Rough Diamond Market
from the
Mining & Exploration: Diamond Exploration in Canada Forum
SUBJECT: Rough Diamond Market Posted By: Troy_McClure
Posted Time: 7/17/03 22:55 EST
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<Feature Story
Date : July 18, 2003
A Review Of The World?s Rough Diamond Market.
Written by James Picton, one of the world?s leading diamond analysts, on behalf of UK stockbrokers W.H.Ireland. It is a preface to a report on several junior diamond companies which he visited on a trip to Africa in May and June. This report will be published by Minesite at a later date.
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In the short term the rough diamond market is enjoying a remarkably good year given sluggish economies and still uncertain stock markets. There are several reasons for this. First, an excess of manufacturing capacity in the diamond pipeline prompting factories to buy more rough than they need in order to keep workforces busy. Second, there is a perception amongst diamantaires that there is a growing shortage of rough, particularly in the +2 carat, fine, large gem categories. They are, therefore, happy to hold stock, the more so because interest rates are at up to fifty year lows in many countries.
This trend has been further enhanced by three rough diamond price increases so far this year by De Beers?Diamond Trading Company and rumours of a fourth. This naturally prompts a desire to buy early. Doubled industry advertising expenditure, as a percentage of revenues, from a low base, may also be playing a part, as will De Beers' "Supplier of Choice" programme which has excluded 30 former clients who will be left scrambling for major sources of rough.
In the meantime DTC sales should remain at around the high level of 2002 when they exceeded US$5 billion and there is no expectation if a boost to supplies apart from the Diavik kimberlite mine in Canada. To be sure, thereare some small increases ahead (eg in Angola) but nothing remotely of the scope of Diavik which should be some US$550 million a year, or more, at full output. Big kimberlites can take five to ten years to bring into production,depending on infrastructure, mining laws and other considerations in the host countries. For example, Ekati took seven years from point of commercial discovery to production and Diavik nine years.
It will therefore take many years for world rough diamond production to rise by the 50 per cent increase (from US$8bn in 2002) postulated by De Beers for demand over the next ten years: It would take the equivalent of eight Diaviks which is quite impossible.
Supply
The statistics for diamond supply in 2002 are quite straightforward with Botswana reported to have 29 per cent by value of the market, followed by Russia with 21 per cent and Angola and South Africa contributing 10 per cent each. It is worth noting, however, that Debswana, the 50:50 JV between De Beers and the Botswana government, reported an increase in carats recovered and "sold" from 26 million to 28 million with a million carats each coming from the Jwaneng and Orapa mines. But De Beers claims a production value figure for Botswana of US$1.8 billion in 2002 compared with US$2.3 billion in 2001 which is a fall of 22 per cent. This implies that the average carat value fell from US$87 in 2001.to US$63 in 2002 which is highly unlikely and suggests some "sales" to Debswana at cost, with the stones being stockpiled by Debswana off the De Beers balance sheet. At full selling value the 2002 production would have at least
matched that of 2001.
There are good reasons for this stock accrual by Debswana at a time when De Beers has been reducing its stockpile. For a start the DeBeers mines in South Africa are 100 per cnet owned and therefore all their profits (enhanced by sales from stock) flow to the bottom line and help fully to pay off the Oppenheimer bank debt taken out to secure the family's 40 per cent stake in De Beers. Meanwhile, only half the profits from Debswana pass to De Beers. De Beers can only pay dividends to shareholders (Anglo 45%, Oppenheimers 40% and the Botswana government 15%) once that debt has been paid down to a certain level. Hence it makes sense to take super - profits in De Beers at the short term expense of Debswana.
As already pointed out the Diavik mine in Canada, which started earlier this year, is by far the largest single addition to world rough diamond supplies and it should eventually be producing around US$550 million per annum. Other notable, though smaller, operations are Trans Hex's two alluvial deposits in Angola (some US$100m at peak output) and SouthernEra's Camafuca kimberlite - also in Angola - which should do about US$50m when it gets going. There are a few others, smaller still, such as Camatui - again in Angola. That's about US$700m-US$750m of increased rough diamond production during the next couple of years.
It would need quite a stretch and some imagination to push the increase up to US$1 billion in the foreseeable future, and major new kimberlites usually take between seven and nine years to reach production from the point of commercial discovery (as at Ekati and Diavik respectively) - and even longer to reach full output. Of the big hitters in the world Botswana really is at full output, with the new Damtshaa operation being very small. Russia will likely struggle to maintain output despite long heralded expansion plans. Jubilee, its newest mine, has been problematic from the outset - it is not another Mir or Udachnaya. Angola and Canada have been discussed. There is no significant new production coming from South Africa, Namibia, Australia or elsewhere.
When we say "significant new production" we mean at least US$100 million a year - and even that would only add aper cent or so to a world production base of US$8bn.However, for the sake of interest, let's assume that world rough diamond production does manage to increase by US$1bn within two or three years, but that any major additional production beyond that is up to a decade away. That would be a 12.5 per cent rise on 2002's aforementioned US$8 billion, while the more likely US$700-US$750 million rise in the same period would represent a 9 per cent increment. Neither number is large, particularly when set against likely demand trends.
Demand
In 2002 demand for diamonds in their rough form approximated US$9 billionn, indicating destocking by De Beers and Russia's Alrosa of US$1 billion . This
figure for rough demand should not be confused with the much larger one for retail sales of diamond jewellery (in its cut, polished and set form) of US$56 billionn in 2002. Sales by the DTC are set to exceed US$5bn this year, as they did in 2002. This really explains why demand for rough is strong. Despite sluggish economies and uncertain
stockmarkets there is already a shortage of ongoing rough supplies which have only been met from stock.
This heavy destocking by the world's two largest producers is coming to an end. De Beers has less than US$2 billion of stock left which is equivalent to less than five months sales and, in any event, is concentrated in those categories where demand is lowest. Alrosa itself destocked by US$73 million in 2002 with a further US$187 million coming from the Russian Treasury and the the Russian State Depository for precious metals and gems. So world rough demand is already ahead of rough production, and the only two producers holding any significant stocks are running out of them. It is therefore really unnecessary to go into long term demand forecasts.
Conclusion
In our view the shortfall in ongoing supplies of rough can only be met by further price rises as stocks in the hands of the two main producers decline to working levels only, and as economies and stockmarkets gradually gain more confidence. The medium to long term outlook for rough diamond prices is therefore very good.>
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