Here is how fast things can change in the diamond industry.

– In March 2014, Anglo American’s CEO Mark Cutifani, then a year into the job, publicly fretted his company had overpaid for De Beers in 2011. “The acquisition is not delivering what we would expect it to deliver,” he said, adding that he wants De Beers to attain a 15 percent return on capital employed (ROCE).

– By the end of 2014, the commodity-sector malaise had dealt Anglo a heavy blow, and it reported a $2.51 billion loss for the year. But De Beers was, as countless headlines put it, the jewel in its crown. Its profits soared 33 percent, and it was the second-largest contributor to Anglo’s profits that year. It even hit the magic 15 percent ROCE number, outshining the rest of Anglo. As 2015 started, executives predicted further rough price increases once the “indigestion” cleared out of the pipeline.

– Now it’s the end of 2015, and the bottom has fallen out of the diamond business. Analyst Chaim Even-Zohar estimates that De Beers’ second-half sales will likely come in at $1.2 billion–$1.3 billion, a 30-year low. In the last 40 years of diamond history, there has never been such a dramatic fall from first-half sales to the second half, he says.

This week, Martin Rapaport sent out a mass email urging De Beers CEO Philippe Mellier—the first outsider to head the company—to resign. He even suggested going over Mellier’s head and emailing Cutifani, urging readers to let him know “about the intolerable situation regarding profits and liquidity in the diamond trade.”

How did all this happen?

The obvious culprit is the economic problems with Asia and generally lackluster world economy. But with squeezed profits and continuing problems with bank financing (as well as several severely over-leveraged companies), the diamond market could not absorb the hit like it would normally. For De Beers’ sparkling results, and the businesses of some major players, were built on sand.

Under Mellier, the company was playing a different game than the industry was used to. Some sightholders seemed to believe that if they just could convince the company that they really were hurting, that this wasn’t garden-variety wolf-crying, profits would return. But with all the pressure from Anglo and producer partners, De Beers had little incentive to stop squeezing clients’ margins as long as they kept buying. In addition, as Rapaport writes, several companies were playing their own game, which involved increasing bank financing rather than profits. Neither strategy was sustainable.

In January, Mellier gave JCK an interview where he sounded cavalier about sightholder profits. His comments weren’t surprising; he said similar things in private meetings. But seeing them in black-and-white jolted clients. When De Beers announced its great results one month later, that just rubbed salt in the wound. Even so, it took until the summer—and further problems in Asia—for a full-scale revolt to occur. 

As the crisis grew in severity, De Beers has been rummaging through its old toolbox to prop up the market. It (reportedly) has offered special deals on some items. It’s shelling out for generic advertising. Little has helped. The diamond industry runs on confidence. That has vanished.

There is a lot of talk now whether to “blame” De Beers for the current mess. It’s true that other miners increased profits on the backs of their clients. Further, as Mellier noted, perhaps too bluntly, buyers ultimately have responsibility for what they purchase, and the prices they pay. Even so, it is hard to view any strategy that produces the lowest half-year sales in 30 years and drives customers to the brink of bankruptcy as sound or smart. Yes, the market has issues, but De Beers has to deal with the industry that exists, not the one that it wishes. Perhaps a more accurate reading of the trade could have prevented this.

At this point, though, the problems transcend one company, and one person. It’s not certain whether producers could change course even if they wanted to. One frustrating aspect of this crisis is that it presents few obvious solutions.

Rapaport and others have said the producers need to lower rough prices, to reflect the weak market. That may still happen. But some worry a too-sharp decline could force bankruptcies without necessarily improving manufacturer profitability, as polished prices might tumble down with them. The problem is also structural. The retail space is overcrowded and competitive, and that hurts store margins. So the retailers then squeeze the profits of diamond manufacturers, another segment with over-capacity. Only diamond miners, a still-select group, have traditionally faced little competition and minimal margin pressure. But now the industry’s issues have trickled up to them.

We may be seeing, once again, that the business never adjusted to the end of De Beers’ monopoly. The trade is used to stable or rising prices. For a time, everyone believed the forecast supply-demand differential would keep that going. But the end of the single-channel system and the growing importance of tenders has introduced an element of volatility that the industry is not equipped to deal with. 

The best hope is that the holiday will come in strong, and manufacturers will be so hungry for rough that demand will spike in January. Yet even if the market comes back—and given that the world has taken a scary turn, that is far from certain—we don’t know if industry confidence will return with it. Will manufacturers regain confidence that miners will give them a fair shake? Will banks have faith in industry financing? Will traders trust each other, amid reports of bankruptcies and incessant scandals?

When Mellier came in as CEO, he talked about the need for more industry leadership and long-term thinking. Yet both have been sorely lacking over the last few years, with too many players seemingly unconcerned about how their actions affect the rest of the pipeline. We have lately seen more industry-wide attempts to increase demand and stop the bleeding. It may still take a long time before the industry emerges from this largely self-created mess. 

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