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MKT&IND REPORTS |
 In contrast with precious metals and other natural resources industries, which rely on multiple sources of demand, the diamond industry derives practically all its value from consumers’ demand for diamond jewelry. The outlook for the industry is thus intrinsically linked to consumer demand. Even under scenarios of volatile or weaker global economic growth, demand for diamonds is expected to show positive real growth in the next decade.
Global demand for diamond jewelry reached a record high of U.S. $79 billion in 2013 according to the inaugural Diamond Insight Report, published by De Beers.
DEMAND
Demand is expected to continue to grow over the long-term, driven by the ongoing economic recovery in the US (the world’s largest diamond jewelry market) and the growth of the middle classes in developing markets such as China and India. Sales of polished diamonds in the US increased 7% in 2013, while both India and China have seen their domestic diamond jewelry markets grow by a compound annual growth rate of 12% in local currency terms between 2008 and 2013.
In its report, De Beers also cites two analytical reports on the diamond market confirming its forecasts.
In particular, Goldman Sachs notes that the diamond demand is expected to expand at a Compound Annual Growth Rate (CAGR) of 11% in nominal value between 2013 and 2017, driven by:
- Cyclical recovery in US consumer spend on luxury goods as economic growth recovers;
- Structural demand growth from emerging markets on the back of higher penetration of diamond jewelry among a growing middle class.
The Royal Bank Canada (RBC) also highlights that the demand will be supported by the two markets, the U.S. and China.
"Demand is set to strengthen rapidly, determined by the recovery of consumer confidence in two key markets: The U.S., which represents the largest share of global jewelry sales - all indicators point to the fact that the US will remain strong going forward and China, which will underpin diamond growth in the medium term, as penetration of diamond jewelry pieces increases. Jewelry growth in China is expected to remain robust, with leading retailers such as Chow Tai Fook reporting 32% higher retail revenue over the 2014 Chinese New Year.
SUPPLY
Overall diamond supply is expected to increase in the next few years, driven by new projects coming on stream. By 2020, when many of the existing mines will begin to see declining outputs, overall supply is expected to plateau. A number of projects are under way to expand diamond production. By 2020, about 25% of carat production will come from projects currently under development, but much of this increase in output comes from projected expansion at current mines such as Rio Tinto’s Argyle mine in Australia. Among new developments, the largest are ALROSA’s Botuobinskaya, Lukoil’s Grib and De Beers’s Mountain Province Diamonds’ Gahcho Kue projects. Beyond 2020, there is a risk that production levels will begin to decline unless major new discoveries are made in the coming years and rapidly developed.
As for global supply, Goldman Sachs forecasts that it is expected to increase at an average rate of 5.2% between 2013 and 2017.
- Output in established mines falls as older mines come to the end of their life or move to underground mining. Going underground will make it difficult to maintain existing output levels due to additional haulage time and the technical challenges that come with underground mining;
- New mines coming online (including Grib, Gahcho Kue, Bunder, Karponskogo, Star-Orion South and Renard) represent only 17 million additional carats per year.
RBC highlights the exact output at mines to come into production soon, namely:
- Petra’s proposed expansion of Finsch and Cullinan, which will lift production from 3 million carats per year in 2014 to over 5 million carats per year in 2019;
- Grib - 4 million carats per year;
- Gahcho Kue - 4 million carats per year by the end of 2017;
- Renard - about 1.5-2.0 million carats by the end of 2017.
De Beers also notes that Russian uncut diamond mining giant ALROSA plans to launch Botuobinskaya in Russia in 2015 with an annual output of 2 million carats, and the Karpinsky-1 project with an annual output of 1 million carats also in 2015.
As of international projects, the company underlines several deposits, which will be put into operation in or after 2017. Namely the Star-Orion South project in Canada of Shore Gold Inc, which is scheduled to produce 2 million carats annually and Rio Tinto's Bunder deposit with the similar forecasted output in India.
In order to make a difference to global availability, any discovery would have to be substantial – even the largest of new projects under development, Gahcho Kue, will only expect to add approximately five million carats per year at its peak of production, about three to four per cent of annual global production. Even if new discoveries were made, the impact of such discoveries on production levels would be likely to be slow. From 1950 to today, it took an average of 14 years between the discovery of a diamond deposit and the start of production. For projects currently
in development, however, this time is even longer: it will take more than 20 years from discovery to first production. Gahcho Kue, for example, was discovered in 1995, but is not projected to enter production until late 2016.
PRODUCTION
Diamond production is also becoming increasingly challenging as mining moves towards deeper, less profitable and more remote sources.
De Beers estimates that overall global rough diamond production increased by 3% from 2012 to U.S. $18 billion in 2013. Measured in carats, the increase was 7%, to reach 146 million carats. This is still well below the production peak in 2005, when overall production was above 176 million carats.
The largest diamond producing country, by volume, is Russia, which in 2013 produced 25% of total carats, and 26% of overall rough diamond value. Botswana produced 16% of carats, corresponding to 21% of overall value. Another large volume producing country is the DRC, which has historically produced on average 19% of total volume, but equivalent to only roughly 6% of value due to low value per carat.
De Beers and ALROSA continue to be the two largest diamond producing groups by value. De Beers’ 2013 share of volume was 21% and its share of value 33%, while ALROSA’s share of volume and value were 25% and 26% respectively in 2013. The third largest company in the sector is Rio Tinto, which produced 11% of total carats in 2013, corresponding to approximately 5% of global production value.
Another large producer is Angola’s Catoca mine, generating approximately 5% of both volume and value of production in 2013. The companies operating the alluvial fields of Chiadzwa in Zimbabwe contributed an estimated 8% of volume and 4% in value in 2013.
SALES
Global rough diamond sales by producers increased approximately 5% from 2012 to 2013, to reach a total of just under $18 billion. De Beers remained the largest supplier with roughly 33% of overall sales measured by value (the same share as in 2012), followed by ALROSA with 25% of sales (vs 23% the year before). Other primary suppliers included SODIAM (Angola) with an estimated 6% share, Rio Tinto with a 5% share and Dominion Diamond Corporation and the Zimbabwe alluvial producers with about 4% each, all in approximate USD value terms.
A variety of rough diamond sales channels are used by primary suppliers. De Beers uses multi-year contracts with more than 80 term contract clients – Sightholders – to sell most of its production. De Beers has also used sophisticated online auctions since 2008 to sell a proportion of the Group’s production. In recent years, ALROSA has established three-year supply agreements with a selection of customers and supplements these sales with onetime sales as well as competitive bidding (auctions). However, some producers, such as Gem Diamonds and Petra Diamonds, use an auction-only platform.
EXPLORATION
Diamond mineral systems occur in very specific cratonic target areas – these are well-known. With growing demand for diamonds and dwindling supplies from existing mines, the search for the next diamond mines is expected to continue.
Since 2000, the diamond mining industry has spent almost $7 billion on exploration. To date, these efforts have yielded relatively meager results: only one diamond deposit of significant size (Bunder, in India) has been discovered during this period, in addition to other smaller deposits such as Orapa AK6 in Botswana (now the Karowe mine), owned by Lucara Diamond Corporation. Today, the majority of diamond exploration spend takes place in relatively underexplored African countries such as Angola, the DRC and Zimbabwe, as well as the vast swathes of Arctic Siberia and Canada. Recently, there has been some change in the allocation of this spending: from 2011 to 2013 the share of global exploration spending that went to Russia increased from 27% to 54%, at the expense of countries such as Canada, South Africa and India.
While the appetite for exploration remains high (2013 spending was 2.5 times that of 2001), overall spending has still not reached the record levels of 2007, when companies spent almost $1 billion on diamond exploration. The trend here differs from the mining sector in general, where 2013 expenditure, although lower than in 2012, remains well above 2007/2008 levels. De Beers and ALROSA represented almost 75% of exploration spending in 2013.
The large diamond mining companies are expected to continue to invest in exploration, but the probability of a major profitable new diamond discovery will remain relatively low. This is simply because finding economic diamond deposits is difficult: even spending billions of US dollars in exploration carries no guarantee of actually discovering economically viable deposits.
Over the last 140 years, almost 7,000 kimberlite pipes have been sampled by geologists, about 1,000 of which have been diamondiferous. However, only about 60 of these are sufficiently rich in diamond to be economically viable. Just seven mines (Jwaneng and Orapa in Botswana, Udachny and Mir in Russia, Premier (now Cullinan) and Venetia in South Africa and Catoca in Angola) are what miners refer to as ‘Tier 1 deposits’ with more than $20 billion worth of reserves.
Overall, the global mining industry is facing increasing pressure on capital expenditure, and in recent years many large-scale development projects have been placed on hold. This also puts pressure on exploration spending. Across the mining sector, exploration expenditure fell by almost a third to about $14 billion in 2013.
The geographical focus of diamond exploration will be likely to continue to be in those areas where the prospectivity potential is highest and where the least exploration has been conducted to date, such as Central Africa, Russia and Canada. In addition, South Africa and Zimbabwe are countries with potential: although they have a long tradition of diamond mining, high-resolution exploration technology has not yet been applied systematically here.
End
23.09.2014 15:06
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