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Cracks Forming In Diamond Market

Posted: Nov 07, 2008 10:56 AM by Eugene Bukoveczky

Tickers in this Article: AAUK, FORSY, NILE, TIF, ZLC

According to a recently published trading report by London-based diamond dealer Gem Diamonds, prices for its top-quality rough diamonds fell 14% at a recent tender in Antwerp. A Reuters report noted that trading in larger stones had nearly ground to a halt as sellers were refusing to deal in a market now dominated by unacceptably low-bids.

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While they might have been Marilyn Monroe's best friend, for investors, diamonds are loosing their luster in these increasingly hard times.

New Mine Adds To An Oversupplied Market
Things are apparently so bad, that the dealer's trade association, the World Federation of Diamond Bourses, issued an appeal for the diamond producers to reduce the supply of new gems entering the market in an effort to reduce supply.

However, the world's largest producer De Beers, which is 45% owned by U.K. mining group Anglo American (Nasdaq:AAUK) appeared unmoved, refusing to give any commitment to curtail production. Recently the company opened the Voorspoed mine in South Africa, which, when fully operational, could add 800,000 carats a year into an already oversupplied market.

Overextended Dealers Could Be Forced To Dump Their Stones
Such willingness to commit new supplies to the market can only add to the woes of diamond dealers, who, according to a recent report by diamond market watcher Martin Rapaport, have borrowed over $12 billion to buy rough diamonds, much of which was lent by ABN AMRO. ABN's parent Fortis NV (OTCBB:FORSY) was partially nationalized in September by the Dutch, Belgian and Luxembourg governments with the balance sold to French financial giant BNP Paribas.

If the Fortis restructuring results in some of these loans being called, that could prompt a wave of selling and knock the bottom out of an already nervous market for rough diamonds.

Retail Jewelry Sales Decelerating Rapidly
While a lack of investment demand is seen as responsible for the recent price weakness at the high end of the diamond market, there's also plenty of evidence that the core of the market, basic jewelry demand by the less affluent, is drying up due to the weaker economy.

According to recently released data by ecommerce research company comScore, U.S. online sales of jewelry and watches fell by 11% during the three months ending September 30. The fall-off in consumer demand for jewelry was also reflected in the disappointing earnings results from online jewelry seller Blue Nile (Nasdaq:NILE) which reported lower sales and earnings during its latest quarter. While sales were down just 3% during the quarter ended September 28, figures for October showed a truly alarming deceleration; dropping by 20%. International sales, once seen as the source of steady demand, were reported to be weakening as well.

These latest worrying data points were no doubt behind the following day's loss of almost 10% in Blue Nile shares and rival mall-based mass market retailer Zale (NYSE:ZLC). Shares of more upscale retailer Tiffany & Co. (NYSE:TIF) also experienced a 7% haircut on the day. (To learn how to value retail diamond sellers, read Analyzing Retail Stocks.)

The Bottom Line
With both high and low-end buyers turning away from the market, expect more rough times for the purveyors of bling.

For all you need to know about investing directly in diamonds and other gemstones, read Introduction To Gemology.

By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint.

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