The diamond industry teetered on the edge of a serious crisis this summer, as defaults multiplied in India and miners faced a mutiny from their customers.
Many are comparing the current situation to 2008, when the industry was paralyzed in the wake of the financial crisis. But there is a key difference, according to one longtime industry observer: “2008 was a financial meltdown. This is a diamond meltdown.”
“If you walk down the street in Antwerp or Mumbai, people are suffering,” Guy Harari, president of online rough diamond broker Bluedax, says of the Belgian and Indian diamond trading centers. “They no longer have confidence.”
The current problems stem from what many term a “perfect storm” of bad news, including a drop in demand from China and Hong Kong; continued poor sales in other major markets, except for the United States; a lack of liquidity due to banks’ unwillingness to finance the business; the heavy debt load carried by many companies; and the continued inability of rough prices to keep pace with polished prices.
The Indian industry has been ground zero for the growing crisis, with local newspapers recounting a chain of defaults, including the reported $100 million insolvency at one major company, Godhani Gems. The situation has gotten so bad that Indian trade groups considered, but decided against, a blockade of rough imports in June.
Many manufacturers say the two leading producers—De Beers and Alrosa—sparked this mess by jacking up rough prices to the point where there was little breathing room between the raw goods and resulting polished. They gripe that while De Beers’ clients were losing money with every purchase, the miner’s profits soared 33 percent in 2014.
Roger Parkes/Alamy
Slumping diamond sales are putting the squeeze on margins; the entire pipeline is feeling the pinch.
“Before, being a sightholder was a privilege,” says Maxim Shkadov, president of the International Diamond Manufacturers Association. “Now being a sightholder or contract holder of Alrosa is almost like a punishment.”
In the past, clients say, they would purchase during the bad times, knowing that producers would reward them when the market improved. But they now feel that producers will keep hoarding the profits for themselves, so even an uptick in demand won’t stem their bleeding, Harari says.
“[Manufacturers] are being squeezed on one side by the producers and on the other side by the retailers and the consumers,” he says. “It is not sustainable.”
At De Beers’ July sight, clients declined or delayed purchasing an unprecedented 60 to 70 percent of the goods on offer—a sign of a growing chasm between upstream and midstream distributors. Sightholders may have been galvanized by a mass email from an anonymous comrade who called on them to reject boxes that didn’t show 10 percent profit.
“If your future, the future of your children, and the future of your diamond business is important to you, don’t agree to take the boxes,” the email said. De Beers “need[s] us, and it is legitimate to expect fair pricing which leaves some profit for our side.”
De Beers spokesman David Johnson says the company recognizes clients are going through a tough time and is trying to be flexible. While in the past, sightholders faced limits on how many goods they could decline without hurting their ability to receive future allocations, De Beers allowed clients to defer up to 75 percent of their sights in August. Still, many see this as the company bowing to the inevitable.
Even its worst critics acknowledge that De Beers has pressures of its own. Majority owner Anglo American was hit hard by the commodity rout; the company has lost nearly half its market value since the beginning of the year, and in July, announced it was cutting 50,000 jobs. De Beers contributed substantially to Anglo’s profits in 2014, but in the year’s first half, its sales plunged 21 percent to $3 billion. (Alrosa’s sales plunged a similar percentage.)
Executives have tried to stay upbeat, with De Beers CEO Philippe Mellier personally inviting sightholder principals to the company’s August allocation in Botswana to discuss how to support the industry in the near term.
But the industry may have to go beyond short-term measures and fundamentally rethink how it does business, Harari says. “To paraphrase Einstein, you can’t solve a problem with the same mindset that caused the problem,” he says. “The industry has to think differently. The current way is not working.”