Diamond regains its glitter thanks to Chinese demand

No matter how bad the economic climate, there will always be someone willing to spend big money on the truly unique. One such eye-catching purchase was made last week when the Cullinan Heritage Diamond, a whopping 507-carat precious stone, sold for $35.3 million (Dh130m) – the highest paid for a rough diamond.

That is a lot of money for a lump of carbon but this is no ordinary bauble. The Cullinan Heritage is not only massive, it is also a white diamond and flawless. As a result, it sold for more than twice what a rare blue diamond might cost per carat.

The buyer was Chow Tai Fook, a large Asian jewellery chain, which is symbolically appropriate as it is China that has driven demand for diamonds recently. China is thought to have overtaken Japan as the second-largest consumer of precious stones and the eagerness of Chinese brides to have diamonds in their wedding bands has helped prices recover after a terrible 2009.

The adoption of diamonds in China has happened quite quickly and there was not much of a culture of wearing them until the recent boom. But as China's population has urbanised and becomes more affluent young women have happily latched onto the old marketing adage that "diamonds are forever".

Diamonds are, of course, a luxury product and it is not surprising that the market was hammered last year during the economic downturn, with prices falling by about 60 per cent. De Beers, the world's largest diamond miner, cut production by 49 per cent to 24.6 million carats last year and its sales also halved to $3.2 billion. Quick action by De Beers to eliminate costs and reduce production meant that the market was not suddenly awash with stones, which would have resulted in an even greater price collapse.

However, De Beers still had to ask for a $500m loan from its shareholders: Anglo American, which owns 45 per cent; the Oppenheimer family, which owns 40 per cent; and the government of Botswana, which owns 15 per cent. These shareholders have also agreed to pump a further $1bn into the business through a rights issue in order to cut debt and strengthen the balance sheet.

Thanks largely to China, demand for diamonds is now recovering and prices have recovered to about 75 per cent of their August 2008 peak (it is difficult to be exact about prices because the stones are not openly traded but sold in "sights" to select buyers).

While the record price achieved by the Cullinan Heritage will certainly add to the growing confidence in the diamond market, this stone was always going to fetch a high price no matter what was happening in the wider world. Just as people seem to find money to buy rare artwork in the face of economic Armageddon, the Cullinan Heritage is such a unique and unusual stone it was bound to attract a buyer with deep pockets.

The sale has given Petra Diamonds, which owns the Cullinan mine in South Africa where the stone was found, an big boost and it is a cherry on the top for the company after it bought Cullinan from De Beers just over two years ago.

Cullinan was founded in 1903 and two years later the world's largest diamond was found at the mine, the staggering 3,106-carat Cullinan Diamond. The two largest pieces of that diamond are now in Queen Elizabeth II's crown jewels. Cullinan has since become famous for its big stones and it is also virtually the only source of blue-coloured diamonds in the world. The mine's bread and butter, however, is the production of about one million carats of "ordinary" diamonds every year.

Despite the mine's pedigree, De Beers was struggling to make it profitable and Cullinan was sold to Petra at the end of 2007. The smaller company has been able to change the way the mine is exploited to eek out every carat and production is now up to 1.4 million carats a year with plans to move to two million carats by 2014.

Petra has also set up a process designed to find the mega-diamonds like the Cullinan Heritage. This has given the mine a new lease of life and Petra has estimated that it could have another 20 to 40 years of profitable production in it.

With prices recovering and a lucrative new source of demand in China, diamond producers are a lot more optimistic about the future than they were this time last year. For Petra, the sale of the Cullinan Heritage means that 2010 will already be a good year.

 

- The author is business correspondent of The Times of London. The views expressed are his own.

 

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