Diamonds are certainly not forever
While to some it may appear that this is a result of the financial scams involving some of the biggest names in the diamond and jewellery business, the causes go much beyond that
RN Bhaskar — Nov 19, 2018
The Indian diamond industry is being forced to change the way in works.
While to some it may appear that this is a result of the financial scams involving some of the biggest names in the diamond and jewellery business, the causes go much beyond that. True, sharp practices by Indian diamantaires made almost every international bank run shy of advancing money to the trade almost five years ago. But there are other developments that threaten to alter the way the trade works, not only in India, but globally as well.
In 2015, Betterdiamondinitiative.com stated the following (http://betterdiamondinitiative.org/wp-content/uploads/2015/12/2015-for-Global-Diamond-Industry.pdf):
More than 30 major diamond mines are rapidly reaching their end of life by 2030. Rough diamond production is forecasted to fall by more than 50% by 2030, from their current levels.
The scenario will further aggravate by 2050, when only 14 million carats of global rough diamond production is predicted, by Frost & Sullivan. Similar forecasts have been made by Bain, McKinsey and De Beers.
The list is quite long.
- Mines like Argyle (Australia) and Ekati (Canada) now have reserves only for 7 years (http://www.dnaindia.com/analysis/column-policy-watch-diamonds-un-make-in-india-2047554).
- Argyle, the third largest diamond mine by volume, will reach its End of Life by 2020.
- Major mines in South Africa (Venetia, Kimberly, Voorspoed) and in Botswana have less than 10 years of reserves (http://www.wallstreetdaily.com/2014/09/09/diamond-shortage/).
- Voorspoed mine (South Africa) has life only till 2021 (https://www.debeersgroup.com/media/company-news/2018/de-beers-group-to-proceed-with-closure-of-voorspoed-mine) .
- Venetia mine has already exhausted its open pit reserves (http://betterdiamondinitiative.org/diamond-mining-on-the-cusp-of-exhaustion/).
- De Beers is ending its Kimberly operations, is currently retreating its tailing dump and the mine is expected to come to end of life in 2018.
A little over a month ago, Berenberg, in its report titled Diamonds: Icy winds of change; dated 19 September, 2018, announced similar conclusions. It stated that supply is falling and demand is rising. “We think that the inflection will occur in ~2021E, but between now and then we forecast a market surplus driven by the emergence of new mines, which are producing lots of low-value, small diamonds. Adjusting for this, we think there will be market tightness in 2022E. This has led to a bifurcated market, with small diamond prices under pressure, and large diamonds, where there are better margins for midstream participants, being structurally more attractive.”
More interestingly, both betterdiamondinitiative and Berenberg are in agreement about one more thing – that lab-grown diamonds (also referred to as synthetic diamonds by some) are a disrupter. Berenberg’s survey of ~2,000 millennial women from around the globe showed that while there is till a market for earth-mined diamonds, there was a growing preference for lab-grown diamonds. The reasons for this are many.
Lab-grown diamonds generally have less flaws than earth-mined diamonds. In markets where flaws are considered inauspicious, the preference for lab-grown diamonds is growing. It is seen to be more friendly to the ecology (it does not scar the earth) and avoids the taint of blood diamonds (http://www.asiaconverge.com/2011/05/what-you-didnt-know-about-de-beers-and-diamonds/).
Second, it is almost impossible to tell the difference between earth-mined and lab-grown diamonds.
Third, lab-grown diamonds are less expensive than earth-mined diamonds (sometime by over 30%). The market for this type of diamonds, says the Berenberg report, could swell to $3.7 billion by 2030. That would help fill the vacuum that would otherwise have existed between the market for diamond jewellery and the supply of earth-mined roughs (see chart 1)
What is equally interesting is that the price of earth-mined rough diamonds has begun to fall. The rate of price declines could be expected to accelerate.
There are several reasons for this.
First, market demand is soft for diamonds. Second, the shift to lab-grown diamonds is now evident. Third, lab-grown diamonds are available at lower prices for quality and sparkle that outmatch earth-mined diamonds.
Equally significant is the fact that even though De Beers has constantly espoused the cause of earth-mined diamonds – at one time it control over 9% of the supply of rough diamonds to the world – it too has begun producing lab-grown diamonds (https://betterdiamondinitiative.org/de-beers-also-foraying-lab-grown-diamond-jewelry-market/). More and more jewellers are beginning to train workers to cut and polish such diamonds.
Meanwhile, the reducing demand for earth-mined diamonds, and the competition of lab-grown diamonds has caused the prices of roughs to start falling (see chart 2), This is notwithstanding the reduced supply of roughs in the world. People expect these prices to continue falling. Before rough prices started falling, De Beers managed to squeeze cutters and polishers of rough diamonds, by constantly increasing the prices of roughs, even while the prices of polished diamonds remained soft because of market conditions (http://asiaconverge.com/wp-content/uploads/2015/12/2015-02-05_Govt_Book_4-2-15_Low_Res.pdf).
Yet the sparkle in diamond jewellery has only increased. This is because lab-grown diamonds offer a better sparkle. Moreover, the industry has even begun producing large stones (https://betterdiamondinitiative.org/rarity-redefined/), Expect more developments on this front.