Is a Diamond Market Supply Crunch on the Horizon?

At the end of 2013, when Diamond Investing News (DIN) published its 2014 diamond outlook, many analysts were predicting that the year would bring market stability and perhaps higher diamond prices.

However, as the year has progressed, concerns about diamond supply have risen to the fore, leaving many curious about whether stability is truly in the cards. Market watchers are also wondering if much higher prices than anticipated are in store.

To find out more about what’s going on with diamond supply and demand, DIN got in touch with independent diamond industry analyst and consultant Paul Zimnisky. He’s written extensively about diamond market trends on his website and elsewhere, and agreed to help DIN suss out what’s next for the diamond market.

Demand on the rise

Part of what’s been spurring concerns about diamond supply is the fact that demand for the gems is growing, largely due to increased demand from China. As Zimnisky explained, “the current generation is the first to adopt the western tradition of giving diamond engagement rings.” Driving home how significant that is, he added, “the number of urban Chinese brides being given a diamond engagement ring has increased from less than 1 percent to greater than 50 percent over the last 20 years; half of China’s population of 1.3 billion is urban.”

Nearby India is also worth mentioning, said Zimnisky. “Diamonds have a solid legacy in India, and the rapid growth in middle class households and growth in personal disposable income there is having a significant benefit on the industry,” he noted. And, though demand from that country has been dampened in the last couple of years, “recent parliamentary elections have resulted in improved economic confidence in India” — in fact, Anglo American (LSE:AAL) mentioned in its most recent quarterly earnings call that it believes “India in particular will have a significant impact on De Beers in the second half of 2014.”

Mines uneconomic

The other part of the equation is that it’s becoming uneconomic to mine at some of the world’s most prolific diamond regions and mines.

Elaborating on what that means, Zimnisky said that “mine economics play a big role in whether a project will be developed or expanded and thus produce supply.” Essentially, “if the price of the resource increases relative to the cost to produce the resource, it could justify putting a project that was not previously economic into production.”

At the moment, however, the opposite is happening. For instance, said Zimnisky, some mines in Botswana “only have 10 years or so of resource left at current economics.” The situation is similar in Canada, where Diavik and Victor, two of the country’s four operating mines, ”have less than 10 years of production left.”

Meanwhile “at the Marange fields in Zimbabwe, most of the easily accessible loose surface gravel has been produced, leaving hard conglomerate rock that requires additional capital expenditure to produce.” Unfortunately, that’s “an investment that most of the seven mining companies there have indicated that they will not make.” Finally, said Zimnisky, Australia’s Ellendale mine, “which is the largest producer of fancy yellow diamonds in the world, is set to go on care and maintenance by year end.”

Little new production

Of course, depleted mines in themselves are not a problem; they’re a natural consequence — and indeed, the entire point — of mining. It’s when few new mines come online to replace them that issues arise.

That’s exactly what’s going on now. Explaining why that’s the case, Zimnisky said, “simply put, high-quality economic deposits are rare. Diamond mines tend to be very capital intensive compared to other mined resources. The success rate of taking a project from greenfield exploration to development and then production is very low.” As a result, “there is not a lot of exploration for diamonds compared to say gold, silver or copper.”

Putting those statements into context, Zimnisky cited metrics released a few years ago by De Beers: “only 6,400 kimberlite pipes … have been discovered in the world; of those only approximately 900 have been classified as diamond bearing, and of those less than 100 have been economic enough to mine.”

Not a lost cause

That’s not to say no new diamond mines are getting close to production. However, that’s predominantly happening in just two locations: Canada and Russia.

“Almost all of the foreseeable new production is going to be coming out of Canada and Russia,” said Zimnisky, adding, “Rio Tinto’s (NYSE:RIO,ASX:RIO,LSE:RIO) Bunder project in India and DiamondCorp’s (LSE:DCP) Lace project in South Africa are the only two large-scale projects in development outside of Canada and Russia, and both of these mines will likely produce less than 1 million carats a year.”

So what companies are making progress in Canada and Russia? According to Zimnisky, “all eyes are on Gahcho Kue.” And for good reason. It’s 51-percent owned by De Beers and 49-percent owned by Mountain Province Diamonds (NYSEMKT:MDM), and Zimnisky believes it “will be the seventh-largest diamond mine in the world in terms of value produced, and 11th in the world in terms of carats produced once ramped up to full production capacity in 2017/18.”

Continuing, he said, “the only other large-scale mines in development are Russia’s Botuobinskaya mine,” which is owned by ALROSA (MCX:ALNU) and expected to start production next year, and Stornoway Diamond‘s (TSX:SWY) Quebec-based Renard mine. It should commence operations in 2017.

Where does that leave prices?

That’s a lot of information to take in, and for most diamond market participants, the real question is: what do these market dynamics mean for diamond prices?

In answer, Zimnisky said, “diamond prices peaked in the summer of 2011 and are approximately 13 percent below that level today in nominal terms. Current new demand growth exceeds new supply growth, and I forecast that trend will continue into the foreseeable future. So this ultimately becomes a price elasticity of demand question since diamonds are really a luxury discretionary item.  But I do believe that diamond prices will make a new nominal all-time high within the next three years.”

With that in mind, it sounds like diamond market participants can certainly look forward to the future.

 

About Paul Zimnisky: Based in the New York City metro area, Paul Zimnisky is an independent diamond industry analyst and consultant. Paul has worked in the capital markets industry for over 10 years where he has held roles as a metals and mining analyst and as an arbitrage trader. He co-founded a company that launched the world’s first publicly traded diamond industry Exchange Traded Fund. His research and analysis has been published in century-old trade journals including The London Mining Journal and The Northern Miner and his work has been used in game theory curriculum by the economics departments at Duke University and the University of California, San Diego. Paul is a graduate of the University of Maryland’s Robert H. Smith School of Business with a B.S. in Finance. His work can be found at www.PaulZimnisky.com.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Editorial Disclosure: Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence. 

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