TORONTO (miningweekly.com) – As diamond prices show their first significant drops since posing a significant recovery from the financial crisis, analysts said on Tuesday the pullback was due at some point, and that prices should more or less hold their current levels for the rest of this year and into 2012.

Diversified giant BHP Billiton last month reported a 15% to 20% drop in prices for its most recent tender, with other suppliers showing a 10% to 15% decline, said BMO Capital Markets analyst Edward Sterck.

“It’s partially the time of year, with a lot of religious holidays...but to a certain extent, it’s time that we saw a bit of price consolidation,” he commented in an interview, adding that prices had become somewhat overheated in some gem categories.

Diamond prices had been on a tear since the financial crisis prompted number-one producer De Beers to slash production in half during 2009, increasing by an average 50% over the past 12 months, according to RBC Capital Markets analyst Des Kilalea.

“The prices just got a bit ahead of themselves. We were roaring ahead at quite a pace,” he told Mining Weekly Online.

Fears around the Greece debt crisis, sluggish growth in the US – the biggest consumer of diamonds – and market wobbles had taken the shine off prices.

But both Kilelea and Sterck don’t expect diamond markets are in for a major slide.

Sterck expects prices might fall a further 5% to 7%, adding that he doesn’t think there will be a “significant” pullback.

According to Kilalea, the diamond pipeline – the process involved in having a rough diamond bought by a cutter and polisher and then sold – has now been restocked after the financial crisis, which along with some speculation and strong demand out of countries like China and India, had driven up prices.

With the restocking largely complete, and a dimming in speculation, markets will largely depend on actual diamond jewellery demand to lift prices.

“Given that the world’s economic growth is expected to be fairly sluggish, and that the pipeline is full, next year will slow. Prices might be slightly up or down – I don’t think anyone would be pencilling in anything dramatic for next year,” Kilalea said.

De Beers Diamond Trading Company head Varda Shine was recently quoted as saying the company had decided to hold its prices for now, as a means to deter speculators.

While prices may cool off further, Sterck said he was still confident in the longer-term prospects for the sector, as demand keeps climbing from Chinese and Indian consumers, with a lack of significant new diamond mines coming into production to meet this appetite.

“I don’t see any reason for that to change. De Beers has been running a very successful platinum-diamond jewellery advertising campaign in China,” said Sterck, adding that he expects prices will grow at 5% yearly from 2012.

There is a potential sweetener for growth if the Chinese government were to allow for its currency to appreciate further, which would “overnight” rebalance the purchasing power of consumers in that country, he said.
 

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