Two largest diamond miners that have faced not only a bad market situation this year but also never-before-seen problems are advancing diametrically opposed agendas to the market. According to De Beers, which is under pressure due to the restructuring process of its parent company Anglo American, a change in priorities is taking place as the market is no longer governed by supply and is more than ever dependent on demand. To support it, it’s necessary to reduce supply and work in a coordinated manner to promote natural stones and their origin (of course, non-Russian). ALROSA, which this year could have experienced sales restrictions due to sanctions imposed on its diamonds, on the contrary, is demonstrating confidence in the stable demand and hopes for the inevitable quick recovery under the influence of robust fundamental factors.
Whether this difference hides the inflexibility of one of the parties or is just ‘verbal interventions’, it is clear that the crisis in the diamond market requires new approaches to be used by key industry players. This crisis can be explained by a combination of several unpleasant factors, but its protracted nature is an important difference from previous ones. And although the prospects for future growth seem likely to many investors familiar with the cyclical nature of commodity markets, the recovery may take longer. By the end of 2024, the diamond mining giants found themselves unable to support prices and capacity utilization any longer despite positive signals from the US and Indian retail sectors. De Beers, which twice cut its production forecasts, postponed one of its sights and made unprecedented concessions to sightholders, was unable to prevent a radical decline in prices. And ALROSA was unable to protect part of its personnel from layoffs, and its production and investment in its growth projects from decreasing as part of the optimization program announced late in the year.
Robust fundamentals
ALROSA considers that good fundamental factors contribute to the revival of trading over the next few months and the transition of the market to a deficit in 2025.
“The cutting and polishing sector is currently releasing inventories. Most likely, this will take one to three months, maybe a little longer,” said Sergei Takhiev, head of ALROSA’s corporate finance and IR department, in September.
After excess supply in 2015 to 2017, diamond production fell by 20 percent to 116 mn carats, and stabilized at a level below demand, noted the representative of ALROSA. In the next 10 years, the diamond supply is expected to be around 110 mn to 120 mn carats, which is 10 percent below the 10-year average diamond consumption in the market.
Demand for diamonds is estimated at 125 mn to 130 mn carats and remains strong, according to ALROSA. “The problem is not in the final demand - everything is fine with the final demand. The diamond market is fundamentally very robust and strong,” Takhiev assured, relying on forecasts for a 40-percent increase in demand for luxury products in the next 5-6 years due to emerging markets.
Over the past few years, global consumption of diamond jewelry has grown along with the global GDP by 1.5 to 3 percent annually, and reached record levels of about $80 bn to $82 bn, according to the head of the ALROSA’s department. The rough diamond market accounts for 18 percent of the jewelry market (about $17 bn) by value. The average growth rate of jewelry sales in 2023-2024 in the United States was 45 percent higher than the pre-COVID level of 2019.
The average ticket in retail continues to increase for the end consumer, Takhiev says. The number of wealthy people with assets above $1 mn, who are the main consumers of jewelry, doubles every 10 years. It is important that the growth is mainly due to developing economies, which offsets the risk of possible sanction restrictions for ALROSA, Takhiev believes.
The reduction in demand for diamonds from polishers in 2023 and most of 2024 is caused, according to ALROSA, primarily by rising interest rates, which forced the diamond industry to get rid of inventories and reduce purchases to repay the loans to banks. A sharp increase in the cost of funding in 2023 (from 6 percent to 11-18 percent) contributed to the sales of inventories accumulated by polishers and the refusal to purchase rough diamonds.
At the same time, the decline in demand in China is not indicative, the ALROSA representative believes, because the talk is about the reorientation of purchases made by Chinese consumers, mainly tourists, to Japan and South Korea. It is more profitable for the Chinese to purchase luxury goods in these countries, taking advantage of the favorable exchange rate and the duty-free trade.
There are currently 20 mn to 30 mn carats of surplus rough diamond inventory left in the system, which is almost half the level of last year and equivalent to a 2.5-month supply. “As soon as the inventory level normalizes, the process starts working normally again,” Takhiev explains. He believes that polishers are now approaching a level acceptable for resuming the purchases of stones.
The Gem & Jewellery Export Promotion Council (GJEPC) announced the signs of a revival of trade against the backdrop of a decrease in the cutting factories’ polished diamond inventories and a decrease in the rough diamond supply seen back in early September.
Sales were strong in August, reflecting increased consumer confidence and a positive trend in the market, and prices in some deficit categories increased, according to GJEPC. Industry players optimized their production capacities and focused on reducing their debts. By September, polished diamond inventories had significantly decreased, which indicates that supply has become more in line with demand, providing a basis for price stabilization. The flow of rough diamonds is limited, which means that new polished diamond production is expected to remain restrained, which, in turn, reduces the risk of oversupply, according to Vipul Shah, Chairman of GJEPC.
But prices keep on going down
According to ALROSA, the decline in real diamond prices (the cost of India’s imports, rather than the index that takes into account the speculative component) was not so strong during the low demand period as the price level in 2023 was higher than in 2017-2018, the favorable years for the industry. In real terms, prices for rough diamonds have fallen by 3-4 percent this year, while the decline in prices was 15 percent last year.
Takhiev predicts that with the market entering the zone of deficit, the imbalance will be corrected through price. Retail sector will accept this price increase, because its margin has grown, the diamond industry has increased the number of stores and invested in marketing, and sales volumes need to be maintained at the proper level, the ALROSA’s representative believes.
Meanwhile, the market is currently giving optimists a ‘cold shower’. In early December, during the last trading session of the year, De Beers had to cut prices by more than 10 percent across its entire range, Bloomberg reports, citing its sources (De Beers does not comment on this information). This historically most significant correction of price was the first this year, and it looks like a capitulation, since the Anglo American’s subsidiary tried to avoid this by all means and provided flexibility to customers in their purchases and the right to refuse. Even after a sharp decline, De Beers’ diamond prices are still higher than in the secondary market, according to Bloomberg’s sources. By cutting prices, De Beers stopped some of the concessions it had previously provided to its sightholders.
Demand concerns
While one major diamond mining company expresses - at least publicly - confidence in the stable demand, another diamond miner declares a radical change in the ‘supply comes first’ trend that has dominated the diamond market.
Previously, the market was focused on supply, but now the priority is demand, De Beers’ CEO Al Cook told Edan Golan at the FACETS 2024 conference in early December.
According to Cook, demand has to outpace supply. There’s no point in producing anything that’s not expected to be in demand. So, they have to work harder to create the demand. “Don’t take demand for granted,” Cook said, warning the industry against complacency.
The industry needs to ‘close the ranks’ and re-stimulate demand, Cook believes. To do this, De Beers intends to resume large-scale investments in generic marketing, promoting natural diamonds as a category rather than brands. Cook also announced deeper partnerships with diamond producing countries in Africa, which means investing in sustainable development to maintain the confidence of consumers, who are more concerned about the origin of polished diamonds and the contribution of mining sector to solving social problems. From early 2025, De Beers is expected to introduce traceability technologies that will allow buyers to identify the origin of any polished diamond weighing over 0.5 carats. De Beers also seeks to establish closer partnerships with some of its sightholders to increase the share of polished diamonds in its sales without expanding its own cutting and polishing facilities. According to Cook, this will maximize revenues, since polished diamonds manufactured from rough ones mined in Botswana, Namibia, and South Africa should be of premium grade, taking into account their high quality, production effectiveness and contribution to the economies of these countries.
Optimism did not save from cost-cutting
Despite the expected trade recovery announced publicly, ALROSA was not immune to the need for optimization looming over the sector. In late November, ALROSA’s CEO Pavel Marinychev announced that the company could suspend production at its least profitable operations in 2025, and also reduce manpower costs by 10 percent via laying-off some employees.
“The industry is currently experiencing a crisis. This crisis is quite deep. For the second year in a row, we have recorded a decrease in prices. We are in a period of time when we have to take optimization measures, control our expenses and reduce our costs,” Marinychev stated.
“This [optimization] cannot but affect the diamond mining production, which we can afford to reduce in 2025 not to disrupt the strategy for developing our deposits. Some less profitable operations may be suspended during this crisis period,” he said. When the diamond market recovers, ALROSA expects to quickly ramp-up its production capacity and “work as usually”.
According to Marinychev, ALROSA is also going to reduce its activity in the implementation of its major investment projects, including the revival of the Mir mine (the Mir-Deep project, or Mir-Glubokiy in Russian) and the potential construction of a mine at the Yubileinaya Pipe.
ALROSA’s rough diamond output last year was 34.6 mn carats, and this year, it should not have decreased according to the mining company managers’ forecasts.
In 2020, amid the declining demand for rough diamonds during the COVID-19 pandemic, ALROSA planned to reduce its output by 6 percent compared to the company’s production plan previously adopted, and produced 32 mn carats instead of 34.2 mn carats. The company suspended mining for several months at its Severalmaz asset in the Arkhangelsk Region, as well as at the mine Aikhal and the Zarya mine of the Aikhal MPP (Mining and Processing Plant). The ores of these deposits are characterized by a low diamond grade, and the assets are inferior in profitability to the rest of the company’s operations. A radical option of adjusting production to 26 mn carats annually was also considered, but after the revival of trade in late 2020, ALROSA gradually resumed mining operation at all its assets.
India’s polishing sector is in depression
Although polished diamonds are gaining popularity in India’s retail sector, allowing this country to compensate for China’s weakness and surpass it, there are no signs of recovery in Indian polishing sector, yet.
According to GJEPC’s statistics, India’s rough diamond imports fell by 32 percent year-on-year to $2.36 bn in the third quarter. This is the lowest level since the onset of the pandemic in 2020. India’s polished diamond exports fell by 23 percent to $3.24 bn, which is a five-year low.
For the second year in a row, the Indian diamond cutting industry will be shut down for Diwali for longer than for traditional 21 days. This year, the polishing factories will return to full production in the first week of December instead of November 15.
Former president of the Surat Diamond Association (SDA) and industry veteran Dinesh Navadia believes that the current situation has changed for the worst compared to the 2008 crisis when demand for polished diamonds remained strong. “We have never seen such a recession in our life,” he says.
He considers geopolitics to be the main factor, including the Russian-Ukrainian and the Israeli-Palestinian conflicts. To overcome financial problems, Indian factories have cut diamond manufacture and gave their workers two or three days-off a week instead of the usual one day-off. US President-elect Donald Trump may be able to solve the global problems affecting the diamond industry, Navadia believes.
Cutting supplies
The crisis in the diamond market has forced diamond miners to reduce supply to speed up the destocking process.
De Beers cut its production guidance twice, ultimately confirming its full-year production target of 23 mn to 26 mn carats, 28 percent below the 2023 levels, but is assessing the possible further decrease in its production. In August, De Beers cancelled its regular trading session, postponing rough diamond sales until later in the year. De Beers’ sales fell more than 70 percent year-on-year in the third quarter as the company postponed the dates of its sights due to negative diamond market conditions and held just one trading session, compared with three sights in the same quarter of 2023. Third-quarter diamond production fell by 25 percent year-on-year amid weak demand and high midstream inventories. De Beers acknowledges that diamond inventory levels remain higher than normal and expects a protracted recovery.
Joshua Friedman of Rapaport also points to De Beers’ announcement to its sightholders that their contracts will not be extended beyond 2025. The number of sightholders (currently over 60) is likely to decrease during the next contract period starting in January 2026. That reflects not only an increase in a rough diamond share of Botswana’s state-owned Okavango Diamond from 25 to 50 percent, but also De Beers’ perception that the low demand period and resulting lower diamond production is protracted, Friedman says.
Petra Diamonds has cancelled its rough diamond tender scheduled earlier for August-September, saying it wants to support steps taken by major diamond producers to limit supply during the period of low demand. Rio Tinto has rescheduled its tender for rough diamonds from its only operating mine, Diavik, due to lower diamond production. Okavango also cancelled its rough diamond tenders in November and December.
ALROSA has not unveiled its sales volumes since the spring of 2022, but a number of statements indicate that the company, despite all the peculiarities of working under sanctions, continues to be cautious about diamond supplies. Russia, as a player in the global diamond market, adheres to the traditional ‘price-over-volume’ principle, according to Alexey Moiseev, Deputy Finance Minister of the Russian Federation. This approach involves limiting supply to support prices. In the conditions of oversupply in the current market, this is necessary - in the common interests - to ensure the industry’s recovery in 2025, as well as stable prices, according to the Finance Ministry.
According to the Finance Ministry’s logic, another element of this policy is the purchases of ALROSA’s rough diamonds by the State Fund controlled by Gokhran (State Precious Metals and Gems Repository) that has a successful experience in implementing such transactions after 2008-2009 when a $1-bn purchase of rough diamonds made it possible to continue diamond production. This year, the first purchase was made in March, and its volume is kept secret; another purchase was in November, but it is not clear whether this concerns unique gemstones that Gokhran acquires by law, or a wider range.
At the same time, the readiness - for the first time since 2012 - to use serious resources from Gokhran’s budget money to support ALROSA (this year, according to Moiseev, $1.55 bn may be spent on purchasing precious stones and metals) may indicate both difficulties with sales and creating a future ‘shelter’ for the diamond market. Gokhran, one of the divisions responsible for filling the Ministry of Finance’s budget, usually strives to preserve unique gemstones only, and sells a wider range, taking advantage of favorable diamond market conditions.
According to Paul Zimnisky, global diamond production is expected to fall to 105 mn carats this year, the lowest level since 1995. Although reducing rough diamond supplies to the market is only one side of the equation, this is the only right way for the diamond industry now, he believes. According to Zimnisky, the measures are expected to result in a significant reduction in inventories in 2025, facilitating the return of growing profitability and confidence to trading.
According to Zimnisky, although a significant price improvement is not expected before 2025, the long-term prospects of the diamond market are closely linked to the growing number and wealth of the population, as well as an increasing share of the middle class.
This is a classic point of view, and its proponents can only console themselves with the fact that the activity of the growing consumer category (Zillenials, Millennials + Gen Z) will help in reviving the polished diamond trade, despite all the challenges that were in recent years with natural polished diamonds and as a category the gemstones of interest.
Sergey Bondarenko for Rough&Polished