AFTER a very strong recovery following an industry-wide inventory buildup in 2014-2015, and again after India’s demonetisation in late-2016, the diamond industry’s momentum has begun to stall, or perhaps normalise is the proper verbiage.
Here we are little more than half way through 2017, and industry fundamentals are not necessarily negative, but signals are mixed with a subdued tone.
In the industry’s largest market, the US, retail diamond jewelry demand is somewhat underwhelming as large national retailers have underperformed so far this year despite a resilient economy and a stock market that seems to make new highs daily. In China, the industry’s second largest market, demand is improving but the market is not thriving.
Rough prices are higher this year, but polished is flat, if not down in some categories, and there are indications that excess polished inventory is building.
De Beers appears to be attempting to curtail excess supply to the market by continuing to raise rough prices while reducing allocations to clients, while Russian-major ALROSA is increasing production and supply to clients due to “strong demand”.
Through June, De Beers sold $2.9bn of diamonds which is a 3.6% decrease year-over-year, but 16.8% more than the 2015 equivalent. ALROSA has sold $2.5bn which is down 0.4% versus last year, but up 14.8% versus 2015. De Beers and ALROSA currently represent an estimated 39% and 28% of global diamond production by value and 22% and 26% by volume, respectively.
For the producers, the first half of 2017 has been marked by a notable return in demand for lower-quality rough that was severely impacted after the Indian government demonetised its highest denomination bank notes last November.
Producers have been unloading excess inventory consisting of primarily lower-quality goods and have seen their average-price-per-carat figures skewed lower so far this year despite raising prices on a like-for-like basis. For example, De Beers has seen over a 20% decrease in average price per carat sold in H1 2017 over H2 2016, but has alluded to a 2-4% increase in their “average price index” over the same period of time. The Zimnisky Global Rough Diamond Price Index, which attempts to consolidate global rough diamond price data, is up approximately 5% year-to-date.
Perhaps the most significant development on the supply side of the industry is the progression of the Luaxe project in Angola. Earlier this year a concession agreement was reached making Angola’s government-run mining entity, Endiama, and ALROSA the primary owners. According to ALROSA, the Luele kimberlite pipe on the Luaxe concession is the largest discovered in the past 60 years, with an assessed value of “over $35bn” [sic].
The Luele pipe is only 20km away from the world-class Catoca mine, which is also owned by Endiama and ALROSA. Luele diamonds are said to be of similar quality to those of Catoca which are worth about $100/carat, but the ore grade of the Luele deposit is said to be even better than Catoca’s. Construction of a standalone plant at Luaxe is still being considered, however initial production of Luele ore may commence as early as 2018 via trucking of ore to the Catoca plant for processing.
This article in its entirety can be read here.
Paul Zimnisky is an independent diamond industry analyst and consultant. He can be reached at [email protected] and followed on Twitter @paulzimnisky.