This gloomy conclusion comes from RBC Capital Markets Equity Research saying “the past month has seen a flurry of negative news for diamonds. The most recent was last week’s HP Billiton Antwerp rough tender where prices, according to diamantaires, fell as much as 40%. This comes after a small tender in South Africa by Etruscan Diamonds where prices were also markedly lower and the recent Letseng tender which saw prices well off the average $2,500/ct of the six months to June 2008. “While diamond prices are expected to respond to lower demand and tighter liquidity (WWW International forecast at RBC’s Diamond Conference in Toronto last March that rough prices needed to soften as they had strayed from polished), some of the prices received have been distorted by low volumes. Not only have volumes been reduced by a reluctance on the part of diamantaires to hold inventory, but October’s Indian and Jewish holidays limited attendance at tenders.

“Bank lending in cutting centres remains a concern with total debt levels in excess of $15 billion. There have been rumours of an Indian bank asking customers to reduce their indebtedness which, if true, would have meant less money to buy at recent at recent tenders and possibly some selling of rough and polished to repay the bank. A recovery in rough and polished prices needs the banks to extend additional credit; this is not likely in the short term in RBC Capital Markets’ view.

“Police raids on the offices of some Antwerp diamond companies and import agents has also contributed to lower rough prices and disappointing attendances at tenders. The police are apparently investigating alleged transfer pricing irregularities.

“Major producers are responding to slowing demand for rough diamonds by restricting production. De Beers, which would attract EU Competition attention if built large inventories to support rough prices, would likely use quiet market conditions to do necessary maintenance at its mines. This may not mean much attrition from the 51.1 Mct produced last year as Snap Lake has come on stream, but major mines such as Venetia have been running at above nameplate capacity and are likely to produce less. Russian producer Alrosa also indicated it might materially reduce rough supplies to support prices.

RBC’s investment conclusion is: “Diamond producers sell the raw materials for luxury goods. Just as the likes of upmarket auto producer Bentley has cut its output, so will makers of diamond jewellery until consumer confidence and wealth start recovering. The result will be slower demand for diamonds and erosion in prices in some areas. The impact on listed diamond companies will likely be felt mainly in those which are exploring or do not have funding required to complete developments.”