By  on February 2, 2009

LONDON — With luxury watch and jewelry sales falling and financial markets freezing up, De Beers finds itself with a stash of surplus diamonds.

As a result, the Diamond Trading Co., De Beers’ commercial arm, may go outside its tight circle of elite clients, known as sightholders, to sell the extra stock.

De Beers’ sightholders are a group of 78 cutting and polishing companies worldwide that have first “sight” — or option to buy — of De Beers’ rough diamonds. The sights take place 10 times a year, and before each event, these clients put in requests for specific types of diamonds.

Last month, the company cut its rough diamond offer to sightholders by 50 percent, and is likely to do the same for sight appointments this month and March and April, a DTC spokeswoman said, adding that the surplus was the result of weakened demand from the sightholders.

“The last two sights of 2008 were smaller than usual, and this trend continued into the January sight,” she said.

The drop in demand has come mainly from lower sales at retail as consumers cut discretionary spending, and is augmented by low liquidity among the sightholders and high levels of inventory in the cutting centers, the spokeswoman said.

She said January was the first time she could remember that De Beers has been forced to reduce its rough diamond offer to the sightholders.

“Until last year, the demand had been fantastic,” the spokeswoman said. “But unprecedented times call for unprecedented action.”

De Beers’ decision comes as jewelers on both sides of the Atlantic report dismal sales. Richemont, the world’s largest luxury watch and jewelry holding company, with brands including Cartier and Van Cleef & Arpels, said it was facing the toughest market conditions since its formation 20 years ago. Sales for the third quarter — the critical October-December run-up to Christmas — fell 7.8 percent to 1.55 billion euros, or $1.92 billion at current exchange.

Cartier, the main engine behind revenue growth, saw sales decline, although the company does not break out specific figures for the brands. Cartier said it planned to scale back investment at its Villars-sur-Glâne factory in western Switzerland that produces watch boxes. It will put 180 of the 200-member staff on part-time contracts at 80 percent of their salaries.

A spokesman for Cartier, which also reported a drop in third-quarter sales, said the decision was made because of a slowdown in demand.

Late last year, as the credit crunch began to widen, the Diamond Trading Co. more than doubled its U.S. consumer marketing budget for the Christmas period, taking out 128 full-page ads in national and local newspapers and launching a TV campaign. The company also unveiled new research showing that diamond jewelry would be the number-one gift for the holidays in 2008 and asserting the majority of women would prefer to receive one fabulous gift with enduring value, rather than several smaller ones. Despite those efforts, demand for rough diamonds continued to slow.

At last month’s annual cocktail party for sightholders, DTC managing director Varda Shine said, “The DTC is exploring options for bringing surplus goods to the market once every avenue of sightholder demand has been satisfied.”

The spokeswoman added that the possibility of turning to nonsightholders in the future “is still under consideration.”

An industry source said the DTC would not make any changes before or immediately after the February sight, but the spokeswoman would not confirm or deny the information. If the DTC decides to go ahead, the spokeswoman said the organization would make sure “every possible area of the sightholders’ demand has been met,” adding, “their needs remain our number-one priority.”

The rough diamond market at large appears eager to snap up De Beers’ surplus. Avi Paz, president of the World Federation of Diamond Bourses, which oversees trading in rough and polished stones, said, “It could bring some much-needed relief to the secondary market. It will be good for the industry. Times are tough and even with the additional rough available, we must proceed with caution. But the increased availability of rough provides us with more options, and that is a very good thing.”

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