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 is 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 nation’s slowdown is not 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, cofounder of rough-diamond trading platform Bluedax. “De Beers is saying it is business as usual; it is 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 percent 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.
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 (周大福珠寶), the world’s largest listed jewelry chain, this month reported a 13 percent drop in second-quarter sales of gem sets, as a government-led austerity campaign that prompted shoppers to cut back on luxury purchases gathered pace.
“It is not a ‘China is over’ story, it is just China is normalizing,” 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 is backing up along the pipe.”
The top two producers have taken some action to shore up demand. De Beers has cut production twice this year by a total of as much as 15 percent, and lowered prices at its sales, known as sights.
Still, that is not proving to be enough. Customers this month rejected 35 percent to 50 percent of diamonds on offer at De Beers’ sight, according to people familiar with the sale, who asked not to be identified as the information is not public. The gems purchased there are already selling at heavy discounts on 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 is 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.
Rio Tinto Group, the third-biggest producer, became the latest miner to respond to China’s slowing appetite, cutting this year’s output target by 10 percent on Friday last week. Rough-diamond prices have fallen about 15 percent this year, according to data from UK-based WWW International Diamond Consultants. De Beers needs to reduce them further, Harari said.
“If they continue with these prices, it will lead to a very bad place,” Tel Aviv-based Harari said. “Prices will have to go down, or they will not sell them. People cannot buy at this level.”
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