Interesting read and projections!
Diamond prices are forecast to rise
Bloomberg News Tuesday, November 16, 2004
LONDON De Beers, the world's largest seller of diamonds, said on Monday that it expected their prices to rise as production falls short of demand in the market for diamond jewelry.
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The company, based in Johannesburg, has raised diamond prices three times this year. Mining companies led by De Beers and Rio Tinto Group, which is based in London, have accelerated their search for stones after sales of jewelry rose 10 percent this year, said Chaim Even-Zohar, an analyst at Tacy, a diamond industry consulting firm.
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A De Beers spokeswoman, Lynette Horil, said that "we do not believe there is a diamond shortage, only a diamond opportunity, one that will deliver sustainable price growth."
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Diamond producers, government officials, jewelers and merchants are meeting Monday and Tuesday in Antwerp, Belgium, the world's largest center for cutting and polishing gems, to discuss the industry outlook.
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New projects like the Diavik mine in Canada, which is operated by Rio Tinto, may not be enough to satisfy growth in demand, with global sales forecast to rise about 50 percent to $14 billion by 2010.
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"Somewhere around 2007 or 2008, we'll have diamond shortages," said Even-Zohar, the Tacy analyst. "We'll have to find new mines."
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The Diavik project will produce as many as 9 million carats a year until at least 2010, Keith Johnson, head of the company's diamond unit, said last month at a presentation to investors in London.
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But even with Diavik, Johnson said, "The rough diamond market will be undersupplied in 2004. There simply won't be enough rough diamonds mined this year to meet demand."
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The United States is the biggest market for diamond jewelry, with a 55 percent share, followed by Japan. U.S. economic growth, estimated at 3.9 percent this year by Morgan Stanley, is raising consumers' incomes and spurring jewelry sales, Even-Zohar said. The global market is valued at $57 billion.
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Retailers may not be able to pass on to consumers all of their higher diamond costs. Tiffany, the largest U.S. luxury jewelry chain, said last week that third-quarter net income fell 26 percent, in part because higher gem prices trimmed margins.
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Tim Jackson, a spokesman for Signet Group, the London-based company that owns the Kay Jewelers and H.Samuel chains, said the stores have raised their prices due to increased gold and diamond costs.
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Martin Rapaport, chairman of Rapaport Research, a consultancy based in Glen Allen, Virginia, said at a conference in New York last month that "large retailers will have to come to terms with the fact that diamonds are a natural product with inherent supply limitations."
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De Beers, founded in 1888, handles three of every five uncut diamonds.
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To increase supply, De Beers has said, it plans to spend $1.35 billion through 2010 on five diamond projects in countries including Botswana and Canada and is exploring in Russia and Brazil. Four other projects under review would cost an estimated $2.4 billion and produce as many as 139 million carats a year, it said.
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De Beers's diamond mines in Botswana, South Africa and Namibia will produce 45.2 million carats this year, less than the 47 million that had been expected, the company said. Anglo American, the world's second-largest mining company, and the Oppenheimer family of South Africa each own 45 percent stakes in De Beers. Botswana's government holds the remaining 10 percent.
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BHP Billiton, the world's largest mining company, made a profit of 56 cents on every $1 of diamond sales from its Ekati mine, in Canada, in the fiscal year that ended on June 30.
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"It's a hugely cash-generative business," said Charles Kernot, an analyst at Seymour Pierce in London.
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Bringing a mine into production takes 8 to 10 years, Even-Zohar said. Diamond-mining companies are lagging behind demand in part because of a lack of investment in the past decade.
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"Diamond prices in the 1990s were the worst they have been since the 1930s, because of recession in the U.S. and the Asian financial crisis," said James Picton, a consultant to W.H. Ireland Group, a British stockbroker.
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Diamond deposits also are getting harder to find, companies say. African Diamonds, based in Dublin, is looking in Guinea and Sierra Leone for kimberlites, volcanic rock formations that may contain gems. Of the 5,400 such formations known worldwide, only about 50 are economically viable, Picton estimated.
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"What is difficult is not diamond mining but diamond exploration," said John Teeling, the chairman of African Diamonds.
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BHP Billiton is spending $146 million to dig at Ekati, 200 kilometers, or 120 miles, south of the Arctic Circle, after saying on Oct. 21 that its diamond sales plunged 36 percent in the three months through September.
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The company may invest $60 million in Angola as part of a joint venture with partner Petra Diamonds, which is based in Johannesburg. BHP Billiton may also invest in Russia, a spokesman for the Russian Industry and Energy Ministry said on Oct. 5.
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