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Global diamond supply expected to decrease 2.5% in 2018

Coming off of 2017, a year in which global diamond supply by volume increased by 13.1% year-over-year, supply is forecast to contract by 2.5% to 149 million carats in 2018.

Out of the world’s top three diamond miners by volume, only global diamond major De Beers is expected to increase production this year, while diamond output at Russian diamond miner ALROSA and diversified mining major Rio Tintois estimated to decline, more than offsetting De Beers’ increase.

Combined, the three companies represent approximately 70% of global diamond supply by volume.

Company-wide, De Beers is estimated to produce 35.2 million carats worth US$5.7 billion in 2018 which is enough to maintain its status as industry-leader in terms of value produced.

The production volume figure represents a modest 1.7 million carat increase year-over-year, with the boost expected to primarily come from the company’s Jwaneng mine in Botswana – the richest diamond mine in the world in terms of value produced.

In 2018 Jwaneng is estimated to produce 13.5 million carats worth $2.7 billion, which compares to 11.9 million carats worth $2.3 billion in 2017.

The mine by itself represents 17% of global diamond supply by value on an annual basis and with an estimated resource of over 350 million carats, it has a remaining mine-life of up to 27 years at current production rates.

At current estimates, De Beers would be producing at approximately 95% of production capacity in 2018, which compares to 91% last year and only 80% in 2016.

De Beers’ strategy of “producing to demand” over the past two years has reduced the company’s excess inventory to more normal levels.

With as much as 12 million carats of excess inventory on hand at year-end 2015, the company now only holds between 3 and 4 million carats over minimum operating levels, the lowest figure since 2014, according to estimates.

At the moment, De Beers market share by value produced and sold is 37%, which is down from 45% a decade ago and down from over 80% in the late-1980’s, before the industry structurally changed.

With no new advanced-stage kimberlite projects in the works and with production close to capacity, it is unlikely that the company’s market share will significantly revert to higher levels in the short-to-medium term without an acquisition, which even then would be limited by antitrust restrictions.

ALROSA is estimated to be the world’s largest producer by volume in 2018, with an output of 36.6 million carats.

However, this would be down from 39.5 million carats last year.

The year-over-year production decrease can be attributed to lost production at the company’s Mir mine following a flooding accident last summer but also a decrease in production at the Jubilee mine, a result of normal depletion.

Mir produced 2.8 million carats last year prior to the accident and 3.2 million carats in 2016. In an investor presentation from January 2018, ALROSA accounts for zero production from the Mir mine through 2020.

Jubilee has been ALROSA’s largest producing mine by volume for the last two years, however, production is estimated to decrease from 10.1 million carats last year to 8.2 million carats this year, and decline further to 5.9 million carats in 2019 on decreasing grade.

Offsetting some of the lost production at Mir and Jubilee will be the commencement of production at the company’s newest mine, Verkhne-Munskoe, which will begin commissioning later this year, and ramp up to 1.8 million carats of commercial production annually by 2020.

Similar to De Beers, ALROSA has reduced excess inventory levels in recent years, and currently sits at its lowest level of inventory since 2014, estimated at approximately 17 million to 18 million carats.

Compared to the company’s minimum operating inventory of approximately 13 million carats, ALROSA’s current implied excess inventory level is about between 4 million and 5 million carats. ALROSA has hinted that the company’s sales plan in 2018 is 41 million carats, which relative to 2018 production guidance of 36.6 million carats, implies a flush-out of the remainder of excess inventory this year.

Not included in the production and sales figures above, ALROSA also holds a 41% stake in the Catoca joint venture.

The partnership operates the Catoca mine in Angola, which is estimated to produce 6.6 million carats this year, and is also developing the industry’s most prospective new project, Luaxe, which is estimated to be a top 5 ranking mine globally (by production volume) when it finally commences full production sometime after 2022. As a note, ALROSA does not receive in-kind production from the Catoca partnership.

The industry’s third largest producer by volume is Rio Tinto.

The company only has interest in two producing diamond mines, its 100%-owned Argyle mine in Australia and a 60% stake in the Diavik mine in Canada.

By volume, 76% of the company’s net production is estimated to come from Argyle – the largest mine in the world in terms of carat volume produced.

The majority of the mine’s production is low-quality in size and color, and the mine’s economics are driven by the occurrence of fancy pink diamonds which fetch a significant premium to white and most other fancy colored stones. In 2018, Argyle’s production is expected to decrease by 3 million carats year-over-year to 14 million carats.

Production at Argyle commenced in 1983 and at one point the mine produced as much as 40 million carats annually, making it arguably the industry’s most important mine for a number of years.

However, as a result of normal depletion, annual production has since dropped to between 14 million and 17 million carats in recent years.

In 2016, Rio took at $241 million impairment charge on Argyle after reassessing mine-life expansion economics, and in March 2018 the company cut the mine’s recoverable diamond reserve estimate to 39 million carats, thus reducing the remaining life-of-mine to less than three years.

With Argyle production set to cease in 2020, there is a pending a global supply gap until commercial production at Luaxe begins in (or around) 2022, at which time the government of Zimbabwe also expects to significantly ramp up production at its Marange fields with conglomerate mining.

Global supply and demand

With global diamond production expected to decrease in 2018 along with producer inventories at multi-year lows, a demand increase should allow for diamond price upside.

A 2-4% increase in nominal diamond demand is quite possible this year given the backdrop of a strong global economy, healthy US consumer sentiment, signs of a stronger Mainland Chinese market, and the Diamond Producers Association’s increased budget fueling the return of generic diamond marketing. This scenario could translate to a real 1-3% increase in rough and polished prices this year.

Through the end of March, the impact of these fundamentals have already been evident as rough prices are up by approximately 2% year-to-date according to the Zimnisky Global Rough Diamond Price Index and surveyed polished prices up 3%.

Risks to the diamond industry

Looking forward to the remainder of the year, demand estimates could disappoint if tighter-than-expected economic policies in developed economies push interest rates higher than expected, resulting in downward revisions and de-risking of financial markets which could negatively impact consumer sentiment and discretionary purchasing power.

More specific to the diamond industry, primary medium and longer-term risks include an acceleration of trends already negatively impacting demand, such as changes in social norms and consumer appetite, for example decreasing marriage rates and changing consumer preferences of younger generations.

More recently, an unfolding story of a banking fraud in India involving at least two large industry players in the manufacturing and retail business will likely have a negative impact all segments of the industry.

Concerns range from damaged consumer perception of diamond jewellery, primarily in India, to strained financing availability in the Indian diamond manufacturing industry.

The latter will likely directly impact demand for rough diamonds in the short-term. While at this point the magnitude of the impact is unclear longer-term, there is the potential that the situation is severe enough to offset some or all of the favorable industry dynamics mentioned above this year. 

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