De Beers, one of the world largest producers of rough diamonds, has painted a gloomy picture of the industry in which demand will outstrip production growth in the next decade coupled by rising costs as mines go underground.
The company ÔÇô with most of its meat in Botswana where it owns Debswana on a 50/50 basis with the government of Botswana, said however that even under scenarios of volatile or weaker global economic growth, demand for diamonds is expected to show positive real growth in the next decade.
“Positive demand growth for diamonds will almost certainly outstrip growth in carat production in the next 10 years, given the lack of major new discoveries in the last decade and the projected production slowdown in several existing mines,” the company said in 2014 Diamond Insight Report released this week.
The company said a positive supply demand outlook is shared by a number of external experts including McKinsey & Company which sets out four potential future scenarios for the diamond industry.
“In every scenario, demand growth outstrips production growth. De Beers has undertaken some modelling of potential rough diamond supply and demand based on McKinsey’s ‘Diamonds are Forever’ scenario, and the relative supply….”
According to Goldman Sach, the demand is expected to expand at a Compound Annual Growth Rate (CAGR) of 11 per cent in nominal value between 2013 and 2017, driven by Cyclical recovery in US consumer spend on luxury goods as economic growth recovers and structural demand growth from emerging markets on the back of higher penetration of diamond jewellery among a growing middle class.
On the downside, global natural supply is expected to increase at an average rate of 5.2 per cent between 2013 and 2017 with output in established mines falls as older mines come to the end of their life or move to underground mining.
RBC on the other hand projects that demand is set to strengthen rapidly, determined by the recovery of consumer confidence in two key markets of China and the U.S. It however remained bullish on production which it said will be increased by a set number of projects coming online including: Petra’s proposed expansion of Finsch and Cullinan, which will lift production from 3 million carats per year in 2014 to over 5 million carats per year in 2019.
“However, the positive supply demand outlook can be expected to be impacted by the cyclical nature of the industry. It is especially prone to the ‘ripple effect’ caused by de-stocking and re-stocking by midstream operators to fulfil lower or higher demand,” De Beers said. “Despite this, over the past 50 years rough diamond values have consistently recovered as economic growth rebounds”.
De Beers said the large diamond mining companies are expected to continue to invest in exploration, but the probability of a major profitable new diamond discovery will remain relatively low.
It added that this move is simply because finding economic diamond deposits is difficult: even spending billions of US dollars in exploration carries no guarantee of actually discovering economically viable deposits.
Over the last 140 years, almost 7,000 kimberlite pipes have been sampled by geologists, about 1,000 of which have been diamondiferous. However, only about 60 of these are sufficiently rich in diamond to be economically viable.
Just seven mines (Jwaneng and Orapa in Botswana, Udachny and Mir in Russia, Premier (now Cullinan) and Venetia in South Africa and Catoca in Angola) are what miners refer to as ‘Tier 1 deposits’ with more than US$20 billion worth of reserves.
“Overall, the global mining industry is facing increasing pressure on capital expenditure, and in recent years many large-scale development projects have been placed on hold,” De Beers pointed out.
It said this puts pressure on exploration spending as across the mining sector, exploration expenditure fell by almost a third to about US$14 billion in 2013. Since 2000, the diamond mining industry has spent almost US$7 billion (over P70 billion) on exploration.
“The geographical focus of diamond exploration will be likely to continue to be in those areas where the prospectivity potential is highest and where the least exploration has been conducted to date, such as Central Africa, Russia and Canada,” the report stated.
“In addition, South Africa and Zimbabwe are countries with potential: although they have a long tradition of diamond mining, high-resolution exploration technology has not yet been applied systematically here.”
De Beers and Russia’s Alrosa continue to be the two largest diamond producing groups by value. De Beers’ 2013 share of volume was 21 per cent and its share of value 33 per cent, while ALROSA’s share of volume and value were 25 per cent and 26 per cent respectively in 2013.