The first half of 2008 saw polished diamond prices go up 15% compared the previous year. Diamond mines were implementing expansion plans and there was full employment for cutters, wholesalers, and retailers worldwide.
Starting in July, diamonds started to see the same pressures that commodities like oil were experiencing. Consumer fear, triggered by reduced real estate equity and tightened credit, resulted in reduced luxury purchases and lower demand for diamonds. The inertia of the diamond industry pipeline caused an out of balance between supply and demand with the result being a 11% drop in polished diamond prices during the second half of 2008.
The diamond industry, unlike the oil industry, has low profit margins all the way along the production and wholesale pipeline. If diamond prices drop too quickly, they can quickly bankrupt large segments of the industry. The only way to preserve the viability of the industry is to quickly match supply with demand in an effort to stabilize diamond prices at a level that can sustain the capital-intensive industry.
Diamond prices dropped dramatically in October and November but then flattened out in December. The unrealistic price increases from the first half of 2008 were mostly erased with the result being closer to the historical annual rate of increase (about 3%). Just as the oil price bubble was not sustainable, diamond prices have retreated back to “normal” levels.
The following is brief summary of the actions taken by the diamond industry in response to the falling demand.
The world’s largest producer, De Beers, is reducing sales of rough diamonds by 50% until April.
Russia’s ZAO Alrosa, the world’s second largest diamond producer, stop selling diamonds to customers in late December. Exploration has been halted at its Catoca mine, which is the fourth-largest diamond mine in the world supplying about 75% of Alrosa’s rough diamonds.
Snap Lake mine, owned by De Beers Canada, has planned a total of 10 weeks of shutdown during 2009 with about 430 workers laid off during those weeks.
BHP Billiton’s Ekati mine, remains at full production thanks to a cost reduction program implemented over the previous two months.
Diavik mine, owned by Rio Tinto and Harry Winston Diamonds, implemented a six-month delay in their planned move to underground production.
The Argyle mine, owned by Rio Tinto, has mostly halted the Argyle Underground Project that will enable them to move from surface mining to underground operations. The diamond processing facilities will be shut down for maintenance for at least three months in 2009, reducing output while waiting for worldwide demand to return.