|
|
Diamond Resources Might Not Be Forever
With the supply of natural stones diminishing worldwide, what repercussions can the industry expect?
Aug 14, 2018 6:40 AM
By Leah Meirovich
|
|
|
RAPAPORT... While it’s true that value comes from rarity, no natural
resource lasts forever, and the rare is becoming even rarer. Diamond production
is set to peak in 2019, after which it will begin a steady decline. De Beers
estimates global output will fall by 1% to 2% a year until 2030, while some analysts
predict as much as a 5% annual drop.
Regions that have heavily dominated the trade over the last
five decades are now reaching the end of the line, and new exploration projects
may not be able to compensate fully for their loss.
Rio Tinto’s Australian asset, Argyle (pictured), is expected to close
in 2020, while its Diavik deposit in Canada’s Northwest Territories (NWT) has a
mine life through 2034. These resources are a drop in the bucket in terms of
their contribution to Rio Tinto’s finances, but the same can’t be said for
their impact on the industry. Argyle’s 14 million-carat yearly production makes
up around 10% of the world’s total annual diamond output, and the mine is a
dominant player in the colored-diamond market.
Other NWT assets, including Dominion’s Ekati mine and the
joint Mountain Province-De Beers venture Gahcho Kué, are also expected to run
out around 2034. And while extensions have been discussed, they have yet to
come to fruition. A case in point is the Jay pipe expansion of Ekati, which has
been suspended several times while Dominion conducts viability testing.
New horizons to explore
As these old and loyal fields dry up, newer pastures are
taking their place. But newer doesn’t always mean greener. Angola, a
diamond-rich country, has long been a questionable prospect due to stringent
rules that make it difficult for potential miners to invest in projects. The
Central African Republic (CAR) only recently came into line with the Kimberley
Process, and in any case, its diamond reserves are not as great as other
countries’.
Dmitry Amelkin, head of strategic projects and analytics for
Alrosa, nonetheless thinks Angola and other, less-explored parts of Africa will
help compensate for the decline in “great measure.”
“I think Angola is a standout…given the geological endowment
that’s in the country,” says Kieron Hodgson, executive director of commodities
and mining research for investment bank Panmure Gordon. “That will definitely
be attracting new capital, given the size of deposits…and the economic viability
of those deposits.”
Hodgson also thinks the African nation of Lesotho could help
counterbalance the deficit in other countries, as well as relatively unexplored
regions of Russia.
However, the shift won’t happen immediately, nor will it be
a simple endeavor. While almost all economically viable deposits can be mined,
says Hodgson, the investment required to establish them can often exceed the
return.
“Mining in alluvial areas like Angola, Democratic Republic
of Congo and CAR is a completely different game,” says Peter Meeus, chairman of
the World Diamond Mark and special government adviser to the CAR diamond
industry. “The sector stands for the largest changes to come in the next
decade. At the same time, these procedures cost money and are not too easy to
apply.”
Jean-Marc Lieberherr, CEO of the Diamond Producers
Association (DPA), agrees. “I think there is likely to be a shift toward new
locations,” he says, but notes that “diamond exploration is very difficult, and
the ‘easiest’ locations have already been extensively explored. Now explorers
are moving to places that are either physically more difficult — deeper or more
remote — or to places which have previously been inaccessible for political
reasons but which are now opening up.”
Ripples through the pipeline
Beyond the impact on miners, what does the potential
shortage mean for the industry as a whole — for diamond manufacturers and
jewelers? What about for the average consumer? Will sourcing become more
difficult, and will prices inevitably rise? Experts seem to have mixed
feelings.
While Hodgson doesn’t fully believe in an imminent shortage,
he concedes that “it’s sort of an economics 101. There’s a shortage potentially
at certain price points, but in a different pricing arena, there may not be a
shortage, so it’s...in the eye of the beholder.”
Amelkin says the drop in production will lead to a shortage,
one that will mean an increase in prices for rough, while Boris Sinitsyn — a
metals and mining analyst with VTB Capital — says its biggest effect will be on
the end consumer, as the scarcity will surely push the price of diamond jewelry
up.
The real consequences won’t be felt until retailers have to
tell consumers something isn’t available, adds Meeus. At that moment, he says,
“scarcity will become a reality, not a mere expectation,” and that “should
support price increases.”
Lieberherr thinks any price changes will be gradual as the
diamond supply decreases, and therefore won’t be as noticeable down the line.
That said, he believes price inflation is good — not only for the industry, but
for the diamond-buying public.
“An environment in which prices are rising modestly is
beneficial for the industry and for consumers alike,” he says. “Slightly rising
prices underscore the value proposition of diamonds.”
A boon to synthetics?
One particularly timely question is the effect a diamond
shortage will have on the synthetics industry. Will lab-grown stones gain a
stronger foothold in the wake of depleting natural supply and rising prices?
In that regard, most of the experts agree the
natural-diamond trade has nothing to fear from its lab-created competitors. At
best, they predict synthetics may take over the lower end of supply.
“I do think…that synthetic production would displace
material volumes at the lower end of the value chain, just simply on an
economic basis,” says Hodgson.
Lieberherr feels synthetics have a place in the fashion
jewelry market, as does Michael Minister, owner of Canada’s Maple Leaf Diamonds
— but “not for engagement or bridal,” Minster says. Sinitsyn and Meeus also see
lab-grown as a lower-end substitution or “niche” product, but not as an actual
competitor, regardless of the supply.
So what will actually happen as some of the world’s biggest
mines turn their lights out and shut their doors?
“I think the sector is in a period of change,” says Hodgson,
“but it doesn’t really know, in my view, what the change will be. I like to
think positively.”
This article was first published in the August 2018 issue of Rapaport Magazine.
Image: Rio Tinto
|
|
|
|
|
|
|
|
|
|
Tags:
Alrosa, Angola, Argyle, Boris Sinitsyn, Canada, car, Central African Republic, De Beers, Democratic Republic of Congo, Diamond Producers Association, Diavik, Dmitry Amelkin, Dominion, Dpa, ekati, exploration, Gahcho Kué, Jean-Marc Lieberherr, Kieron Hodgson, Kimberley Process, lab-grown diamonds, Leah Meirovich, Lesotho, mines, mining, mountain province, northwest territories, NWT, Panmure Gordon, Peter Meeus, Production, Rapaport News, Rio Tinto, Rough Diamonds, Russia, Shortages, Synthetics, VTB Capital, world diamond mark
|
|
|
|
|
|
|
|
|
|
|
|
|