High rough diamond prices significantly boosted mining profits in the first half of 2011, according to Avi Krawitz at www.diamonds.net. Rapaport estimates that average Diamond Trading Company (DTC) rough prices rose about 35 percent during the six months proved spot-on when De Beers reported its results earlier this week [July 25-31]. Others, including ALROSA, Gem Diamonds and Petra Diamonds, showed similar strong gains.
The price hikes therefore came as little surprise and the market has now well surpassed pre-recession levels. However, the extent to which prices lifted the mining companies’ respective bottom lines did surprise as the volume of rough diamonds supplied to the primary market fell compared to the same period in 2010. It’s little wonder that demand appeared so strong during the period.
ALROSA was the largest producer by volume during the half-year with production up 8 percent to 19 million carats. But the number of carats sold by the Russian company fell 23 percent to 19.1 million carats. De Beers production was flat at 15.5 million carats, while Rio Tinto’s fell 26 percent to 5.2 million carats and BHP Billiton’s was down 25 percent to 1.13 million carats. The number of carats sold by Petra Diamonds and Gem Diamonds fell by 2 percent and 7 percent respectively, while their production dropped by even more.
The combined total of these top six producers indicates that global production fell by about 2 percent compared to the first half of 2010. As already noted, the drop in carats sold, which were not disclosed by De Beers, Rio Tinto and BHP Billiton, followed suit.
The declines were attributed to a variety of reasons, including a prolonged period of heavy rainfall in southern Africa, maintenance issues at De Beers mines and the impact of underground development projects at BHP Billiton and Rio Tinto. Perhaps one should add to that the aspect of careful market assessment as the risk of U.S. and European debt default, and generally sluggish economic growth in those mature economies, continue to threaten the recovery.
Indeed, supply appears to be in line with demand and there have not been reports of rough shortages in the market. There is enough rough above the ground to satisfy demand. It seems that rough dealer’s inventories have risen this year with buoyant trading taking place. If anything, sporadic reports of shortages in the polished market indicate that not enough rough is being passed on to the manufacturing sector. Dealers, like the miners, have capitalized on the high rough prices so far in 2011.
The outlook for rough supply signals that the same trends will continue for the rest of the year. De Beers management told Rapaport News that it has lowered its initial production outlook for the year from 38 million carats to about 35 million carats. While its inventories are said to be stable and back to normal working levels, the volume of carats sold by De Beers is expected to fall well short of the 38 million carats supplied by the company last year. Still, De Beers management assured that supply would meet demand from its DTC sightholders and Diamdel clients, and that supply by other producers would compensate for the shortfall.
Undeniably there may be rough coming to market from previously untapped resources. Petra Diamonds is expected to ramp up its production, particularly as it closes its purchase of the Finsch mine from De Beers in the coming months. But perhaps more significantly, scores of diamonds from Zimbabwe’s Marange fields are expected to enter the market, if they haven’t already, with or without Kimberley Process (KP) certification.
Tendai Biti, Zimbabwe’s Finance Minister, reported this week that the country exported 716,958.5 carats of diamonds from Marange in the first half of the year and that the Treasury collected diamond revenues of $103 million, which would include proceeds from Rio Tinto’s Murowa production. Marange production, meanwhile, reached 2.3 million carats in the first half of 2011 adding to the output of 8.4 million carats in 2010, Biti reported. The numbers indicate that Zimbabwe has accumulated an inventory of more than 10 million carats of Marange production over the past year and a half. While Biti claims that the Treasury has a significant shortfall of diamond revenues that have not been collected, it is assumed he is referring to a large portion of that inventory that has in fact been sold.
Whether the Marange goods will make up for the decline in supply from the major mining companies remains to be seen. It is expected they will not as the Marange goods would satisfy only demand for lower quality diamonds, as these stones are said to be. Certainly, Marange production is not significant enough in quality to impact any average price uptrends that might take effect in the coming months.
That job would be left to the rough-dealer market. As dealer inventories have risen in line with their expectations for future price hikes, a continuation of that practice at the same level seen in the first half of the year could lead to an overheated market. With the forecast out for strong Diwali, Christmas and Chinese New Year seasons, one would hope that more rough is filtered to the diamond cutters, at reasonable premiums, to ensure a healthy balance between rough supply and polished demand - perhaps achieving a balance that would mirror the caution signaled by current production levels.
