Sun, Jun 28, 2015 - Page 14 News List

Diamond trade faces uncertainty as profits vanish

By Tova Cohen and Ari Rabinovitch  /  Reuters, TEL AVIV, Israel

Ballerina Dimity Azoury from the Australian Ballet holds up the “Argyle Prima,” a 1.2-carat Fancy Red diamond, during the launch of Rio Tinto’s Argyle pink diamonds tender in Sydney on Friday.

Photo: AFP

The family businesses that make up the global diamond trade have seen their profits wiped out over the past five years, hit by shaky financing, increased costs and uncertain demand from customers who prefer high-tech gadgets to bling.

Manufacturers who cut and polish diamonds have found themselves caught between giant mining companies charging high prices for rough stones, and big retail chains that demand gems at low margins to keep sales moving.

While the US$80 billion overall spent on diamond jewelry last year was a record, manufacturers are expected to share a profit of just US$100 million this year. That is half last year’s total and down from US$900 million in 2010, said Chaim Even-Zohar of Tacy Ltd and Pranay Narvekar of Pharos Beam in Mumbai, India, two of the industry’s top consultants.

Even-Zohar estimated that 300,000 Chinese and Indian workers had been laid off out of nearly 1 million employed in gemcutting in those two countries, where most manufacturing takes place.

“The rule of supply and demand doesn’t necessarily apply to the diamond sector,” said Yoram Dvash, a high-end polisher in Israel who outsources his rough stones to smaller Israeli polishers.

Over the past year he has been sending his subcontractors 20 percent less volume.

“Manufacturing is not just work, it’s out of love — taking the rough stones, with all their odd shapes, and bringing out the most precious thing in the world, but this love costs a lot of money, and rough prices have been going up and up with no connection to demand,” he said.

In the longer term, the industry needs to sustain consumer demand at a time when the prized possession of many people with disposable income is more likely to be a smartphone than a piece of jewelry. The hottest wristwatch this year does not have diamonds on its face — it has an Apple touchscreen.

“Have you ever heard of a 20-year-old standing outside a store all night to buy jewelry?” World Federation of Diamond Bourses president Ernest Blom asked delegates at an industry conference at a Tel Aviv luxury hotel.

“I haven’t,” he said. “We have fallen behind the times.”

Last month, the leading mining companies formed a Diamond Producers Association with a focus on stimulating consumer demand, but its annual budget is just US$6 million, which many delegates at the conference said was not enough.

The manufacturers and dealers depend on just a handful of miners, which control most of the world’s diamond production and say they have had no choice but to pass on high costs further down the supply chain.

No major deposits have been discovered in about two decades. The miners say they are investing heavily to keep supplies coming.

Production in 2013 was down 26 percent since 2005, although estimates suggest it has risen slightly since.

De Beers, a unit of South Africa’s Anglo-American, which is the market leading diamond miner in terms of value, says current projects are costing it more than US$3 billion.

Russia’s Alrosa, the world’s top producer by volume, just finished building three underground mines at US$1 billion each.

De Beers said that high costs for rough diamonds were forcing changes on gemcutters.

“Overall, this trend is expected to affect the way the industry operates,” De Beers said in a report last year.

Less well-established midstream companies may have to close, it said, forcing a consolidation in the market.

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