The World Has a Diamond Glut. Why Is That a Problem?

LONDON — Is it ever potential to have too many diamonds? For many within the enterprise of manufacturing and buying and selling these gems in recent times, the reply is sure.

The high diamond miners on the planet, together with the 2 largest, Alrosa and De Beers, have a list downside. So do most of the cutters and polishers who purchase the tough stones and promote them to retailers. At each stage of the availability chain there are too many of those treasured gems, whose advertising and marketing has lengthy relied on their rarity.

A glut in lots of different industries would ordinarily result in deep worth cuts. But customers are shopping for stones which have handed by way of many layers of middlemen: merchants, polishers and cutters, who’ve absorbed a lot of the uncooked stones’ worth volatility, in addition to manufacturers and jewellery homes that create rings, bracelets and necklaces. This has saved retail costs comparatively fixed, fueled by strong demand from buyers all around the world.

Still, challenges are mounting for the $17 billion diamond mining business. The oversupply of tough stones and the more and more strained funds of middlemen have hit miners’ stability sheets in current months as they attempt to handle the excess and improve the worth of current stones.

More significant, a growing glut of rough diamonds, coupled with foreign exchange volatility, trade wars and rocky stock markets, has upended the industry. Prices for rough diamonds have declined about 6 percent this year, while polished stones are about 1 percent lower, according to data from

Mine exploration boomed after the 2008 financial crisis, partly in anticipation of demand from China. “Rough diamond prices hit an all-time high in 2011,” Mr. Zimnisky said, “but have basically been on a slide since then.”

Because it takes four to eight years to develop most mining operations, and sometimes longer, stones from newer explorations didn’t hit the market until late 2017 and early 2018, after trading conditions had drastically shifted.

In addition, financing problems have affected the miners’ core customer base: the traders, cutters and polishers of rough stones, whose hubs are predominantly in India and Belgium. Banks have moved away from this complex and secretive industry, made up of tens of thousands of small and medium-size businesses, after being stung by frauds and bad loans. In February 2018, news broke of one of India’s biggest frauds, allegedly perpetrated by a celebrated trader and jeweler, Nirav Modi.

Last month, the Dutch bank ABN Amro was the latest to announce that it would scale back its financing of rough-diamond purchases, citing a lack of profitability.

“There is significant indigestion in the midstream of the market, thanks to both a nasty cocktail of recent geopolitics and now this credit squeeze on polishers and traders,” said Bruce Cleaver, the chief executive of De Beers. “The impact is being felt across the entire market.”

With the profit margins of its clients — traders, cutters and polishers — rapidly slipping away, De Beers said it had reduced rough diamond production by 11 percent for the first half of 2019. It also cut prices and offered options like deferring purchases. A weaker rupee has also made gems more expensive for Indian manufacturers, which cut or polish about 90 percent of the world’s stones in the city of Surat.

“We need to help customers ride out this storm,” Mr. Cleaver said. “That said, we’ve seen trading downturns like this before. There is still plenty of demand for diamonds from consumers, and I feel confident this will pass.”

Rio Tinto said the main reason for shutting down Argyle was not that there was a lack of demand, but that the mine’s remaining stones were not valuable enough to extract, which involves sifting through 100 tons of a rock called kimberlite to collect a single carat.

But the shutdown could ultimately help the industry.

The Argyle mine has produced about 865 million carats of rough diamonds since 1983, Mr. Zimnisky said. Just over one million, or 0.13 percent, have been classified as pink, a rarity that tends to fetch several million dollars per carat, but the majority have been lower-quality browns and whites. Losing those browns and whites will knock 10 percent out of the annual world diamond output and may rebalance supply and demand. The shutdown could also lift the prices of pink diamonds already in the hands of investors.

The closing of a mine like Argyle and an incremental decrease in diamond output could also help shift some pressure away from small and medium-size traders and polishing businesses to larger, better-financed companies that can weather the volatility caused by excess inventory.

Miners have also significantly reduced investment in exploration over the past decade. Bain & Company estimates that exploration spending as a percentage of revenue has fallen to 2 percent from about 8 percent in 2007-08.

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