Businessweek Archives

Cracks In The Diamond Trade


Finance: COMMODITIES

CRACKS IN THE DIAMOND TRADE

A flood of low-quality gems has shaken De Beers' iron grip

Step into a Kmart or Wal-Mart Store these days, and you can pick up a diamond bracelet for $29.99--about the same price as a toaster. That speaks volumes about the state of the diamond business. Prices of smaller diamonds are plunging--retail prices are off as much as 20% in the past year--and demand for some types of poor-quality stones is nonexistent. Why? Blame an avalanche of cheap stones from Russia and Australia.

So far, the plunge hasn't affected the pricier fine diamonds shimmering in display cases at Tiffany & Co. or Cartier. That upscale market has held its own despite deteriorating demand in financially strapped East Asia. But for how long? Some analysts fear that the abundance of supply could overwhelm the firm hold that the cartel led by South Africa's De Beers Consolidated Mines Ltd. has held over the diamond business for decades. "There is a concern that the problems in the lower-quality market could creep up to the higher end and destabilize prices," says Hilton Ashton, a diamond analyst at SMK Securities Inc. in Johannesburg.

COUNTERATTACK. It's not as if De Beers is standing still. It continues to control the bulk of the diamond trade through its London-based marketing arm, the Central Selling Organization (CSO). And it has tried to keep a tight rein on supplies and prices by jawboning cartel members and purchasing diamonds produced outside the cartel. That has helped push prices up 50%, on average, since 1986. But despite all of De Beers' efforts, the CSO has seen its share of the global market for rough, or unpolished, diamonds erode from 80% to 70% in the past five years. Many investors think that's only the beginning of a slippery slide. Since July, the price of De Beers' American depositary receipts has plummeted 37% in dollars, to $20.

The current problems started in the early 1990s, when the Russians, in

desperate need of hard currency, began dumping low-quality "near-gem" diamonds. This violated Russia's contract with the CSO, so the CSO retaliated by dropping its price for this type of rough stone. That so angered the owners

of Australia's Argyle Diamond Mines, the world's largest producer of near-gem stones, that they broke with the CSO in 1996. And that, in turn, produced the avalanche of cheap stones from Russia and Australia, and, experts say, the CSO, which decided to play hardball.

By the time the Asian financial crisis hit last summer, the diamond market was shaky. With so many diamonds at the low end of the market, De Beers no longer found it effective to try to maintain control of the cheaper stuff. So De Beers focused on the higher end. Since November, the CSO has contracted supplies by halving sales of rough diamonds to "sightholders," the 160 cutters and dealers to whom De Beers sells stones every five weeks. Indeed, Deutsche Morgan Gren- fell analyst Niall Carroll expects CSO sales to fall by 16% in 1998, to $3.91 billion.

As sales drop, the cartel's diamond stockpile will soar from the $4.1 billion it held in June, 1997. CSO spokesman Robin D.G. Walker says De Beers

isn't worried about its ability to finance the growing stockpile. The cartel has deep pockets and many investments outside the diamond business, including mining companies such as Anglo American Corp. and Minorco. Moreover, with a debt-to-equity ratio of only 6%, De Beers is able to leverage its increasingly large stockpile, which analyst Ashton estimates may reach $5.6 billion by yearend. Roger Chaplin, an analyst at T. Hoare & Co., says the company could even borrow up to $5 billion to fortify its war chest.

There are already signs that things are turning in De Beers' favor. The Russians, who had not had a contract with De Beers for several years, have signed up again and are no longer leaking diamonds. Even the Asian crisis could work in the cartel's favor. "It's a dire market, so everyone is playing ball," says Mark Cockle, editor of London-based trade magazine Diamond International.

Moreover, De Beers is still counting on its longtime marketing mantra--"Diamonds are forever"--to hold sway. The cartel believes that couples shopping for engagement and wedding rings won't be swayed by cheap, mass-market gems. "Weakness at the bottom doesn't drag down the top. These are two different types of consumers," says Jeffrey H. Fischer, president of both New York-based Fischer Diamonds Inc. and the Diamond Manufacturers & Importers Assn. De Beers is betting that this continues to hold true and that

its costly efforts to hold the line on top-quality diamond prices will bear fruit.By Heidi Dawley in London, with William Echikson in BrusselsReturn to top


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus