Barclays’ Bob Diamond may not be the only diamond having a rough time of late.
It seems in times of financial crisis and general economic malaise global appetite for diamonds can go down just like the Barclays share price. The revelation is now finally being noted by the world’s diamond industry.
Speaking at a recent industry gathering organised by the Diamond Trading Company (DTC), the rough diamond sales and distribution arm of the De Beers Family of companies, Nicky Oppenheimer, chairman of De Beers Group, gave a somewhat impassioned warning of the difficult times ahead.The address could even be considered Churchillian in style:
Oppenheimer began by reminding attendees of the industry’s past resilience in challenging periods – citing tales from his own childhood, no less.We quote:
“…I recall the tales with which my father and grandfather used to caution me. As a result two things are clear to me. First, our industry has survived previous downturns, including the Great Depression. However long the recovery may take to arrive, recoveries will inevitably follow a downturn. Secondly, the industry only survived because we were willing to be courageous in the face of those uncertainties.”
Gareth Penny, De Beers Group managing director, meanwhile, added even more heroically (our emphasis):
“conventional wisdom says that this will be one of the industry’s most difficult periods. I say it will be our proudest moment. Years from now, when they write the history of this period, I believe it will be those who kept their head, those who remembered the intrinsic qualities that make diamonds the most desired product on Earth and treated them how a natural treasure deserves to be treated, who will emerge from this unprecedented period set for long-term growth.”
Some stirring stuff indeed.
The speeches have led to an equally stirring move from De Beers, which on Wednesday announced it would be cutting the number of gems it offers to the market by no less than 50 per cent. As Bloomberg reports:
Jan. 21 (Bloomberg) — De Beers, the world’s largest diamond producer, will reduce the amount of rough gems offered to customers by about 50 percent until April after U.S. retail sales slumped over Christmas. Retail sales in the U.S., the world’s largest diamond market, dropped by as much as 20 percent over Christmas and “underperformed” the company’s expectations, said Varda Shine, head of Johannesburg-based De Beers’s marketing unit. The drop in full-year U.S. sales was in “the high single digits,” Shine said in a speech yesterday, a copy of which was e-mailed today.
RBC Capital Markets, warning of even darker clouds for the industry to come, had anticipated a De Beers production cut in excess of 30 per cent but at 50 per cent the move certainly suggests De Beers believes desperate times call for desperate measures.
So just how weak is demand?
RBC’s analysts cite Christmas sales at Tiffany’s, which were down 35 per cent in the US and 20 per cent globally in November/December. That performance, they say, is likely to be mirrored by virtually all luxury goods retailers.
Swiss luxury goods house Richemont, for one, released figures this week showing US sales falling 24 per cent in the fourth quarter and global sales falling by 12 per cent. The group also warned it was facing its most difficult trading conditions since being founded 20 years ago.
RBC argues lower diamond demand and prices are inevitable as the sales effect ripples back to diamond miners. Debt levels at the gem cutting centres – which remain stubbornly high at some $15bn – are also troubling the analysts. As they explain (our emphasis):
Poor trading in the retail jewellery sector will mean less cash flowing back to the cutters and polishers of diamonds as receivables take longer to convert to cash. And this means less ability to repay bank debt and fund new rough or polished diamond purchases. Consequently demand for rough and polished diamonds will probably remain depressed at least until the second half of the year and the level of bank indebtedness in cutting centres is unlikely to decline materially. Indeed, given a major scaling back of cutting centre activity, in particular in India, it is increasingly likely that the banks could see a significant rise in bad debts.
In the junior diamond mining sector the challenge for companies will be to remain solvent in the face of falling rough and polished diamond prices, which suggests to us many companies may be forced to curtail or close mines to conserve cash. The scope for further rationalisation exists, though those with cash are likely to remain on the sidelines a while yet. As one junior stated: “We can afford to wait as asset prices will probably get cheaper”. Potential corporate action is likely to be the only spur to share price performance in the next two quarters, and even here the pace of activity will probably be slow.
Certainly not a sparkling outlook for anyone planning to invest in diamonds as a last resort.
Related links:
Luxury not for the masses – FT Alphaville
Recession at Tiffany’s – FT Alphaville