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Increased Diamond Production
Editorial
Apr 26, 2013 1:57 AM
By Avi Krawitz
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RAPAPORT... Diamond mining companies are slowly raising their production levels even as many of the major mines continue to face operational challenges. Theoretically, the trend should ease cutters’ concerns about prevailing high rough prices and apparent supply shortages. But it’s not clear that it will.
It hasn’t been an easy year for diamond cutters. In fact, many sightholders have downplayed the value of their De Beers supply given the losses they incurred during 2012.
Their anxieties continued in the first quarter of 2013 as rough markets have been worryingly upbeat. Price increases have been driven by speculative trading on the secondary market.
As a result, diamond manufacturers have been caught between rough price hikes of about 7 percent in the first four months of the year, according to Rapaport estimates, and relatively stable polished prices. As of April 25, the RapNet Diamond Index (RAPI™) for 1-carat certified diamonds was up just 0.5 percent from the beginning of the year. Manufacturing levels reflect a similar cautious outlook for the polished market.
If rough and polished markets are out of sync, a prospective increase in rough production should offer some remedy to the market. Greater rough supply would ease the competition for goods as well as dealer expectation that prices will rise in the short term. It would also result in larger polished supply, alleviating the shortages in certain popular categories.
Meanwhile, sightholder applications for De Beers supply for the year ahead are about 20 percent below those made a year ago. Are they downplaying their expectations to avoid the supply shortfalls they experienced in the past year? Given the recent market volatility, it is perhaps better to err on the side of caution in planning the year ahead.
In contrast, the recent first quarter production data published by the major mining companies suggest that supply should improve in the months ahead. Rapaport estimates that global diamond production by volume rose approximately 4 percent year on year in the first quarter of 2013.
De Beers output increased 3 percent year on year to 6.364 million carats during the quarter. Rio Tinto’s diamond production fell 4 percent to 3.2 million carats while the combination of Dominion Diamond Corp’s production and at the Ekati mine – which was owned by BHP Billiton during the period but has since been acquired by Dominion – rose 2 percent to 1.1 million carats. ALROSA has yet to publish its first quarter figures and were not available for comment at press time. One expects the Russian company’s output to be stable as it has been in the past few years.
The production increases come despite operational challenges at a number of mines, including at De Beers three flagship operations. At Orapa in Botswana, lower production due to plant maintenance was offset by improved grades at the mine. Jwaneng continues to recover from the impact of a slope failure in June 2012 and excessive rainfall at the end of the year, while wet weather also disrupted production at the Venetia mine in South Africa. Production at Rio Tinto’s Argyle mine continues to vary as the project shifts to underground mining, with similar issues faced at its Diavik operation.
These issues should continue to stabilize through 2013, raising expectations for higher production.
However, the cutting sector should not get ahead of itself in expecting a sudden influx of rough supply. The mining companies have set a new normal level of global diamond mining since the 2008 downturn, one that is significantly lower than before the crisis.
The result is that annual global production fell from its peak of 168.2 million carats in 2007 to 122.4 million carats in 2011, according to the most up-to-date Kimberley Process (KP) data. Rapaport estimates that production fell 2 percent to about 120 million carats in 2012 and will stay at around that level in 2013.
Rather the increases will be gradual and one expects there to be a reasonable level of supply given the current state of the diamond market. In counting the carats being brought to market, if reported shortages prevail — and in fact are real — various factors could be at play. Either the mining companies are holding back goods or selling outside the market — as ALROSA sold to the Russian treasury (Gokhran) last year — or they are selling at unrealistic prices so that there is not enough supply being sold at the right price.
It is not clear whether either of these scenarios is currently prevailing in the market. Hopefully, any reports of rough supply shortages are a function of high prices. There is demand for every diamond at a price, and there may be rough prices that manufacturers are just not willing to pay.
As manufacturers maintain a cautious outlook for the polished market, there should be sufficient rough supply at current levels of production. While mining companies hint at a prospective increase in production for the rest of the year, there’s no real reason to suggest rough prices will go up further. If they do, it is up to manufacturers to reject supply and maintain equilibrium in the market. For the extra rough production means precious little if the goods are polished at a loss.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz
This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.
Copyright © 2013 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.
Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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Tags:
Alrosa, Avi Krawitz, De Beers, diamonds, Rapaport, Rio Tinto
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