China’s commodity slump hurts De Beers
THE CHINA-fuelled 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’s bad news for Anglo American.
Cooling demand for diamond jewellery in China, the biggest market after the US, is the latest sign that the country’s slowdown is not only a problem for industrial commodities. At the same time, customers of Anglo American’s De Beers unit, who trade, cut and polish 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,” said Guy Harari, the co-founder of rough diamond trading platform Bluedax. “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 the Asian nation has caused a blockage in the notoriously long diamond pipeline as inventories build and prices slide. At the same time, producers have been reluctant to cede their hardwon 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 fell 7.4 percent in London on Monday, the most in three weeks.
Vulnerable
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, the world’s largest listed jewellery chain, reported a 13 percent drop in second-quarter sales of gem sets this 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 normalising,” said Kieron Hodgson, an analyst at Panmure Gordon & Company in London. “The problem is the level of inventories that are in the country or with the major retailers. It’s backing up along the pipe.”
Customers rejected 35 percent to 50 percent of diamonds on offer at the October sight.
The top two producers have taken some action to shore up demand. De Beers has cut production twice this year by a total of as much as 15 percent, and lowered prices at its sales, known as sights.
Still, that’s not proving to be enough. Customers rejected 35 percent to 50 percent of diamonds on offer at De Beers’s October sight, according to people familiar with the sale, who asked not to be identified as the information wasn’t public.
The gems purchased there were already selling at heavy discounts in the secondary market, they said.
Between miners and jewellery retailers, the diamond-industry chain is impenetrable to outsiders and has been dominated by family-run firms that do business based on personal relationships.
Challenges
De Beers recognised that there were challenges in the midstream at the moment and that it was a difficult time for its customers, a company spokesman said. There was still good client demand for diamonds and the producer expected to see gradual improvements as inventories cleared, the spokesman said.
The company has been flexible with its customers, allowing them to defer purchases.
Rio Tinto Group, the thirdbiggest producer, became the latest miner to respond to China’s slowing appetite, cutting its 2015 output target by 10 percent on Friday. Rough diamond prices have fallen about 15 percent this year, according to data. De Beers needs to reduce them further, Harari said.
“If they continue with these prices, it will lead to a very bad place,” Harari 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 consecutive 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.
De Beers said last month 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. – Bloomberg