Last week was a glittering week for diamonds. As preparations for the Queen’s Diamond Jubilee were underway in London, the Martian Pink, a 12.04 carat diamond, went under the hammer at a record HK$135 million (US$17 million) at a Christie’s Hong Kong jewellery sale.
However, in the same week Graff Diamonds announced it will shelve a US$1 billion IPO in Hong Kong. In the U.S., shares of diamond jewellers including Tiffany and Harry Winston have all fallen sharply while BHP and Rio are seeking buyers for their diamond mines. Is a diamond still a “girl’s best friend?”
“In spite of uncertainty, and barring a global economic shock, we expect to see continued growth in global diamond jewellery sales, albeit at lower levels than the exceptional growth seen in 2011,” De Beers’s CEO Phillipe Mellier said in the outlook section of the company’s Operating and Financial Review 2011. “This will be driven by the overall strength of the luxury goods market, improving sentiment in the U.S. (the largest diamond jewellery market), continuing growth in China, and the positive impact of the 2011 polished price growth on retail jewellery prices,’’ according to the company which produces about 35 per cent of the world’s rough diamonds.
However, concerns about whether the European debt crisis could be brought under control have returned to haunt the equity markets. Global consumer spending has turned cautious, dampening the strength of the luxury market. Sentiment in the U.S. has weakened while growth in China slowed.
London-listed Gem Diamonds said in its Interim Management statement in April that its own price index has risen 7 per cent in the year after a sharp fall in prices across the industry at the end of the third-quarter of 2011. The U.S. S&P 500 equity index reached its highest point of 1,419 this year on April 2. The benchmark has since fallen to around 1,285.
Graff Diamonds, Tiffany
Graff Diamonds said it will postpone its share sale because of “consistently declining stock markets.” While there were concerns that the valuation of its stock was rich compared with its peers, the company’s decision to delay its IPO followed Tiffany’s reduction of its sales estimates. The diamond retailer revised its worldwide net sales to a 7-8 per cent gain, down from a previous expectation calling for 10 per cent growth.
Announcing its first-quarter earnings, it said sales were weakest in the U.S. compared with other regions. Smaller bonuses on Wall Street, the European debt crisis and the stronger dollar have taken their toll on consumer spending. Tiffany’s shares have fallen 14 per cent in the last month.
“Although we are very early into the second quarter, worldwide sales are currently increasing by a low-single-digit percentage, reflecting difficult year-over-year comparisons and decelerating rates of economic growth in many countries,” the company said in its result statement.
According to Rapaport Group, its RapNet Diamond Index (RAPI) for 1 carat diamonds fell 0.6 per cent in May. The 0.3 carat category declined by 0.3 per cent and the 0.5 carat stones dropped 0.4 per cent. RAPI for 3 carat diamonds fell 1.6 per cent during the month. Through the first five months of the year, RAPI for 1 carat diamonds fell 1.7 per cent and has declined by 4.5 per cent from one year ago.
“Trading is set to remain challenging in the second half of the year,” said the group that plans to set up a diamond exchange for banks and brokers in October.
Shares of Anglo American, which owns 45 per cent of De Beers, have declined 7 per cent in the past month. Harry Winston is down about 11 per cent. Gem Diamonds has fallen 8 per cent, which some analysts say represents a buying opportunity. The diamond retailers have all underperformed the S&P 500 index, which has fallen about 4 per cent over the same period.
BHP, Rio Mines
As global market sentiment turns sour, Rio Tinto Group and BHP Billiton are negotiating to sell their diamond mines. Back in March, Rio said it was looking to exit the diamond industry. The move followed BHP’s announcement on November 29 that it’s studying the sale of some or all of its diamond unit because the operations may no longer fit with its strategy. Rio gave similar reasons for the sale if its diamond mines, adding they don’t have the required scale.
Rio’s decision comes after it took a US$344 million one-time charge for the diamond business earlier this year to reflect higher costs for the $2.1 billion expansion of the Argyle mine in Australia.
Melbourne-based BHP, which accounted for about 7.5 per cent of global diamond production by value in 2010, owns 80 per cent of the Ekati mine in Canada’s Northwest Territories.
Diamond prices are likely to see a further dip in 2012 with a possible rebound in 2013, according to analysts. While there are still expectations for longer-term diamond prices to increase as the middle class in China and India expands and global supply remains limited, currently it appears diamonds are a fickle fair-weather friend. Chinese per capita consumption of diamonds though increasing is also said to be well behind developed markets.
Meanwhile, the European debt crisis has spread. Cyprus, the zone’s third-smallest economy, is the latest to say it might seek a banking sector bailout. The Portuguese government has announced it will inject 6.6 billion euros (US$8.3 billion) into the country’s three largest banks. Spain is struggling to contain its own banking crisis after last week’s failed attempt to shore up Bankia, arranging 100 billion euros in loans from the Eurozone to shore up its ailing banks.
Gold More Reliable?
Given the global uncertainty it appears gold not diamonds may be the investors’ more reliable friend. After temporarily giving up its gains for the year last month, bullion is heading for a 12th straight annual gain, according to a Bloomberg report. “Gold remains the currency of last resort,” Jeff Currie, the New York-based head of commodity research at Goldman Sachs said in the report, predicting gold to reach $1,840 by the end of the year.
Bee Lin Ang is a writer and blogger based in Sydney. She was a former editor with Bloomberg News in Hong Kong and spent 10 years as a correspondent with Reuters in Singapore, London and Melbourne, specialising in Asian equities and commodity markets. She is fluent in Mandarin and speaks various other Asian languages.