Big diamonds like the Constellation and Lesedi la Rona defy market

Recent headlines have highlighted record prices commanded by large rough and polished diamonds. However, this news is in danger of blinding investors to the market’s true straits.

Diamond producer Lucara sold the Constellation, an 813-carat stone from a mine in Botswana, to trader Nemesis International for a rough-diamond record of $77,649 per carat in May 2016. The total price for the stone was $63m.

Lucara has a 374-carat diamond it found last November with the Constellation but the company may decide to delay selling the stone until next year for tax and marketing reasons, says William Lamb, chief executive.

The Constellation’s price is likely to be dwarfed by Lucara’s sale of the Lesedi la Rona, a 1,109-carat gem-quality diamond also found at the same mine. It has an estimate of $70m for its sale at Sotheby’s on June 29.

The Lesedi La Rona, unearthed at the Karowe mine, is the second largest diamond ever mined and is ranked only after the Cullinan diamond discovered near Pretoria in 1905, which was cut and polished into diamonds now in the British crown jewels.

Lucara spent up to $300m buying the Karowe deposit from De Beers and building a mine, according to one industry analyst, adding that these large stones are very significant finds for the company and help to justify its outlay in buying the mine.

Polished diamonds, too, have made news. A 14.62-carat fancy blue diamond owned by Sir Philip Oppenheimer was sold for a record $57.5m by Christie’s in Geneva in May.

But the performance of these exceptional stones does not reflect the trend in global diamond jewellery sales. To align its output with weak rough diamond demand, De Beers has stopped or sold some mines, and slowed production at others. It also reduced rough diamond prices by 15 per cent last year to stimulate the market, which was choked by oversupply in the cutting and polishing segment and thin profit margins. Overall, rough diamond prices fell by 20 per cent last year, investment bank Macquarie reports.

De Beers spent $20m on top of its annual $100m marketing budget to target advertising at buyers in the US in the six weeks ahead of Christmas last year. It also zeroed in on China in a bid to boost diamond jewellery sales and clear out excess stock, says Philippe Mellier, De Beers’ chief executive.

The US diamond jewellery market was the standout performer in a year when other key areas recorded flat or falling sale. Sales there hit a record $39bn last year, according to De Beers. But that did not prevent a 2 per cent fall in total global sales to $79bn. India, Japan and the Gulf states all delivered lower sales, caused by factors including global economic uncertainty, tighter consumer credit and falling crude oil prices. Indian purchases fell 9 per cent to $3bn, Japan was down 13 per cent to $5bn and the Gulf fell 3 per cent to $4bn.

There are signs that, in the medium term, diamond prices could recover. Rough diamond production is forecast by Macquarie to rise from 125m carats in 2014 to 145m carats in 2018 before the closure of big, depleted mines and the lack of new large diamond deposits erodes output over the next decade back to levels achieved in 2014, Macquarie says.

“The implication, in our view, is that while diamond prices remain subdued in the short term, the long-term supply shortage should result in a significant upside to both rough and polished prices,” says the bank.

Mr Mellier of De Beers says the global diamond market is showing signs of a “fragile recovery” after a difficult year and a half. De Beers is the largest producer of rough diamonds by value and the company formerly controlled up to 90 per cent of the world’s rough diamond sales.

It was a view generally shared by panellists at Macquarie’s annual Global Gemstone conference in London in May. “Our key overall takeaway was that the rough diamond industry is in a much healthier position than it was last year at this time,” analysts Patrick Morton and Daniel Sepe said after the event.

“Profitability has returned to cutting centres, and a significant restocking event is under way. While opinions remain mixed regarding end-user demand, the overall view is that global demand is growing at a slow but stable pace,” they said.