Diamonds Update

De Beers, the world’s largest diamond producer, has notified their clients that the first half of 2007 will have a reduced supply of rough diamonds.

This is a result of several forces in the rough diamond production and marketing arena.  One factor is that 2007 will begin the reduction of De Beers’ purchases of Alrosa rough diamonds as a result of a deal with the European Commission to settle a long-running legal case alleging monopoly.  Under the agreement, De Beers agreed to reduce purchases of Alrosa production by $100 million in 2007 and $100 million each subsequent year until purchases are zero in 2009.  Alrosa is unlikely to replace that level lost sales as they work to ramp up their new marketing efforts so the supply will dwindle.

Another complicating factor is that Botswana, primary source of De Beers’ production, will probably have lower production in 2007. The declining production of older mining operations is an industry trend that will continue for the next decade.  The diamonds in these older mines are more difficult to extract as they most go deeper, so production declines. 

De Beers’ newest mine, Snap Lake Arctic, is projected to start production in October 2007 so will not be contributing to worldwide production during the first part of the year.

The diamond industry is going through many structural changes and change usually means less efficient flow of diamonds.  For example, De Beers has pledged to provide rough diamonds to southern African countries so they can expand their involvement from mining into cutting and polishing and thus enjoy a bigger share of the economic wealth created by diamonds.  These operations will not have the efficiency of current clients and will siphon some of the rough diamond supply away from their current clients.

The bottom line is that worldwide supply will be reduced or at least slowed down in 2007 with the expected result being the firming of prices leading to a longer term trend of price increases.