Diamond activity tends to slow down in the summer as market participants take time off for vacations, but activity in July and into August is considered unseasonably slow this year. Both the rough and polished markets are weak.

High rough diamond prices in a market environment where polished prices were softening created a situation this year whereby margins came under extreme, and by many accounts unsustainable, pressure. As a result, as demand and trading slumped, inventories built up.

In July, the RapNet Diamond Index (RAPI) for 1- carat certified diamonds fell 5.4 percent. For the first seven months of 2012 the RAPI for 1-carat diamonds declined 8.8 percent, which represents a decline of over 18 percent when compared to the same period last year.

Similar declines are also seen in other areas of the RAPI.

At De Beers Diamond Trading Company, prices were reduced by 2-3 percent, a discouraging decline. Sightholders rejected an estimated 20 percent of their allocations, despite the option for payment deferral. Meanwhile, Alrosa continued to resist lowering its rough prices in July and about 30 percent of its allocations were refused.

In this value-conscious market, where buyers are prioritizing lower prices, fancy diamonds are performing well. However, large fancy diamonds, though currently stable, are showing signs of weakness. Cushion diamonds are in short supply, making them hot items. But the round diamond market is weak both in terms of price and demand.

Generally, the diamond market recovers from the summer slowdown in September. The Mumbai show, from August 23-27, will be looked to by many as a gauge of what is to come.