De Beers cuts rough diamond intake as US slowdown bites

The world diamond market has collapsed, leading the marketing arm of De Beers to reduce its intake of rough diamonds for this year by nearly 10 per cent.

Reporting interim results yesterday, De Beers, which dominates the world's diamond trade, said the rough diamond market remains depressed.

DTC, the marketing arm of De Beers, said first-half sales of rough gem diamonds dropped from $3.5bn (£2.4bn) in 2000 to $2.6bn, cutting net profits by 15 per cent to $744m.

"The first six months have been difficult for the diamond industry, with prices under pressure, liquidity tight and profitability eroded," De Beers said.

The group, which markets two thirds of the world's rough diamonds, said it had been hit by the global economic slowdown and weakness in the US, which represents half the world market. As a luxury good, diamond jewellery is highly susceptible to the economic cycle in most markets.

Demand for De Beers rough diamonds is reduced as US jewellery shops are holding large stocks of polished diamonds.

De Beers said any improvement would depend on a recovery in economic growth, the relative strength of the US dollar and, more immediately, the level of sales this Christmas.

The company abandoned its target for rough diamond sales for this year of $4.8bn, despite seeing sales of $2.6bn in the first half. The move implied an even poorer second half, analysts said. Gary Ralfe, De Beers' managing director, said the company was still on course for sales of $4bn.

DTC has cut the amount of diamonds it is prepared to buy ­ mostly from De Beers' mining units. The company indicated that buying quotas had been cut by a little under 10 per cent.

The introduction of quotas represents a severe climbdown. De Beers had originally hoped its new "supplier of choice" initiative would take the diamond market by storm this year.

It means that De Beers' three mining divisions, two of which are joint ventures with the governments of Botswana and Namibia, will either have to stockpile diamonds or cut production levels.

Earlier this year De Beers was taken private. It is now 45 per cent owned by Anglo American, the mining group, 45 per cent by the Oppenheimer family, and 10 per cent by the joint venture between De Beers and Botswana.

"Supplier of choice" was intended to end decades of gem stockpiling designed to support diamond prices. The programme involved working with its largecustomers to fan demand for its gems rather than restrict supply.

The economic downturn, coupled with objections from the European Commission that supplier of choice potentially fell foul of European competition law, put that initiative on hold.

Despite the bad news from De Beers, Anglo shares rallied, topping the list of FTSE 100 gainers, up 4 per cent at 955p.

Peter Dupont, a mining analyst at Commerzbank in London, said De Beers had produced more profit than the market had expected in the first half and that the outlook, though weak, was not any great surprise.