THE global diamond sector is going through a difficult patch, with prices falling and demand slowing in key markets, though rough diamond prices are expected to show signs of recovery next year, RBC Capital Markets analyst Des Kilalea said yesterday.

Rio Tinto and BHP Billiton are both reviewing their diamond divisions with a view to selling them. The Oppenheimer family, whose name is synonymous with diamonds, has agreed to sell its 40% stake in De Beers to Anglo American for $5bn in a deal that is nearing conclusion.

De Beers is 45% owned by Anglo American.

The longer-term outlook for diamonds is positive, De Beers CEO Philippe Mellier said this month, pointing to a widening gap between demand and supply, which shrank 15% between 2007 and this year due to operational issues and dismal market conditions caused by the onset of the global financial crisis in 2008.

The Chinese and Indian diamond markets, accounting for 25% of demand, should match the world's largest diamond market, the US, with its 38% stake, in the next decade, he said.

However, the short-term forecast is bleak, with demand in key markets like China and India cooling and a fully stocked pipeline of rough diamonds, Mr Kilalea said.

"Diamantaires are facing the twin pressures of slow sales of polished stones and rough prices that seem out of kilter with polished. Add to that tight liquidity and a slowing economic outlook for China and it is clear that the industry is in a difficult phase right now," he said.

He reported De Beers' sales arm, the Diamond Trading Company (DTC) had a tough sale, or sight, last month. with diamantaires estimating sales came in at about $450m rather than the expected more than $500m. A number of buyers, which are carefully selected by De Beers and are called sightholders, had "left goods on the table, or in terms of their contracts, deferred taking the rough they had indicated they would want", Mr Kilalea said.

It was reported that DTC would allow sightholders to defer up to 50% of their purchases by value over the seven sights to the end of next March, he said. De Beers is forecast to report first-half sales of $3bn from $3,5bn a year ago. Full-year sales are expected to be between $5,8bn and $6bn from $6,5bn last year.

Bob Gannicott, CEO of the Toronto-based diamond producer and jewellery retailer Harry Winston, said earlier this month rough diamond prices have fallen 15% this year and described the outlook for the remainder of the year as "pretty chaotic."

Companies like Petra and Gem Diamonds can adjust their capital expansion plans by postponing spending, Mr Kilalea said.

"For the larger players deferring sales is an option; for smaller companies this is more difficult given project funding," he said.

seccombea@bdfm.co.za