The market for diamonds is totally messed up right now

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rio tinto pink red diamond

Reuters

Josephine Johnson, manager of Rio Tinto's Argyle Pink Diamonds, poses with the Argyle 'Phoenix' red diamond, one of the world's rarest gems, during a private viewing at a Sydney hotel May 17, 2013.

It's a good time to talk about how messed up the world's diamond supply dynamics are right now.

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To put it most simply: The world has more diamonds, and fewer people who want diamonds, and that's suppressing the price and hurting diamond miners.

On Thursday, the world's second largest mining company, Rio Tinto, reported that in 2015, it earned half of what it earned in 2014, and changed its dividend policy so that they won't increase automatically.

The commodities the Rio Tinto produces have been getting crushed for about a year now. And lest you think that only goes for the boring, practical stuff - like iron ore - know that the diamond industry the world once knew, doesn't exist anymore either.

"Industry rough diamond prices were weaker, driven by lower demand from India and China, higher rough and polished diamond inventory, and lower trade manufacturing margins," the company said in its earnings report.

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At the same time demand was declining, production was ramped up.

"Diamonds production increased 25 per cent year-on-year, with higher volumes at Argyle from the continued ramp-up of production from the underground mine offsetting lower carats recovered at Diavik, attributable to processing plant pauses in the fourth quarter and the absence of stockpiled ore which was processed in the first half of 2014," the company said.

This resulted in a 30% decline in the revenue brought in by Rio Tinto's diamonds and minerals group, according to the company.

We should note that Rio Tinto owns the largest diamond mine in the world by carat production - Diavik mine in Canada.

diavik diamond mine

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Diavik diamond mine

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Bit of a surprise

This lack of demand came as a bit of a surprise in 2015. Commodities firm Anglo American, which owns 85% of De Beers, was counting on diamonds to help it through a rough patch in other commodities. In the first half of the year diamonds made up over a third of its earnings.

But in the second half of 2015 customers really started to reject the prices De Beers was trying to charge, especially in China and other parts of Asia, according to Bloomberg.

You can blame it on President Xi Jinping's infamous corruption crackdown - which has made Chinese people think twice about buying flashy things - and the country's overall slowdown. Either way, in this environment, increased supply is taking prices even lower.

One way people think that the whole industry will move out of this phase is through mergers and acquisitions. The stronger, bigger players, will buy the weaker, smaller companies and consolidate.

But Rio Tinto's CEO Sam Walsh told Bloomberg he's not convinced even that will do the trick.

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"Every time I look at financial forecasts and so on... I think 'oh boy the others must be doing it tough'... I think we'll see distressed players not only at the junior and mid tier, but also in the majors."" he said.

Regardless, he's not buying now. M&A deals are just not attractive.

"At this stage there's nothing out there in the market that interests us, but we are holding our powder dry," he said.

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