Whither the diamond?
It’s a good question. Ask the man on the street about the diamond industry, and he’ll insist that it couldn’t be going better — hell, diamonds are still a girl’s best friend, aren’t they? Ask a miner from any sector of the industry other than diamonds, and she’ll shrug and walk off — diamond people are mining’s small fry, our $8.5 billion a year barely registers against gold, or coal.
In other words, it’s difficult to get a bead on where the diamond sector really stands, unless you take the time to jump into the numbers. I live inside the numbers. As both a miner and a retailer, I have the rare privilege of observing the industry throughout the entire pipeline. These are some thoughts on what I’ve learned.
For one thing, diamonds remain a powerful symbol at the retail level. Despite all the conflict diamond tarnish, they still represent love and commitment. With the new, emerging middle class in China and elsewhere in the developing world, our stones are the ultimate sign of luxury. Like fine art, they remain a financial and emotional investment. Because so few diamonds make it to the resale market, prices historically remain high. Numerous attempts at creating diamond funds have never born any fruit, even though the price of polished diamonds has increased 100% since 2004. Rarity and quality still drive prices, as always.
“You cannot drown a market with an article appertaining to the highest luxury. . . Into the hands of a company all these public fields must fall and, thus used, they may benefit the countries for generations to come.” So said Frederick Boyle back in 1871, and a decade later, the De Beers diamond company made attempts at consolidating all the smallholdings in South Africa’s Kimberley. By 1887, all of them were amalgamated. Cecil John Rhodes, the indefatigable colonialist who drove the De Beers machine, declared that “producers were not at the mercy of buyers, but buyers at the mercy of producers.”
That status quo — the so-called De Beers monopoly, lasted until the late 20th century, and then started unravelling due to pressure from new markets coming online. The increased transparency leads to competitive prices, never a bad thing for the consumer.
Now, the industry has hit a rough patch.
Where are all the major new discoveries that the diamond sector needs to drive production? Where are the funds for exploration? The assets held by the large producers are reducing supply, while the numerous small to medium producers with smaller assets are at various stages of production, and unable to pick up the slack. The result: demand is outstripping supply, or at least soon will.
Once again, we note that consolidation is the key to future growth of the industry.
As far as the global rough diamond market is concerned, De Beers and Alrosa control 60% of it. This remains a segmented market with respect to prices: both the open market and direct supply market feed product to those who need it. Post the 2008 financial crash, the market changed dramatically, with roller-coaster rough prices that hadn’t been experienced by the industry before. There was suddenly a major disconnect between prices of rough and polished diamonds.
Since 2012, we’ve experienced a 15% drop in prices, and it’s been a rocky road. There remain two forms of sales — tender and contract. The open market, as Milton Friedman promised, increases competition.
(The likelihood is that mega companies will created from sightholders, but there is a chance that won’t happen. Diamonds could buck the consolidation trend.)
As far as the open market is concerned, tender sales are predominantly by junior- to mid- sized producers. With tender sales, the price moves upwards in a good market and dives in a soft market; there is no obligation from diamond traders to support sales. “Old school” negotiations are still possible in some African countries, but less so in the developed world. As De Beers divests of their sightholders, the competition increases.
As far as contract supplied rough diamonds are concerned, the major players are De Beers (DTC), Alrosa, Rio Tinto (RIO-N,RIO-L), and until the sale of its Ekati mine to Dominion Diamond (DDC-T, DDC-N), BHP Billiton (BHP-N, BLT-L). DTC services a supply contract that will run from 2012 to 2015 (three years) Alrosa, on the other hand, do direct supply for local beneficiation and traders and tenders, while BHP engaged in a unique form of tender that dictated the spot price.
Then, there’s the so-called “Alternate Assured Supply,” where diamond producers sell marketing rights in return for debt or equity, and diamond industry players invest in their own diamond mining ventures.
That’s the basic overview, and as I’m sure you can tell, it’s up and down regarding pricing, and some major, major changes in the stability of the industry since the crash.
But for aggressive producers and retailers, there is still hope.
Diamonds, after all, are forever.
— Jeffrey Brenner is a diamantaire and manager of diamond marketing and sales for Rockwell Diamonds.