The cheapest diamonds bring to life the hidden world of the gem trade

For the past six months, the world's diamond centers in Antwerp, Belgium and Mumbai have been at a standstill, with cutting and polishing factories shuttered and trading floors shuttered. Now a capitulation on prices by the biggest miners is bringing the industry back to life.

After refusing to budge on diamond prices for much of the pandemic, De Beers and Russian rival Alrosa PJSC decided last week they saw enough signs of demand recovery and seized the opportunity, cutting some prices. by almost 10%. The impact was instant, as buyers of rough diamonds walked away with about $500 million worth of uncut gems, according to people familiar with the situation who asked not to be named because the information is private.

The revival came the same week that Tiffany & Co said her jewelry sales were improving on a monthly basis, adding to optimism that the entire industry is on the mend. The developments will bring relief to a supply chain that has been at a standstill since the pandemic struck, with jewelery shops shuttered, cutters and polishers stuck at home and traders locked out from key producing countries.

De Beers declined to comment on the details of its sale this week.

The engine room of the diamond industry is dominated by small private family businesses that cut, polish and market the stones. They form the invisible link between the African mines and the jewelry stores in New York, London and Hong Kong. It's a secret business and largely unnoticed outside the closed world of diamonds, but their fortunes are often a benchmark in the industry at large.

Cheapest diamonds bring life to the world hidden gem trade

The fate of the diamond industry will ultimately be decided by retail demand, and so far that has been uneven. The Chinese market has recovered strongly, with Chow Sang Sang, one of the country's largest jewelry retailers, saying its domestic sales as of June were at 95% of last year's levels. That recovery was helped by consumers being unable to travel abroad, where they have traditionally been big shoppers in cities like Hong Kong, London and New York.

However, sales in the United States, which account for nearly half of all diamond demand, remain under pressure as the pandemic keeps shops shuttered, millions are jobless and the country posted its biggest quarterly economic contraction since the Great Depression.

Tiffany highlighted the clear divide on Thursday. In the second quarter, her Asia-Pacific business posted profits at the same level as a year earlier, while profits collapsed in the Americas, sending her posting losses in what is traditionally the largest region. Still, the iconic retailer showed that its global sales were picking up every month. Tiffany may soon have a new owner as it is trying to close a $16 billion deal with luxury goods giant LVMH.

While the sale has yet to be finalized, De Beers likely sold about $300 million worth of rough diamonds last week, according to people familiar with the situation. That's less than a traditional sale, but it's the biggest deal since February and equals roughly six times its total sales for the entire second quarter. The company could have sold more, but it held back some sales to avoid overwhelming the nascent recovery, the people said. Diamond buyers estimate that Alrosa probably sold around $200 million, the people said.

Alrosa's head of sales, Evgeny Agureev, declined to comment on how much the company sold.

There were other key signs of recovery within the trading community. In the so-called secondary market, where buyers sell to gemmakers without direct access to De Beers, boxes were changing hands for premiums of more than 5%, indicating the makers believed they could make a profit at current prices.

However, the recovery remains uneven. High-quality diamonds, used as solitaires and for bridal rings, are where demand is strongest, and it was for these types of stones that De Beers slashed prices.

It's another story for lower quality stones, where there is little demand from retailers or dealers. De Beers refused to cut prices here, agreeing that he would sell few stones. The company would have had to lower prices by as much as 20% to find buyers capable of turning a profit, according to people familiar with the matter.

However, many diamond dealers remain nervous about the strength of any recovery. Middlemen have been starved of supply for months, leading to a desperation for new stock that might not be reflected in consumer demand. There are also estimates that the biggest miners hold billions of dollars in rough diamond inventories, raising concerns that they could undermine the recovery by selling too much too soon.

Bloomberg

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