Rough Diamonds’ Loopy Ride

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Two opposing trends arise from the steady series of diamond miners’ annual reports that have come out over the past few days: while rough diamond production increased, rough diamonds’ average price per carat decreased in 2017. With few exceptions, this resulted in a rise in sales volumes, and a decline in rough diamond sales revenue.

One outcome of sales outpacing production could be an incentive to further advance rough diamond prices.
There are many reasons for the decline in the average price of rough diamonds: a change in the mix of goods coming out of the ground, a change in consumer demand that drove interest in lower-cost diamonds, a decline in sales, and the impact of the demonetization in India.

De Beers reported that the average price of goods sold to trade clients (consolidated sales) was $162 per carat (p/c). This is 13% lower than the average price achieved in 2016. This price decline, the company said, reflected strong demand for lower value goods following “a recovery from the initial impact” of India’s demonetization in November 2016.

Another reason for the price drop was the ramp-up of diamond production from lower value per carat, but high margin operations at the Orapa and Gahcho Kué mines.

In total, De Beers’ diamond production rose 23% to 33.5 million carats. Total rough diamond sales are estimated at $5.7 billion, a 5% year-over-year decline.

De Beers: 22 Years of Rough Diamond Sales

De Beers: 22 Years of Rough Diamond Sales

ALROSA reported that diamond production increased 6% to 39.6 million carats in 2017, and rough diamond sales totaled $4.2 billion, down 13% year-over-year. The average ALROSA achieved price fell 15% in 2017.

ALROSA Rough Diamond Sales

ALROSA Rough Diamond Sales 2002-2017

Rio Tinto, the third largest diamond producer, mined 21.6 million carats, up 20% compared to 2016. Based on preliminary figures, Rio Tinto Diamonds’ sales are estimated at $649 million, up 6%. If the estimate is accurate, Rio Tinto Diamonds is the only major diamond miner to post an increase in sales.

At Petra, production rose 3%, and sales declined 6%. Here, the issue was unique: Tanzania blocked the export of some 71,655 carats of rough diamonds from the Williamson diamond mine. Petra’s average rough diamond price per carat declined 3% to $121 p/c.

Leading Diamond Miners’ Diamond Production & Sales 2016-2017

Leading Diamond Miners’ Production & Sales 2016-2017

Italicized figures are estimates
Source: Company reports, Edahn Golan estimates

Realized Price Down, Despite Price Increases

Many diamond traders and manufacturers state that the prices they are paying for rough diamonds are high. Even where prices declined, they declined at a slower rate than polished diamonds.

The decline in average price per carat as reflected in diamond miners’ reports was mainly a result of the change in the mix of goods sold. In fact, some of the diamond mining companies reported that on a like-for-like basis, prices were actually higher – up a low single digit.

On a like-for-like basis, rough diamonds price rose 3% according to De Beers and by about ~3.5% according to Petra. The important takeaway is that after rough diamonds’ price depreciation in 2015 and 2016, in 2017 the direction changed, and prices headed upwards.

De Beers Rough Diamond Price Index

De Beers Rough Diamond Price Index - 2009-2017

Signs of Underproduction

Both De Beers and ALROSA sold more diamonds than they mined. This happened in 2016 and again in 2017. It makes sense that sales and production never fully align, and this happens in both directions – more sales than mining and vice versa.

The important takeaway is that after rough diamonds price depreciation in 2015 and 2016, in 2017 the direction changed, and prices headed upwards.
Sometimes, a small overhang develops and miners will make a few price adjustments to increase attractiveness and move out goods. If demand is strong enough, and inventories are so low that it makes it difficult to create an assortment, it makes sense to increase diamond production.

The odd thing is that sales outpaced production to a good degree. Based on figures that De Beers and ALROSA released, they each sold about 1.6 million carats.

It may not seem like a lot, just 4% of their sales by volume in 2017, but 3.2 million carats between the two of them is a sizeable amount of goods. This means that these miners had a serious buildup of inventories during the past two to three years.

How much of a stockpile did each hold at the onset of 2018? According to ALROSA’s 2016 IFRS statement, it had diamond inventories valued at 55.53 billion rubles – about $832 million. However, inventory is valued below wholesale value (either calculated on a cost basis and/or expected realized price less cost).

In 2017, rough diamond inventories at the two companies were lower than in 2016, but this still could be an issue and may have a certain impact on the industry.

One outcome could be an incentive to further advance rough diamond prices. This move would not be welcomed by the midstream of the diamond pipeline, especially if polished diamond prices continue to slowly slide downwards.

Kicking Off 2018 with a Cautious Cheer

De Beers’ first supply cycle of 2018 totaled $665 million, up 46% compared to the preceding sales cycle, the last one in 2017. The first Sight tends to be high, on the heels of the November-December holiday sales period that results in lower polished diamond inventories – both in the trading centers and in the consumer markets. However, when compared to the first cycle a year ago, the Sight was 9% smaller.

De Beers did not raise prices during the first sales cycle. That said, some boxes sold for a double-digit premium on the secondary market.
This news is actually encouraging. After a tough year for manufacturers, a strong holiday season led to a sharp drop in the polished diamond stock they held, resulting in a much needed cash flow. The optimistic mood, strong interest in rough diamond tenders, and historic trends indicate that demand will be very strong.

But buyers, while paying more at auctions – see Stornoway’s January rough diamond tender results for example – and asking for additional supplies from De Beers (ex-plan) do not seem to be rushing into another escalating price war. De Beers supported that by not raising prices either. That said, some boxes sold for a double-digit premium on the secondary market.

At best, the market is expected to be stable in 2018. Polished diamond prices will not rise dramatically, but are likely to remain near their current level due to tempered consumer demand in the US. The volume of demand will follow suit. Therefore, the main producers are likely to adjust diamond production to consumer demand and inventories. As for rough diamond prices –we are at the point where consumer demand has great influence on prices up the pipeline. If this demand is stable –rough prices will be stable too.

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Comments 2
  1. The suggestion that the fall in $/ct prices is a result in increased demand for lower price goods, only makes sense if they are being supplied from stockpiles. A mine cannot produce to order, so any increase demand for lower-priced goods should result in an increase in average $/ct unless the demand increase is accompanied by a decrease in higher-priced goods resulting in a lowering of their price. But there is no suggestion that has happened.

    1. Post

      John, that is indeed what happened: manufacturers bought a greater proportion of low cost rough (which pushed down miners average price p/c of sold goods). Because run of mine production does not reflect demand, miners have had large inventories for the past few years. At the same time, If you look at changes in price on a like-for-like basis (which is disconnected from the mix of sold goods), than you will see that on average, prices are up.

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