Increased diamond production

Avi Krawitz

Diamond mining companies are slowly raising their production levels even as many of  the major mines continue to face operational challenges. Theoretically, the trend should  ease cutters’ concerns about prevailing high rough prices and apparent supply shortages.  But it’s not clear that it will.

It hasn’t been an easy year for diamond cutters. In fact, many sightholders have  downplayed the value of their De Beers supply given the losses they incurred during   2012.

Their anxieties continued in the first quarter of 2013 as rough markets have been  worryingly upbeat. Price increases have been driven by speculative trading on the  secondary market.

As a result, diamond manufacturers have been caught between rough price hikes of  about 7 percent in the first four months of the year, according to Rapaport estimates, and  relatively stable polished prices. As of April 25, the RapNet Diamond Index (RAPI™) for   1-carat certified diamonds was up just 0.5 percent from the beginning of the year.  Manufacturing levels reflect a similar cautious outlook for the polished market.

If rough and polished markets are out of sync, a prospective increase in rough production  should offer some remedy to the market. Greater rough supply would ease the  competition for goods as well as dealer expectation that prices will rise in the short term.  It would also result in larger polished supply, alleviating the shortages in certain popular  categories.

Meanwhile, sightholder applications for De Beers supply for the year ahead are about 20  percent below those made a year ago. Are they downplaying their expectations to avoid  the supply shortfalls they experienced in the past year  Given the recent market  volatility, it is perhaps better to err on the side of caution in planning the year ahead.

In contrast, the recent first quarter production data published by the major mining  companies suggest that supply should improve in the months ahead. Rapaport estimates  that global diamond production by volume rose approximately 4 percent year on year in  the first quarter of 2013.

De Beers output increased 3 percent year on year to 6.364 million carats during the  quarter. Rio Tinto’s diamond production fell 4 percent to 3.2 million carats while the  combination of Dominion Diamond Corp’s production and at the Ekati mine – which was  owned by BHP Billiton during the period but has since been acquired by Dominion – rose   2 percent to 1.1 million carats.  ALROSA has yet to publish its first quarter figures and  were not available for comment at press time. One expects the Russian company’s  output to be stable as it has been in the past few years.

The production increases come despite operational challenges at a number of mines,  including at De Beers three flagship operations. At Orapa in Botswana, lower production  due to plant maintenance was offset by improved grades at the mine. Jwaneng continues  to recover from the impact of a slope failure in June 2012 and excessive rainfall at the  end of the year, while wet weather also disrupted production at the Venetia mine in South  Africa. Production at Rio Tinto’s Argyle mine continues to vary as the project shifts to  underground mining, with similar issues faced at its Diavik operation.

These issues should continue to stabilize through 2013, raising expectations for higher  production.

However, the cutting sector should not get ahead of itself in expecting a sudden influx of  rough supply. The mining companies have set a new normal level of global diamond  mining since the 2008 downturn, one that is significantly lower than before the crisis.

The result is that annual global production fell from its peak of 168.2 million carats in 2007  to 122.4 million carats in 2011, according to the most up-to-date Kimberley Process (KP)  data. Rapaport estimates that production fell 2 percent to about 120 million carats in 2012  and will stay at around that level in 2013.

Rather the increases will be gradual and one expects there to be a reasonable level of  supply given the current state of the diamond market. In counting the carats being  brought to market, if reported shortages prevail — and in fact are real — various factors  could be at play. Either the mining companies are holding back goods or selling outside  the market — as ALROSA sold to the Russian treasury (Gokhran) last year — or they  are selling at unrealistic prices so that there is not enough supply being sold at the right  price.

It is not clear whether either of these scenarios is currently prevailing in the market.  Hopefully, any reports of rough supply shortages are a function of high prices. There is  demand for every diamond at a price, and there may be rough prices that manufacturers  are just not willing to pay.

As manufacturers maintain a cautious outlook for the polished market, there should be  sufficient rough supply at current levels of production. While mining companies hint at a  prospective increase in production for the rest of the year, there’s no real reason to  suggest rough prices will go up further. If they do, it is up to manufacturers to reject  supply and maintain equilibrium in the market. For the extra rough production means  precious little if the goods are polished at a loss.

Source Rapaport