A new Diamond Review Report has suggested that while diamond prices may remain subdued in the short-term, the long-term supply shortage might result in a significant upside to both rough and polished prices.
The report released ahead of the Macquarie’s Global Gemstones Conference, states that from 2018E onwards, mine closures combined with firm demand should be very positive for diamond prices and miners’ profitability.
The rough diamond market is currently under short-term pressure, but the future looks bright.
“Over the next four years, Macquarie’s proprietary global supply model shows an uptick in global diamond production, from approximately 130M carats in 2014 to 158M carats in 2018E,” said Morton.
“Post 2018E, the closure of several large operations over the next 10 years and a lack of new discoveries will bring a steady decline in global output to 125M carats per annum,” he added.
There is a down turn in diamond pricing with analysts suggesting it is influenced by slowing demand growth in China caused by a government crackdown on corruption and the reduction of visas being issued to Chinese tourists which has hampered luxury goods sales in that market.
Equally, the weakness is blamed on a contraction of credit availability for diamond cutters and polishers following the closure of the Antwerp Diamond Bank and declining profit margins for diamantaires (diamond cutters/polishers) and jewellers owing to the rising cost of rough diamonds, while polished diamond prices have stagnated.
“But given the significant upside in China due to demographic and economic progress, we think that country could contribute meaningful growth to the global diamond market over the next 5-10 years, underpinned by stable growth in mature markets like the US,” the report said.
“Further, by 2018E, production of diamonds is expected to peak at the relatively low level of 158M carats per annum, and steadily decline thereafter. The combination of stable demand growth and significantly constrained supply should be a positive for both rough and polished prices,” it added.
Morton said this suggests flat or 5-10% downside for rough prices in the next 6-12 months, followed by a period of significant price growth during the 2016-2019E period. However, the analysts remain bullish despite the weak market at the moment. He said their proprietary global minesite cost and margin analysis suggests diamond mines have strong margins, and ability to withstand short-term weakness in prices.
“From 2018E onwards, mine closures combined with firm demand should be very positive for diamond prices and miners’ profitability,” the study added.
“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”.
According to Rapaport estimates, rough diamond sales at De Beers’ fifth sight for the year were US$550m.