Global diamond production will gradually decline from 2020

Do not give advertising statements that present a deficit as a reason for investors to invest dollars in the diamond mining sector, to deceive themselves. In fact, like many other goods in the world now, the diamond mining industry is also "drowning" in excess supply. Worse still, against the backdrop of all talk about a decline in diamond sales, world output actually grew in the first half of the year and seems to continue its growth for the remainder of 2015.

The total output of the five major diamond mining companies in the world rose to 47.26 million carats in the six months ended June 30, an increase of 8 percent from the previous year. The shares of ALROSA, De Beers, Rio Tinto, Dominion Diamond Corp. And Petra Diamonds account for approximately 70 percent of the global supply. Taking into account their respective plans, it is planned to increase production by 5 percent to over 50 million carats in the second half of the year, which is the highest level of production for the half year since the financial crisis of 2008
Limited Demand for Diamonds

Of course, neither the diamond market nor the diamond market guarantees such volumes in 2015. Demand for diamonds in July fell to new record low values, as diamond producers reduced their purchases of rough diamonds due to high diamond prices and an oversupply of diamond stocks.

Recognizing the weakness of the market, De Beers allowed sightholders to postpone up to 75 percent of their bids for the remainder of the contract year, while ALROSA made similar concessions to its customers - to postpone the volumes allocated to them in July and August. De Beers also lowered its prices by almost 10 percent on the August website, which affected the fact that some sightholders asked to return already deferred goods. This site closed with an estimated amount of $ 300 million compared with the originally projected amount of $ 250 million.

Still, the demand for diamonds is limited, and the trade in diamonds is cautious. "People buy less and try to keep small stocks," said the Antwerp dealer who was taking part in the International Diamond Week in Ramat Gan this week. "But there's still a lot of goods on the market."

Dealers at this event said that demand from the United States supports the market, as demand from China and - to a lesser extent - India has declined. In addition, the outlook for China has declined, thereby reducing the long-term growth prospects for the industry and increasing surplus.

Diamond miners are making plans

Des Kilalea, an analyst at RBC Capital Markets, expects that the market will continue to surplus, at least until 2018. He said that liquidity levels and a decline in diamond prices will help increase demand and reduce surplus. But Kilali also stressed that the decision on the volume of production of large diamond mining companies will have an impact.

In light of the weakening of the market, De Beers is the only one among the five companies that has cut its production plan for this year from 32-34 million carats, projected in January to 29-31 million carats today. Paul Rowley, De Beers' global sales manager for sightholders, told Rapaport News that the diamond company does not plan to further reduce its production volumes, although it will continue to closely monitor the market.

Therefore, why should not other companies adjust their production volumes accordingly?

Perhaps the most revealing was that Igor Kulichik, Finance Director of ALROSA, said during a recent teleconference that the Russian company would prefer to increase its reserves, rather than reduce production due to high costs of operations to regulate production. He said that ALROSA stocks have already jumped from 14 million carats at the beginning of this year to 17 million carats at the end of the first half of the year. Although the company confirmed its forecast for production of 38 million carats for 2015, he added that by the end of the year, perhaps the reserves will grow even more.

Some suggest that ALROSA can afford to maintain full production, as they did during the financial crisis of 2008-2009, because it can sell surplus stocks to Gokhran, to the state treasury. But a representative of ALROSA said that the company did not sell any volume of diamonds to Gokhran this year, adding that "it is difficult to predict whether such sales will be made before the end of 2015".

In fact, the Russian Gokhran has its own limitations in 2015 after the ruble depreciated by 76 percent over the past 12 months due to the fall in oil prices, creating a big gap in the state budget. It should also be noted that ALROSA sold 18 million carats in the first half, which equals the volume of its production, despite a 21 percent increase in inventories.

Similarly, in six months, including June, Petra Diamonds sales amounted to 1.77 million carats, compared to a production volume of 1.58 million carats. Despite the fact that Petra is striving to achieve the annual planned production of 5 million carats in 2019, the company representative noted that the company's volume is not large enough to influence the conditions of the global market. A representative of the company Dominion declined to comment on this message, as the company has a quiet period before the publication next week of income data.

In addition, Rio Tinto is on track to achieve a production volume of 20 million carats in 2015, a 44 percent increase over the previous year, and the bulk of this growth comes from the Argyle mine in Australia. Kilali said that increasing supply in the market from the Argyle mine could offset the decline in production from the Marange fields in Zimbabwe, where similar types of diamonds are of poor quality. In 2014, production in Zimbabwe fell sharply by 55 percent to 4.77 million carats, according to the Kimberley Process Certification Scheme, and this year it is expected to fall further.

Markets, the driving force of which is the offer

A spokesman for Rio Tinto noted that the Argyle and Diavik mines owned by the company are completely underground operations that can not be regulated. In fact, the creation of stocks may well be a matter of value, not a matter of the market. Diamond companies may also want to maintain production levels, since the main production costs are relatively low, given that energy prices are below $ 50 per barrel, and the currency, for example, the Russian ruble, the RAR of South Africa and the Canadian dollar, are trading close to the record low Levels. De Beers reported that its cost in the first half of 2015 decreased by 10 percent compared to the same period last year.

This sheds light on why production volumes will continue to grow in 2015, and will not decline in the coming years. In addition to the production plans of large companies, a number of new mines are put into operation, which further increases the excess supply volumes. The Mushroom Mine of Lukoil Company was put into operation in 2014 and increases production to full capacity, as well as the Gaghoo mine of Gem Diamonds. The Gahcho Kué mine, which has a high volume and is a joint venture between De Beers and Mountain Province, is due to be commissioned next year, although Stornoway Diamonds has stated that its Renard mine will be ready to start production at 2017 year.

As the projects were commissioned and the old mines closed, De Beers and Bain & Company predicted in their reports that global production will gradually decline from 2020 after reaching a peak around 2018. It may be so, but it seems that there will be a larger volume of diamonds for sale for a long time after these terms, as diamond mining companies accumulate stocks.

There remains one of two possible scenarios for the rest of the market in the coming years. Diamond companies can either sell those excess diamonds at reduced prices - ultimately, each product is sold at some price - or they can hold these diamonds and give them out gradually when demand maintains the price preferred by diamond mining companies.

This second scenario allows us to present the strategy of the past few months in a broader context. Despite the fact that diamond prices have been adjusted by about 10 percent in August, it is unlikely that they will fall sharply again this year, despite prolonged discontent over the low profits of diamond producers. Since diamond mining companies prefer to store diamonds in their storage facilities, rather than in the bowels of the earth, they certainly prefer to reduce the supply and wait for prices to improve in the market. Therefore, the surplus of diamond stocks is gradually decreasing, diamond diamond mining stocks are growing rapidly. Probably, this will allow them to convince investors that in the medium to long term the demand actually exceeds the supply.

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