Rapaport Magazine

The Future of Diamonds

Diamond dealers could face significant challenges in the coming decades as supplies diminish and profit margins shrink.

By Brian Bossetta
Though diamond supply is expected to increase in coming years, it is likely to plateau by 2020 and then significantly drop off in the following decade unless major new discoveries are made, said Howard Davies, head of commercial development for De Beers. Davies briefed members of the New York banking community on the current state of the diamond market in an October meeting at the Roosevelt Hotel in Manhattan. Estimated annual global rough production, according to De Beers projections, will drop to 115 million carats by 2030, down from the nearly 160 million carats expected for 2014.
   This trend, Davies said, would likely result in a widening gap between supply and demand that the industry will have to address because, while supply will likely slow, demand will not and, in fact, is expected to grow. Simply put, Davies said the expected decline in rough supply is based on the fact that “finding diamonds isn’t easy” and making those necessary major new discoveries is not at all a sure thing. In 150 years of exploration, Davies noted, only 60 commercial mines have been discovered, with only seven of those — Venetia, Orapa, Jwaneng, Mir, Udachnya, Catoca and Cullinan — considered “world class.”


The End of the Frontier?
   The rising costs of exploration, coupled with the harsh realities of searching for new diamond-rich areas — brutal climates, extremely remote and inhospitable locations and challenging natural obstacles from which the diamonds must be unearthed — raise the possibility, Davies said, “that maybe all the diamond mines have already been discovered.” Finding diamonds and extracting them from deep within the earth is an arduous process and one that requires an enormous amount of human ingenuity and engineering expertise, Davies added, and those costs are rising.
   Still, the obstacles haven’t kept De Beers from searching. The company has spent $50 million in the past two years hunting for new areas to mine. But are the mitigating factors of the costs and complexities of exploration worth the risk of those dividends not paying off? “It’s more hope than expectations,” Davies said, referring to the chances of uncovering a yet untapped treasure trove of gems. “And we’ve literally gone to the ends of the earth looking.”

Effect on Prices
   The inflation of exploration costs is directly related to the steadily rising price of rough, which many dealers in the U. S. wholesale market claim has been a drag on their business due to the shrinking profit margin between the prices of rough and polished. But the recent price increases in rough are dictated, Davies said, by market factors that De Beers cannot control. “Ultimately, prices are determined by what consumers are willing to pay for polished diamonds,” he explained.
   There are those in the industry who say, however, that consumers are not willing to continue to pay more for polished goods. Greg Telonis, president of Mr. Baguette, a manufacturer of small loose diamonds and jewelry in New York City, is one of them. Today’s consumers are becoming increasingly savvy at using the internet to get information on prices in order to use it as leverage against retailers to get them to lower prices on goods, according to Telonis. “Price resistance has been a persistent problem all year long,” he added.
   Consumers’ use of the internet to comparison shop — as with other goods and services — is one of the main factors shrinking profit margins for diamond dealers, according to Ronnie VanderLinden, president of Diamex, a New York City wholesaler, and president of the Diamond Manufacturers and Importers Association (DMIA). “As with everything, consumers can go online and check prices,” VanderLinden said. “And you can only sell a piece of jewelry for what the consumer will pay for it.” If price hikes continue, Telonis cautioned, business will suffer. “The flow of buying and selling diamonds has been interrupted by the very high prices of polished because most wholesalers cannot make higher prices and are not willing to buy new inventory at the new prices,” Telonis explained.
   Some in the industry have criticized De Beers for artificially inflating prices by stockpiling its diamonds and buying up the inventory of emerging competitors, thus controlling the flow of diamonds into the market. Whether that is true or not is impossible to know, Telonis said. But he did note that De Beers is able to control which items it increases or decreases in price — a reality, in Telonis’ estimation, that could come back to haunt the company. “If De Beers is not careful, it will eventually price itself out of the market with its cheaper goods. Consumers just might eventually move toward synthetic diamonds rather than pay high prices for eye-imperfect diamonds.”
   Davies, however, flat out rejected the idea that De Beers is hoarding a massive inventory in order to manipulate the market and referred to such a notion as “one of the myths” about the company. “The De Beers stock at the time of the Asian currency crisis of 1997/1998 had a value of several billion dollars. Our senior management questioned whether holding such a large stock was a sustainable and efficient use of capital,” Davies said, “and this triggered a strategic review that resulted in a decision to liquidate the stockpile over a number of years.” Responding to that claim, VanderLinden said, “We can only take them at their word. Nobody really knows. The truth is probably somewhere in the middle.”

The Solution
   In light of rising exploration costs, the shrinking supply and the difficulties in identifying new territories to mine, what then, is the answer? Expansion of existing mines is one solution, Davis said, adding that De Beers was “investing major capital in expanding current projects.” These include underground exploration at the Venetia mine in South Africa and the Jwaneng Cut 8 project in Botswana. Along with exploiting current sites, Davies said the industry must also exploit growing diamond demand, particularly in the emerging markets of China and India.
   The Far East, especially China, is where demand is growing exponentially and it presents the most powerful market for potential profits. De Beers estimates that by 2020, affluent and middle-class Chinese will account for the majority of the country’s population. “Potentially, the Chinese market could be bigger than the U.S. market,” Davies said.

Article from the Rapaport Magazine - November 2014. To subscribe click here.

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