BHP Price Drop: The Canary in the (Diamond) Mine?

In trade lore, when prices at the BHP tender sank some 30 percent on the onset of the financial crisis in October 2008, that was a warning there was real trouble ahead.

And so this week, the prices at BHP’s regular rough auctions fell some 18 percent, according to trade sources. And while just about all of their lots sold, a few didn’t. 

Because BHP is the only big player with a consistent, market-based sales mechanism, the company’s auctions are widely watched as a trade indicator. So with this news, some worry they once again portend rough seas.

We’ll wait and see, but the people I spoke to warn against reading too much into these results. First off, we are obviously coming off a period of incredible price growth. BHP’s prices have risen about 50 percent so far this year; De Beers’, at least 35 percent.

Now we all know the reason for this: The fundamentals of the diamond industry are strong—with no new sources of diamonds discovered in over a decade (other than the very problematic Marange), and two major new markets coming on stream, the simple law of supply and demand decrees that diamond prices will rise. But everyone might know those fundamentals too well. For all the things going in the industry’s favor, diamonds don’t have an unlimited upside. Nothing does. It’s possible to pay too much for an even attractive commodity. So we have this correction, which even some dealers think was a while in the offing.

Even so, the picture on the ground hasn’t changed much. The big question mark is the U.S. economy, but the odds still seem (for now) to be against a double dip. India and China continue to rush full-steam ahead, and they are the ones that are really driving this bus.

So, the fundamentals in favor of diamond price growth are still there, just as they are with gold. They are just not enough to drive prices perpetually upward.

JCK News Director