosa, Rio Tinto, BHP Billiton and Harry Winston Diamond Corp have come together to discuss plans for a joint marketing effort. De Beers used to foot the bill for generic advertising: “A Diamond is forever” was its most memorable slogan. The new message to encourage purchases is going to be “Fewer, better things.”
Meanwhile, the central bank in India, the Reserve Bank of India is lending a hand to diamond industry participants. The task force’s recommendation on lending against the stock of polished diamonds held by units in their inventory was one of the major demands of the Surat diamond industry that has rekindled hope among the diamantaires, especially small and medium manufacturers. Sources said that in addition to helping the business, the task force has also laid special emphasis on measures to assist around 413,000 skilled diamond workers. As per the official figures by the state government’s department of labor, around 1,232 units out of the total 2,500 have downed their shutters in Surat, leaving around 200,000 diamond workers jobless in the past six months.