Anglo American, one of three De Beers shareholders, reported this week that diamond production had dropped by over 90%.

The production drop number is for the first three months of 2009 compared to 2008, and is measured in diamond weight produced at the mines.  For the record, the relevant numbers are: 1.08 million carats for Q1 2009, compared with 11.77 million carats for Q1 2008.

Rough diamonds; photo by DTC

On the face of it, this is an astonishing drop, and it would seem to signal that demand for diamonds has fallen off a cliff in recent months.  So does that mean that consumers have almost completely stopped buying diamonds?

No it does not.  Consumers are still buying diamond jewellery: still getting engaged, still having anniversaries and other celebrations, and still marking those occasions with diamonds — a gift that is, almost literally, timeless: a diamond is forever, as they say at De Beers and indeed throughout the diamond world.

So what’s going on?  Well, consumer sales of diamond jewellery did fall away to some extent as the recession took hold around the world, along with demand for lots of other things, especially in the luxury sector.

As a result, jewellers didn’t need to restock as much or as early as ‘usual’, and this effect worked its way back up the complex diamond industry ‘pipeline’, in the same way that a drop in new car sales from at retail dealers led to a complete shutdown in some car manufacturing plants around the world.

In addition, the diamond business was probably overstocked in any case (again, like the car industry), and so some sort of correction was probably due anyway, even without a recession of this depth.  Industry finances were in pretty poor shape too, and the banks that finance the industry, like almost all banks, have been tightening up their lending criteria and refusing to finance purchases of diamonds that nobody wants to buy.

So De Beers, along with other diamond mining companies (and contrary to popular understanding, there are some other diamond mining companies) have found that there has been very little demand for their diamonds over the last few months.  The drop in demand came along at the same time as the annual Christmas shutdown (and Southern African summer holiday) at the diamond mines.

For De Beers, looking to cut costs to match this reduced demand, the sensible thing to do was to extend the Christmas/summer shutdown at their diamond mines in Botswana and elsewhere, and also to introduce other measures such as reducing the number of shifts worked. In the meantime, De Beers has been able to supply its clients from inventories that it built up during 2008.  Hence the need for almost no newly mined diamonds during the first quarter of 2009.

Things are slowly returning to normal now, and De Beers report that their diamond mines in Botswana (which represented 65% of De Beers production in 2008) recommenced production in April.