The Rough Reality of 2012‎

Avi Krawitz

The 2011 global production data published by the Kimberley Process (KP) last week ‎presented a vastly different market scenario than what is the reality today. Then again, a ‎very different atmosphere has engulfed the industry in the past seven months, ‎influencing a drop in demand for rough and its resulting polished.

While the market peaked in July 2011, it has since been on a steady decline, causing the ‎mining companies to curb their supply in one way or another. In the case of the major ‎rough suppliers, they have managed to hold back supply by maintaining steady prices in ‎a depressed market.‎ Either way, the growth in production and prices seen in 2011 is not expected to be ‎repeated in 2012.   ‎

The KP data showed that the value of global diamond production rose 26 percent to ‎‎$14.41 billion in 2011 as higher rough prices compensated for the lower quantities mined. ‎Production by volume fell 3 percent to 123.99 million carats, while the average price ‎increased 31 percent to $116.19 per carat. In context, the diamond mining sector has maintained lower but relatively steady levels of ‎production since the economic crisis of September 2008. Meanwhile, the value of ‎production has increased and surpassed 2008’s peak levels already in 2010 (see Figure ‎‎1). A strong and somewhat speculative market in the first half of 2011 further catapulted ‎prices skyward.

Figure 1‎ : Based on data published by the Kimberley Process

The Rankings ‎

As in previous years, Botswana was the largest diamond producer by value while Russia ‎ranked as the largest producer by volume. This was in line with the respective earnings ‎posted by the two largest mining companies for the year whereby De Beers – which has ‎about two-thirds of its production mined in Botswana – had the highest revenue, while ‎Russia-based ALROSA mined more carats of diamonds. De Beers other main mining locations also featured strongly with Canada ranking as the ‎third largest producer country by value, South Africa fourth and Namibia listed in sixth ‎place (see Figure 2). Fifth place was occupied by Angola, where ALROSA owns one-‎third of the country’s largest mine, Catoca, and state-owned Endiama has a majority ‎stake in most diamond mines.

Other large-volume producers included Zimbabwe, with its Marange mines accounting ‎for the majority of the country’s low-value output, while Rio Tinto’s Argyle mine ‎accounted for the bulk of Australia’s diamond production. The Democratic Republic of ‎the Congo (DRC) ranked as the third largest producer by volume but its low-priced ‎diamonds kept the overall value of its production down.


Figure 2 : Based on data published by the Kimberley Process

Average Prices

The growth in the average price of production since 2008 has varied according to the ‎category of goods being mined, with the mid-to-higher priced production outpacing the ‎lower priced goods.

South Africa’s production, which had an average price of $211 per carat in 2011, is up ‎‎120 percent from 2008. Lesotho, with its high-value Letšeng mine, had an average price ‎of $1,602 per carat in 2011, which was 82 percent higher than 2008 levels, despite being ‎among the few countries to register a decrease in price in 2011. The average price of ‎Russia’s production, which stood at $76 per carat in 2011, was up by just 12 percent ‎since 2008 (see Figure 3).


Figure 3‎ : Based on data published by the Kimberley Process

Similar trends were seen in the manufacturing and trading centers as the global ‎consumption of diamonds — calculated as a function of production and rough imports ‎less exports –— rose 22 percent to $12.47 billion in 2011, while consumption by volume ‎fell 3 percent to 124.24 million carats. The consumption of rough diamonds in India, the ‎world’s largest cutting center, rose 22 percent by value to $12.48 billion, while by volume, ‎the country’s consumption fell 28 percent to 95.04 million carats (see Figure 4).

Israel, which serves as a higher-end manufacturing niche and a rough trading center, ‎saw its consumption rise significantly by both value and volume during the year. Import ‎and export activity also rose at other major hubs such as Belgium and the United Arab ‎Emirates (UAE), which were net exporters of rough diamonds in 2011.


Figure 4 : Based on data published by the Kimberley Process

The year 2011 was split into two halves with the first half being a period of strong growth ‎and speculative trading until the market turned in August. The rough market overheated ‎and cutting center liquidity dried up, particularly in India, because manufacturing costs ‎had increased with rough prices. Since August 2011, a steady downtrend has enveloped the diamond market which has ‎been evident in polished and rough prices, as well as in trading and production levels. But ‎while the lesson from the 2008 crisis to hedge the risk of a downturn by keeping lower ‎inventories was learned and implemented across the pipeline, it is one that has been ‎amplified in 2012.

Rapaport records show that the combined production by volume among the top five ‎mining companies that publish their data – ALROSA, De Beers, Rio Tinto, Petra ‎Diamonds and BHP Billiton – fell by 9 percent year on year in the first half of 2012 (see ‎Figure 5). These companies together accounted for about 65 percent of the KP total in ‎‎2011 and an estimated 80 percent to 85 percent by value.


Figure 5 : Based on data published by the respective companies and the Kimberley Process. ALROSA 2H 2012 production ‎includes Rapaport estimates for 2Q 2012.

The declines so far in 2012 are more pronounced than in previous years and one must ‎recognize that the current lower production in 2012 is not just a function of maintaining ‎output below pre-2008 levels. Rather, there has been a shift toward lower levels of ‎demand in a weak global economy.

The slump in demand has been evident in the trading centers where the volume of rough ‎being handled has dropped by significant amounts. Belgium’s rough imports and exports ‎by volume fell by 18 percent each in the first half of the year, according to data published ‎by the Antwerp World Diamond Centre (AWDC). Israel’s diamond controller reported that ‎rough imports were down 53 percent and its exports by 43 percent during that same ‎period.

Bucking the trend, India’s rough imports in fact rose 6 percent by volume in the half-year, ‎despite challenges facing its cutting sector (see Figure 6). Market observers there note ‎that managers are bringing goods to the factories as a means to keep them operating and ‎maintaining their workforce, as they are loath to lose workers as they did in 2008. In ‎addition, anecdotal evidence indicates that both rough and polished inventories in India ‎have increased this year as a result.‎


Figure 6‎ : Based on data published by: India’s Gem & Jewellery Export Promotion Council (GJEPC), Belgium’s Antwerp ‎World Diamond Centre (AWDC), Israel’s Ministry of Industry, Trade & Labor

More poignant to the market is that India’s polished trade has slumped as both domestic ‎and international demand has diminished. India’s polished exports by value fell 41 percent ‎year on year in the first half of 2012, while its polished imports fell 76 percent. Similar ‎declines were witnessed in other trading centers (see Figure 7). U.S. data shows that total ‎polished imports to the world’s largest consumer market is down 7 percent and exports ‎fell 4 percent during the same period.


Figure 7 : Based on data published by: India’s Gem & Jewellery Export Promotion Council (GJEPC), Belgium’s Antwerp ‎World Diamond Centre (AWDC), Israel’s Ministry of Industry, Trade & Labor, and the U.S. Commerce ‎Department.‎

Profit / Supply

Demand is down as the global recession has spread. The economic boom in the Far East ‎has slowed, while economies in the west remain sluggish at best. India’s fortunes have ‎turned as liquidity is tight in the manufacturing sector and the outlook for its retail market ‎remains weak.

It is therefore no surprise that rough production and trading are down in 2012 and should ‎continue to decline on a comparative basis in the second half of the year. The more ‎pressing issue revolves around rough prices, particularly if polished prices continue to ‎soften. ‎

Both De Beers and ALROSA have stated that they managed to maintain relatively steady ‎prices during the first half while anecdotal reports indicate that rough prices in the market ‎dropped by between 8 percent and 15 percent.‎

Mining companies are expected to continue to hold out for high prices thus curbing ‎supply via out-of-synch prices. They certainly can exercise their right not to sell and ‎maximize their own profits as shareholders require. But as this column has stressed ‎before, such action may have an adverse effect on the distribution system, squeezing the ‎diamond cutters and retailers, which in turn will further diminish demand.

By not adjusting their prices to meet lower levels of demand in the global economy, the ‎mining companies need to be concerned about the negative impact on the distribution ‎system.‎

While the current scenario appears gloomy, all is not lost. The volume of diamonds ‎filtering to the market may be down, but there remain opportunities to make money, as ‎Rapaport Group stressed in its July Rapaport Research Report.

Lower prices are healthy and necessary for the diamond market as they allow trading to ‎adjust to lower levels of demand. The diamond trade makes money by selling diamonds, ‎not by holding them. Dealers must learn how to make profit when prices go down by ‎selling and replacing inventory at lower prices. The value of inventory is its replacement ‎cost,” said Martin Rapaport, Chairman of the Rapaport Group.

Certainly, both rough and polished trading has slumped and has been more quiet than ‎usual during the July and August vacation periods. But while next year’s KP report will ‎reflect a far less encouraging picture of 2012 than it did 2011, the true test will be on how ‎dealers navigated the bearish market. Ultimately, the focus remains on their ability to ‎profit from diamonds, and not on supply.‎

Source Rapaport