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By Bloomberg

Diamond prices suffered the biggest quarterly decline in more than two years as banks tightened credit to the industry, forcing traders, cutters and polishers to sell more inventory.

Rough diamond prices fell 6.9 percent in the last three months of 2014, the steepest drop since the second quarter of 2012, according to data from U.K.-based WWW International Diamond Consultants. That comes after the stones had previously resisted the slump in other commodities from oil to iron ore, with prices advancing about 30 percent in the past five years.

The diamond industry has been hit by a lending drought after KBC Groep NV said it’s winding down its Antwerp Diamond Bank unit, a source of finance for 80 years to the network of companies that trade, cut and polish diamonds in the Belgian port city. Other lenders, including ABN Amro Bank NV, have cut the proportion of gem purchases they were willing to finance amid fears that prices had risen too fast.

“The biggest thing really is the tightening liquidity,” said Ed Sterck, an analyst at Bank of Montreal. “If you’re a cutter or polisher of rough whose available liquidity is being reduced you’ve got to adjust your inventory. Selling inventory to increase cash has the knock on effect of increasing the supply of polished diamonds.”

The midstream diamond industry, which buys rough stones from mining companies and sells polished gems to jewelry retailers, is dominated by family owned firms that crisscross the globe from trading hubs in Antwerp, Mumbai, New York and Tel Aviv. These firms depend heavily on credit to purchase the rough stones that can take many months to sell as polished jewels.

Winding Down

KBC is winding down the Antwerp Diamond Bank, or ADB, after a sale to China’s Yinren Group collapsed in September. The bank was forced to sell the unit as part of conditions imposed by the European Commission for receiving state aid in 2008 and 2009. ADB accounted for more than 10 percent of the $15 billion diamond-finance market and extended credit to about one-third of the city’s gem merchants.

While the slump in prices pared earlier gains, rough diamonds were little changed last year, avoiding the trauma that has hit oil and iron ore, which tumbled 46 percent and 47 percent respectively. Rough Diamond prices have gained in five of the last six years, underpinned by tight supply and the burgeoning middle class in China and India.

“I suspect it will be relatively temporary blip,” said Sterck. “It could be a six-month time frame unless we see further reductions in liquidity.”

Diamond output fell to about 146 million carats last year from a 2006 peak of 176 million carats as the industry faces a dearth of new projects.

“Diamond prices, even with the current pullback, are at historically elevated levels, and at levels where producers are expected to make attractive returns,” said Sterck.