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The Globe and Mail

Diamonds hit rough patch as demand falls

Single diamond isolated on white.

Evgeny Terentev/iStockphoto

Harry Winston Diamond Corp. is grappling with rising diamond inventories and falling prices, as the slack global economy prolongs a year-long slump.

The Toronto-based gem company said on Tuesday that it would likely not sell all of its production in the fiscal second quarter ending this month, and that it expects to have higher-than-normal inventories as diamond cutters encounter difficulties arranging affordable financing.

"The rough diamond market has experienced softened demand since the beginning of the year," Harry Winston said in a report. The premier diamond jeweller and luxury retailer – with locations in fashion capitals from New York and Beverly Hills to Paris, Beijing and Hong Kong – estimated that market prices have dipped 8 per cent since April.

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Diamond prices are still struggling to recover since falling off a cliff over a year ago, when the global economic outlook darkened suddenly, spoiling the plans of speculators who had stocked up in anticipation of a stronger economic recovery after the 2008-09 crisis.

Successive waves of the European sovereign debt crisis kept prices low and leery lenders passed higher borrowing costs on to diamantaires, the craftsmen who cut diamonds and who depend on financing for 90 per cent of their rough diamond inventory.

"The biggest thing going on here is the euro crisis, where the main diamond-lending banks are capping their lending facilities," said Edward Sterck, a London-based analyst with Bank of Montreal's investment arm, pointing at diamantaires who have gone out of business because they couldn't afford to buy raw material to work with.

"Effectively they are drawing down on their working inventory at the moment, and when they do need diamonds they are purchasing them more on a hand to mouth basis," Mr. Sterck said.

Volatility has been an issue for the industry for over a decade, ever since diamond giant De Beers saw its monopoly grip over the industry thwarted by producers in Russia, Canada and Australia, ending more than 80 years of predictable pricing and forcing diamantaires to fend for themselves in a market subject to the whims of supply and demand.

Earlier this week Lucara Diamond Corp., a Toronto-listed company with two mines on the African continent, said it had to withdraw three lots of diamonds – out of a total of 35 – from a sale amid soft bidding for gems described as being of high colour and high quality.

The company said it would go back to market in September, in Antwerp and Gaborone, when it expects stronger prices amid restocking from cutters and polishers ahead of Diwali, India's biggest and most important holiday of the year, the Indian wedding season and then the Christmas season in December.

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The United States is still the world's biggest retail market for diamonds, but demand from India and China is growing. A weaker rupee currency in India has dampened demand of late, but analysts say growth is still strong at between 12 and 20 per cent, compared with 30 per cent growth in previous years.

"I'm encouraged by the structural trends in the industry," said Oliver Chen, an analyst with Citigroup Inc in New York. "Supply of diamonds is growing at low- to mid-single digits and demand is growing at 7 to 15 per cent, which is a nice structural trend for the long-term pricing of diamonds."

At the same time, Mr. Chen expects prices to remain volatile for the rest of the year, and may not rise until early 2013, when diamond cutters finally start to build inventories again.

"Most likely, prices are not going up. They are going to bounce around or go down."

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