27 Jun 2019
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ROUGH & TOUGH
LOWER PRODUCTION TO RAISE ROUGH PRICES
By: Diamond World News Service
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Apr 29 2019 2:58PM
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Reference: 18185  

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Top diamond miners, focused on future industry growth, are prepared to lower diamond production in 2019. Is this a deliberate and purposeful move, geared to raise diamond value and influence diamond rough prices or are the mines simply wearing down? The warning bells toll for the industry as rough prices are set to increase by the end of this year reports Aasha Gulrajani Swarup

Global diamond production decreased in 2018 with each of the top three miners, ALROSA, De Beers and Rio Tinto, who collectively account for more than half the global diamond production, reporting a decline in diamond production.This could well be the trend over the next few years.

“Top diamond miners are planning to bring down production to a third of current levels in the next decade to ensure that the diamond gets its true value,” Jean Marc Lieberherr, CEO, Diamond Producers Association, was quoted as stating in the Indian media.

The year 2017 saw the highest production of diamonds since 2008 and witnessed some of the largest diamond finds.

The supply did not help rough prices, which have plummeted over the last few years. In this scenario, production by top diamond miners is slated to go down further in 2019 as per the diamond production guidance issued by these companies.

Is this a deliberate attempt to lower production to raise rough prices in the face of record demand for diamonds? The three diamond mining giants, ALROSA, De Beers and Rio Tinto, however, attribute the decline in production on the mines.

“De Beers Group’s rough diamond production guidance for 2019 is in the range of 31-33 million carats (compared with 35.3 million carats of production in 2018). This reduction is a result of change in our mine portfolio and based on a computation of the availability from mine production that Source – Bain & Company; Kimberley Process accounts for the closure of Voorspoed Mine in South Africa in 2018, Victor Mine in Canada that will cease production in 2019, and the process for transitioning Venetia Mine, the largest mine in South Africa from an open pit to an underground operation, which will actually extend the mine’s life in the long term and increase the amount of carats we can eventually recover from it. The net effect of these changes forecasts a lower rough diamond carat production in 2019,” explains David Johnson, Head of Strategic Communication, De Beers Group.

Even Alrosa experienced mine issues. States Sergey Takhiev, Head of Corporate Finance for ALROSA, “Production decreased due to the shutdown of the Mir underground mine and the completion of open-pit mining at the Udachnaya pipe.”

Another top producer Rio Tinto too reported a diamond production 15 per cent lower in 2018 than 2017 at its Argyle mine in Australia while production at its Diavik mine in Canada was 3 per cent lower in experiencing a further drop in 2018 following the larger than normal supply of smaller, lower value rough diamonds.

Informs ALROSA’s Takhiev “In the next five years, four major mines will cease operations taking over 21 million carats of supply over the market. At the same time, six smaller mines will start operations, but they will bring only about 13 million carats to the market. Therefore, the net impact will be roughly 8 million carats disappearing from the market.”

Miners are investing significant capital in their mines with efforts to initiate new production lines.“Rio Tinto has invested US $350 million in the development of our fourth pipe at Diavikto provide an important source of incremental production and we continue to invest in diamond exploration. We also have an option agreement with Star Diamond Corporation, a Canadian mining company focused on exploring and developing Saskatchewan’s diamond resources,” responds Chirgwan.

The focus is always on mine potential and yield rather than the number of mines. Explains Johnson, “Some diamond mines have much greater supply potential than others. For example, the Cut-9 extension of our Jwaneng Mine in Botswana is expected to provide a much greater volume of carat production than Victor Mine in Canada will over its entire lifespan. As such, investing to extend the life of one existing mine can have a much bigger impact on production capacity than closing a smaller mine completely.”

It is true that individual mine operations are not as meaningful a measure of production than the overall carat production. And protecting the future of the diamond industry mandates a lower supply for the next few years.

However, while De Beers terms the lowered production for 2019 as a reduction, not a cutback, Rio Tinto submits that it is not a purposeful move. Yet, this move is expected to boost prices of rough that have plummeted over the last few years, De Beers Victor Mine Canada will cease production in 2019 experiencing a further drop in 2018 following the larger than normal supply of smaller, lower value rough diamonds.

“In 2017, diamond miners used new x-ray recovery technologies that made diamond recovery, especially of the smaller categories that would usually get lost, more efficient, which accounted for the increased production during 2017,” explains Zimnisky.

The excessive supply combined with other factors raised inventories and impacted rough prices.

“Initially, we saw a reduction in miners’ inventories over the first half of 2018, coinciding with improved prices. However, in the latter part of 2018 there was an increase in inventories, predominantly of lower quality rough diamonds. This led to a softening of prices,” Chirgwin elaborates.

Reduction in production is expected to impact the high stock levels positively. States Dinesh Lakhani, Director, Kiran Gems, “Stock level is on the higher side at various levels of the diamond business pipeline. We therefore think that reduction in production of rough diamonds in 2019 and 2020 will definitely help reduce unsustainable higher stock at various levels and finally lead to healthy stock levels.”

Diamond prices have been weak over the last five years while production costs have been higher, reducing the economics of projects. Add to this mix, a reduction in production and escalating demand for diamond jewellery, which has increased on average by 4 per cent since 2010, the impact on prices is inevitable.

“A significant decrease in global diamonds supply is expected in 2020 and onwards. Certainly lower supply and continued demand for diamond jewellery will provide upwardpressure on stones prices,” confirms Takhiev.

Lower production in the face of strong demand is bound to push up prices. But when?

“With rising cost inflation and mine production down, suppliers are under pressure to raise prices. By the second half of 2019, when the issue of oversupply of smaller diamond categories is expected to normalise, rough prices should rise,” Zimnisky predicts.

However,despite the forecast of higher rough prices from a reduction in production, miners do not expect any material impact on availability, which would be backed up by diamond stockpiles.

“Although, we do not hold sizeable inventories of rough diamonds, the business maintains a working inventory of 1.5-2 sights’ worth of rough diamond supply in order to ensure our ability to provide customers with consistent supplies of rough diamonds from one sight to the next,” reveals Johnson.

True, stock with miners will protect the industry, but only for so long. “We started 2018 with 18 million carats of stocks, produced 36.7 million carats, sold 38 million carats, and ended the year with 17 million carats. We cannot divide fresh / non-fresh diamonds, but from the numbers you can deduce that give or take, half of annual sales during the year is sold from stock, and half from output,” elaborates Takhiev.

As production falls in the coming years, how long will stocks support the industry, in the face of rising demand, especially in India and China?

States Jean Marc Lieberherr, “By 2030, we believe there will be a much larger demand for diamonds from both China and India, but annual production will be down to about 100 million carats, as no new mines have been discovered in recent times. Production won’t rise in the near future, as it takes 10 years to identify a mine and another five years to begin operations in the area.”

Prices of rough will certainly strengthen throughout the convoluted segments of the diamond supply chain. And no one but the end consumer shall rise to protect the stature of the diamond as a luxurious asset!

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