Page last updated at 10:27 GMT, Friday, 24 July 2009 11:27 UK

De Beers profits lose their gleam

People sorting diamonds in Botswana
The Republic of Botswana is a big shareholder in De Beers

Profits at De Beers, the world's biggest diamond producer, have slumped in the "most difficult" economic environment in decades.

In the first six months of 2009, it made a profit of $3m (£1.8m), down from $316m a year earlier.

Diamonds may - as the song goes - be forever, but they have proved to be as vulnerable to the recession as other, less enduring, consumer goods.

Demand is weak in the US, but many in China and India are still buying gems.

Production cut

As consumers have conserved their cash for more mundane expenditures, De Beers has cut its production.

In the first six months of this year, production was 73% lower than last year at 6.6 million carats - the weight of a diamond is expressed in carats, with one carat equivalent to 0.2 grams.

De Beers will produce roughly half the amount of carats in 2009 that it did in 2008.

Mines in South Africa, Canada, Botswana and Namibia have all taken production holidays as demand fell.

This has helped the company reduce inventories of rough diamonds in cutting centres by 30%. It has also shrunk its global workforce by 23%.

This May 6, 2009 file photo shows a Sotheby"s employee displaying an aquamarine and diamond necklace, by Cartier, 1912, during an auction press preview at Sotheby"s in Geneva, Switzerland.
Diamonds may last forever, but consumers are reluctant to buy

A future sparkle?

While its profit statement may make gloomy reading, De Beers says it has reason for optimism. The rate of decline has slowed so the second half should be better, it said.

Diamond sales, it points out, typically do well after recessions. It pointed to "significant price growth seen in almost every recovery period dating back to the 1970s".

While diamond prices have fallen, there have been no major diamond discoveries in more than a decade, a fact which should support prices.

We have had to make our prices fairly competitive to win the sales
Joe Boll, JP Diamonds

"With worldwide reserves at an all-time low, diamonds will become more scarce," it said. "As demand grows in emerging markets, it is likely that sales will outpace forecast diamond supply for many years to come."

Hidden gems

But, as things stand, there is "still poor demand for diamond jewellery in major markets," wrote Des Kilalea, an industry analyst at RBC Capital Markets, in a research note earlier this week.

"Diamond jewellery sales in all markets but China and the Middle East remain under pressure. This trend is highlighted by poor department store revenues in the US (where 45% of all diamond jewellery is sold) with June's sales down 10%, according to government figures, " he wrote.

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