Oh boy… Where to begin… The recent GIA newsletter was not encouraging. Perhaps we should start by taking a look at how overzealous De Beers DTC sightholders tried to impress daddy earlier this year by buying up rough at insane prices to make themselves look better. Or perhaps we should look at how Argyle is in serious trouble after commencing an enormously expensive operation to convert the mine from open-pit mining to an underground operation. Even better, we might want to start by taking a look at the US economy lately, especially in regards to lowered consumer confidence in combination with a collapsed sub-prime market. Finally, diamond mining profits have dropped this year, as the decline of the USD (miners are paid in USD) against other world currencies, in conjunction with higher energy costs, more taxes and foreign policy. And if all of that doesn’t work, blame Canada.
Regardless of how we start to look at this situation, one thing is for certain, India is very concerned right now; and rightfully so considering they are the world’s largest diamond manufacturing center. Estimates are that India has $1 Billion USD in inventory sitting around right now that they cannot move (with additional inventories stored in New York, Hong Kong, and Antwerp). The overall market for diamonds in India and other parts of Asia are very good right now, but when the world’s number one consumer of diamonds (that would be the US) has an anemic demand for finished stones, this threatens to cripple everyone below that wrung on the ladder. According to GIA, a Surat manufacturer said rough that yields a carat or smaller finished stone is priced 15-20% too high for the current market; and that a major correction would have to take place before firms became profitable again.
On that note, it now costs more to purchase and manufacture lower quality rough diamonds than US retailers are willing to pay for the finished gem… Think back to Econ 101, that’s not a good situation for the manufacturer. Poor India, it gets better for them though right? Hardly. The Argyle mine in Australia, the world’s largest diamond mine by volume produced, is under imminent economic threat; so much so it is speculated that it’s parent company Rio Tinto has put the property up for sale (Rio Tinto has not commented). Considering that cutting centers in Ahmadabad, employ hundreds of thousands of cutters solely to manage the output from Argyle, India is concerned that the mine’s closure would leave hundreds of thousands jobless (it’s not like they can go down the street and work for another cutting center). Diamond cutters are a dime a dozen in India.
The De Beers DTC sightholders did not do the market a favor either when bidding each other up in price for diamond rough in tenders earlier this year. Apparently, they were trying to show an increase in the production volume their firms handled for the next sightholding term… not thinking about how they were going to liquidate the material once they obtained it. Pure genius at work there.
Finally, the US housing market scene and general overall economic decline has had an effect on diamond demand. According to the Consumer Board in August, “The number of consumers claiming present-day conditions are ‘good’ decreased from 28.3% to 26.4% in July, while those saying conditions are ‘bad’ increased from 14.5% to 16.3%.” In addtion: “Those especting business conditions to worsen within the next six months rose to 10.6% from 8.2%”. Surely, the collapse of the sub-prime housing market had no impact on consumer confidence right? People generally try and make the mortgage payment before purchasing diamond jewelry. Oh wait, they don’t do either? How strange.
Aerial view of the Argyle diamond mine.
[…] prices give Indians “heartache.” Also, a good summary of the current state of the market. It’s pretty […]