Have diamonds lost their glitter? If you are De Beers — the world's biggest natural diamonds producer — a decline in sales and the growing popularity of synthetic stones is hurting the bottom line, but some see a silver lining to the clouds.
De Beers’ low rough-diamond sales signal potential difficulties in a planned unbundling of the asset by parent company Anglo American, mainly because natural diamonds have lost their popularity as a luxury purchase, analysts said this week.
Diamond producers have been hit by a lower-than-expected recovery in China, the world's second biggest market, and higher global inflation that has consumers pulling back on luxury spending.
Ben Davis, equity research analyst for mining and commodities at Panmure Liberum, said lower sales at De Beers were expected as the diamond market faces volatility, putting pressure on Anglo American’s plans to sell the asset.
For prices to stop falling we need to see further cuts to natural mine supply and for lab-grown diamonds to stop growing
— Ben Davis, equity research analyst
“Our view is that the De Beers' disposal is unlikely to happen and it will stay in the Anglo-American portfolio as it is too difficult to spin off or sell with the current outlook and [the fact] that the Botswana government has yet to sign the joint venture agreement,” he said.
Parent company Anglo American was the target of an unsuccessful $49bn (R892bn) takeover bid by Australian giant BHP Billiton this year, looking to tap mainly into its rich copper assets in South America.
In response to the bid, Anglo American said it would demerge De Beers by the end of 2025, marking the end of a 100-year director ownership era. Anglo American owns 85% of De Beers, with the remainder held by the government of Botswana under the Debswana partnership.
Davis said the rough diamond market was unlikely to see an improvement soon as synthetic diamonds were also hurting natural producers of the precious stone.
“For prices to stop falling we need to see further cuts to natural mine supply and for lab-grown diamonds to stop growing, to better match demand," he said.
In its fifth global sightholder sales and auctions, De Beers said rough diamond sales declined to $315m from $456m a year earlier.
De Beers CEO Al Cook cited a generally quieter northern summer for rough diamond sales as weighing on the sales cycle. He said while a recent jewellery show in Las Vegas confirmed a resurgence in retailers’ interest in natural diamonds in the US, "ongoing economic growth challenges in China mean we continue to expect a protracted U-shaped recovery in demand”.
In response to low demand, De Beers held back online sales after they fell to $200m in the seventh sales cycle in late 2023, and India halted diamond imports.
Davis said while luxury brands are trading close to previous highs, natural diamonds have lost their sparkle among consumers.
“Natural diamonds are just not that popular. The US bridal market has been cannibalised by lab-grown [stones] and in China they prefer gold as a store of value over diamonds”.
Lab-grown diamonds, which are attractive to retailers because of strong margins, have been squeezed, resulting in De Beers’ lab-grown diamond subsidiary Lightbot in May resetting prices to $500 a carat from $800 a carat.
Davis said there would eventuallty be a recovery in natural diamonds. “But there are no signs of it happening in the short term.”
Speaking to investors during an update on the production outlook last week, Petra Diamonds CEO Richard Duffy said lab-grown gemstones were an entirely different value proposition and product segment that provided a cheap entry point for consumers into diamonds.
"The price of lab-grown diamonds has collapsed and these are now sold at a discount approaching 90% when compared to natural diamonds, with margins following a similar pattern."
He said despite challenges, natural diamonds are associated with celebrating life's special moments.
"The fact they are billions of years old and are formed through volcanic activity bringing these unique stones to the surface reflects the enduring nature and significance of natural diamonds that are associated with celebrating these significant moments. This has resulted in retail jewelers again turning to natural diamonds that represent better value for them and their clients," he said.
Last week Petra Diamonds announced the extension of the lives of both Cullinan and Finsch mines, with internal cash flows highlighting how both mines' production will continue well into the next decade.
Paul Zimnisky, a global diamond industry analyst, said there was highly unusual volatility in diamond demand over the last four years.
“Following a major recession in 2020, diamond demand hit record levels in both 2021 and 2022 as record economic stimulus drove diamond consumption [while] the experiential luxury industry, for example, travel, was for the most part closed.”
Zimnisky said 2023 saw an unwinding of these fundamental factors, which led to a relative drop in diamond demand. He agreed with Davis that there should be a recovery.
“2024 and 2025 should allow for a gradual recovery in diamond fundamentals. A recovery in diamond consumption in China, as well as the impact of the Western sanctions on Russian diamonds, will be major variables in the medium-term. The impact of competition from man-made diamonds will also continue to be a major factor.”
De Beers was being careful to not overstock a diamond supply chain that was still digesting excess inventory from last year, Ziminsky said.
“Theoretically this should support industry fundamentals in the medium-term and could make a disposal of De Beers more favorable whenever that may finally be.”
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