In the United States, we keep hearing that the economy is improving.  And yet the mood in the diamond market has turned grim, which is fatal for such a psychologically dependent industry. 

Polished prices are soft. Inventories have been high due to a number of factors, including a lessening of the backlog at GIA, falling liquidity due to banks leaving the business, and a holiday that came in under expectations. (It was not terrible, but hopes were high.)

Some tell me the mood has hit its worst point since the truly dire days of 2008. But there is a difference. “2008 was a financial meltdown,” says one industry veteran. “This has been a diamond meltdown.”

Many point their finger at the big mining companies—particularly the largest producers, De Beers and Alrosa—arguing they have squeezed manufacturers so hard they are threatening that sector’s existence. 

“They don’t care about the margins of the clients,” says Maxim Shkadov, president of the International Diamond Manufacturers Association. “Before, being a sightholder was a privilege. It was the best companies, with the best financials. Now being a sightholder or contract holder of Alrosa is almost like a punishment.”

In fact, the situation has gotten so dire that some now view with suspicion sightholders that don’t refuse the boxes.

“Up to a point you can understand politics,” says Antwerp World Diamond Centre president Stephane Fischler. “People will take goods to increase their scorecard. But manufacturers say, ‘How it possible? I believe that I am fairly professional. How can these guys claim they have 10 to 15 percent more margin than I do? Is it due to politics and just grabbing market share? Maybe. Maybe professionalization, maybe consolidation, maybe higher efficiency.’ But people do not believe that is the only explanation. They start to wonder: Could it be mixing of synthetics, could it be abuse of certificates, could it be round tripping?”

While the diamond producers don’t get a lot of sympathy these days, they are in a dicey situation. Besides obligations to shareholders—which are generally seen to be motivating De Beers’ actions—correcting (i.e., lowering) prices comes with its own risks.

“Everyone says they are not making money, and De Beers needs to reduce prices,” says Mike Aggett, managing director of De Beers broker H. Goldie. “But that is not really what they want, because then you have issue with stock losses.” 

Fischler argues the producers have options besides flatly lowering prices. 

“They have a few weapons at their disposal if they want to kick-start the market,” he says. “There is supply, volume, the price, the assortment. They know how to work it out if they want to.”

At this point, the producers have not given many hints on their strategy. (De Beers spokesperson Lynette Gould says, “We can’t give any forward view on pricing.”) But Fischler hopes for quick, decisive—and well-communicated—action. 

“The producers need to avoid having this drag on for too long,” he says. “If you have to do something, better to do it at once. No one really knows where the bottom is. Otherwise, they will totally destabilize the market.”

It’s possible De Beers feels we have hit the bottom. Aggett thinks that after two sights where prices fell, it will hold the line going forward. 

“They are playing a slightly longer game—hoping that prices will pull through,” he says.

De Beers executives have said they think the pipeline is suffering from “indigestion,” but upcoming gift events like Chinese New Year and Valentine’s Day will help clear out the pipeline. With production down due in part to refused sights, the prices of certain sizes—from quarter caraters to 90 pointers—has bottomed out, and we are starting to see upward movement, Fischler says.

Of course, if polished stocks do clear out and prices start heading up, De Beers and other producers could simply lift rough prices to meet the new level. 

“Once this pulls through, if the longer-term policy of the producers remains the same it will push us back into this situation,” says Aggett. “Profitability has to return. I would like to believe there are people within De Beers’ management team who understand that, fundamentally, manufacturers have to make profits to keep the business sustainable.”

The current policy hurts the entire industry, says Fischler.

“There are few miners and a huge numbers of manufacturers,” he says. “The producers say, ‘What do you want us to do? I have a product everyone wants and 200 people in my waiting room.’ But at the end of the day, there is a third party—the banks. They are looking around, saying, ‘Why should I finance this industry?’ If we end up in this situation every 12 to 18 months, if bankers start to see more risk than opportunity, then they will leave the business.” 

“Right now if you trade diamonds you have a chance to make a margin. If you transform the product, you lose. That is totally unsustainable. Bram Laub used to say, ‘Polished is spoiled rough.’ We need a new paradigm in this industry, and African producers need to consider this as well. Otherwise, their rough will end up spoiled.” 

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