Diamonds start to lose their luster to Chinese

A sales woman picks up a diamond ring at a department store in Zhengzhou, Henan province. Chinese demand for diamond jewelry has dipped as compared with last year.

The 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 the country, the biggest market after the United States, 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 division, which trades, cuts and polishes 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," Guy Harari, co-founder of rough-diamond trading platform Bluedax, said. "De Beers is saying it's business as usual; it's not business as usual. The market is much weaker than what De Beers tries to show the world."

Lower-than-expected demand from China has caused a blockage in the notoriously long diamond pipeline as inventories build and prices slide. Producers have also 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. Anglo shares have since taken a hit.

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, the world's largest listed jewelry chain, reported a 13 percent dro in second-quarter sales of gem sets last month as a government-led austerity campaign that prompted shoppers to cut back on luxury purchases gathered pace.

"It's not a 'China is over' story, it's just China is normalizing," Kieron Hodgson, an analyst at Panmure Gordon & Co in London, said. "The problem is the level of inventories that are in country or with the major retailers. It's backing up along the pipe."

The top two producers have taken action to shore up demand. De Beers has cut production twice this year by a total of 15 percent, and lowered prices at its sales, known as sights.

Still, that is not proving to be enough. Customers rejected 35 percent to 50 percent of diamonds on offer at De Beers' October 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 in 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 at the moment and that it is a difficult time for its customers, a company spokesman said.

There is still client demand for diamonds and the producer expects to see a gradual improvement as inventories clear, the spokesman pointed out. The company has been flexible with its customers, allowing them to defer purchases.

Rio Tinto Group, the third-biggest producer, became the latest miner to respond to China's slowing appetite, cutting its 2015 output target by 10 percent.

Rough-diamond prices have fallen about 15 percent this year, according to data from WWW International Diamond Consultants based in the United Kingdom.

De Beers needs to reduce them further. "If they continue with these prices, it will lead to a very bad place," Harari, of Bluedax, said.

"Prices will have to go down or they will not sell them. People cannot buy at this level."

The diamond industry has ridden the Chinese wave as demand increased 16 percent a year from 2009 to 2014.

Prices for rough stones gained more than 20 percent for three straight years from 2009 to 2011 as Chow Tai Fook and other Chinese retailers opened thousands of new stores, all needing to be fully stocked with gems.

In September, De Beers said that Chinese demand would grow as much as 4 percent this year, compared with 6 percent in 2014.

The company, in recognition that demand was softening, announced in August a "major" investment to advertise diamonds in the US and China, the two biggest markets, during the year-end holiday season.