Diamond Production Dropped, Now It Is Nosediving

Global diamond production sank 6.9% in 2019, the deepest plunge in a decade. By value, production dropped 6.2%. There were good reasons for this, and our updated production forecast calls for an even more significant slide in 2020.

Diamond Production by the Numbers

Diamond production totaled 138.2 million carats (mcts) in 2019, according to the latest figures released by the Kimberley Process (KP). The value of this production was $13.6 billion. This is the deepest drop in diamond production since 2009 when the Great Recession led to a deep decline in global economic activity and consumer demand.

Most leading producing countries suffered from a deep drop in production volume, down cumulatively 24.6%. The rest of the producing countries suffered a 14% decline in production.

Russia’s production, essentially ALROSA’s production, rose despite less demand for rough diamonds. ALROSA’s underlying philosophy is that the company will not reduce production in response to reduced demand. It will not reduce prices either. Instead, it churns out goods and waits for demand to rise again. When that happens, they have stocks of the needed goods on hand, while other diamond miners must ramp up production.

There are a few other reasons for this approach, some to do with internal pressures, but until COVID-19 forced its hand, ALROSA maintained this policy.

Diamond Production Breakdown

By value, the 6.2% decline in production is less pronounced and less unusual. In 2018, the total value of diamond production declined 8.9%. In 2010, the value dropped 10.7%. 

The Anomaly of Rising Production in a Downward Market

The most significant conclusion about the drop in global diamond production is that, in the past few years, there was an oversupply of rough diamonds. The rise in production was a disconnect from real demand and caused a buildup in polished diamond inventories in the manufacturing section of the diamond pipeline.

This decrease in demand started at the consumer level. Consumers in the recent past were less inclined to pay high prices for a diamond jewelry item. This placed pressure on retailers and slowly affected the value chain through wholesaling, manufacturing, rough trade, and production, forcing prices downward. The rise in production only exasperated the situation.

Diamond Business Hurt by Oversupply

During 2016-2018, De Beers, ALROSA, Rio Tinto, and other large diamond producers sold what they mined almost regardless of any large drop in real demand. By doing so, they created the rough diamond glut that hurt the diamond business and eventually forced miners to sharply decrease production in 2019.

Historically, De Beers has decreased supply when prices declined and increased it when prices were too high. The company was widely criticized for this practice. It is ironic that when De Beers did exactly what many demanded they do – to simply sell all rough diamonds they mined regardless of price movement – it proved harmful to the diamond business as a whole.

Real Global Diamond Production Estimate

In reality, the quantity of global diamond production was a little higher than 138.2 mcts due to smuggling. A certain amount of goods were reportedly smuggled out of their country of origin. This practice was estimated to be very limited in scope. According to these reports, the illicit cross border movement happened primarily, but not only, out of central African producing countries.

Just how much is smuggled and what this represents in terms of total production are key questions. Most production, accounting for nearly 80% of mined output, is in very organized countries where smuggling is not suspected. The rest include some rogue countries with limited controls. The illicit trade is mainly out of a limited number of these countries.

The additional goods unaccounted for from countries like Venezuela, the Central African Republic, and Cameron are roughly estimated at 700,000 carats.

In total, KP’s reported 138.2 mcts plus the smuggled goods brings real global diamond production to 138.9 mcts. This places the smuggling estimate at 0.5%.

Global Diamond Production Forecast

More than halfway through 2020, a devastating year for global economies with extensive lockdowns and hardly any rough diamond sales, it is clear that diamond production in 2020 will be considerably lower than it was in 2019.

Based on production reports published so far and miners’ updated guidance for the year, diamond production is estimated to decline 22% in 2020. Using the KP figures, this translates to 108 mcts in 2020, or 108.5 mcts based on the full global production including smuggling.

A 22% decline in the volume of diamond production is a very conservative figure. It does not take into account the realistic possibility that several mines that closed or were put on care and maintenance in recent months may not open until the diamond market recovers.

A more aggressive estimate, which takes into account the issues that mining companies in Canada have, the high inventories held by the leading producers with the impact lower prices will have on less profitable smaller mines, and the decline could sink a further several million carats to 103 mcts, a 25% drop in production.

The Bottom Line

Pay attention to consumer demand. The supply chain may end there, but demand starts there!