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Diamond industry dragged into slump as China demand ebbs away

Tuesday, October 20, 2015 - 15:11
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The China-fueled commodity slump that has torn through the world's biggest raw-materials markets from iron ore to copper is now hitting the diamond industry.

[LONDON] The China-fueled commodity slump that has torn through the world's biggest raw-materials markets from iron ore to copper is now hitting the diamond industry. That's bad news for Anglo American Plc.

Cooling demand for diamond jewelry in China, the biggest market after the US, is the latest sign that the country's slowdown isn't only a problem for industrial commodities. At the same time, customers of Anglo American's De Beers unit, who trade, cut and polish the stones, say the producer is demanding more for the gems than many in the industry say they can afford to pay.

"It is a catastrophe," said Guy Harari, co-founder of rough-diamond trading platform Bluedax. "De Beers is saying it's business as usual; it's not business as usual. The market is much weaker than what De Beers tries to show the world." Lower-than-expected demand from the Asian nation has caused a blockage in the notoriously long diamond pipeline as inventories build and prices slide. At the same time, producers have been reluctant to cede their hard-won price gains.

Anglo American, which owns 85 per cent of De Beers, is counting on diamond profits to counter slumping earnings from its other divisions such as platinum, copper and coal. De Beers accounted for more than one third of the company's first-half underlying earnings and was the biggest contributor to its profit. Anglo shares fell 7.4 per cent in London Monday, the most in three weeks.

What started as a slowdown in construction and industrial production is now hitting Chinese consumers, with luxury products especially vulnerable amid a clampdown on corruption. Chow Tai Fook Jewellery Group Ltd, the world's largest listed jewelry chain, reported a 13 per cent drop in second-quarter sales of gem sets this month as a government-led austerity campaign that prompted shoppers to cut back on luxury purchases gathered pace.

"It's not a 'China is over' story, it's just China is normalising," said Kieron Hodgson, an analyst at Panmure Gordon & Co in London. "The problem is the level of inventories that are in country or with the major retailers. It's backing up along the pipe." Shoring Demand The top two producers have taken some action to shore up demand. De Beers, a unit of Anglo American Plc, has cut production twice this year by a total of as much as 15 per cent, and lowered prices at its sales, known as sights.

Still, that's not proving to be enough. Customers rejected 35 per cent to 50 per cent of diamonds on offer at De Beers's October sight, according to people familiar with the sale, who asked not to be identified as the information isn't public. The gems purchased there are already selling at heavy discounts in the secondary market, they said.

Between miners and jewelry retailers, the diamond-industry chain is impenetrable to outsiders and has been dominated by family-run firms that do business based on personal relationships.

De Beers recognizes there are challenges in the midstream at the moment and that it's a difficult time for its customers, a company spokesman said. There is still good client demand for diamonds and the producer expects to see gradual improvements as inventories clear, the spokesman said. The company has been flexible with its customers, allowing them to defer purchases.

Rio Tinto Group, the third-biggest producer, became the latest miner to respond to China's slowing appetite, cutting its 2015 output target by 10 per cent on Friday. Rough-diamond prices have fallen about 15 per cent this year, according to data from UK-based WWW International Diamond Consultants. De Beers needs to reduce them further, MR Harari said.

"If they continue with these prices, it will lead to a very bad place," said Tel Aviv-based MR Harari. "Prices will have to go down or they will not sell them. People cannot buy at this level." The diamond industry has ridden the Chinese wave as demand increased 16 per cent a year from 2009 to 2014. Prices for rough stones gained more than 20 per cent for three straight years from 2009 to 2011 as Chow Tai Fook and other Chinese retailers opened thousands of new stores, all needing to be fully stocked with gems.

De Beers said last month that Chinese demand would grow as much as 4 percent this year, compared with 6 percent in 2014. The company, in recognition that demand was softening, announced in August a "major" investment to advertise diamonds in the US and China, the two biggest markets, during the year-end holiday season.

China, heading for its slowest economic growth since 1990, isn't the only problem for the industry. Heavily dependent on finance to fund the purchase of rough diamonds, traders have been hit by a credit crunch as lenders including ABN Amro Bank NV and Standard Chartered Plc have curbed loans to lower their exposure, while Antwerp Diamond Bank, which accounted for about 10 percent of the financing market, was wound down last year.

BLOOMBERG