Rough diamonds achieved record prices in the summer of 2011, but prices have since slipped back to 2010 levels on global macroeconomic worries. However, current prices are still higher than historic levels reached in the summer of 2008, and new supply is estimated to fall short of new demand over the next two decades, which could take prices back to new highs. According to a December Bain and Co. report, “The Global Diamond Industry: Portrait of Growth,” global diamond demand is expected to grow at 5.9% annually through 2020, while supply is only expected to grow at 2.7% over the same period of time. (I think it is worth noting that when discussing diamond supply/demand, the demand is typically end user or purchaser demand of polished diamonds, while supply is typically rough diamond supply from mines. There are sometimes divergences between rough and polished diamond prices, but generally speaking they are symbiotic.)
Modest-at-best new supply growth over the next 17 years can be attributed to mature mines approaching non-economic depths, and a lack of new projects to offset the diminishing production of the aging mines. Even with annual supply growth of 2.7% through 2020, the supply in 2020, estimated to be 157 million carats, will still not equal pre-financial crisis supply of 177 million carats produced in 2005.
Two of the largest diamond mines in the world, Canada’s Ekati and Diavik mines, have exhausted open pit resources and now are both underground mines. The need to convert a mine from an open pit operation to an underground operation typically results in curtailed production given the geology of kimberlite pipes (the geologic formation of the resource is shaped like a carrot, and gets narrower at depth). Ekati’s production declined 28% year-over-year (YOY) in 2012, and Davik’s production is estimated to decline 17% YOY in 2013. Three more of the world’s largest mines are set to go underground over the next few years, as Russia’s Udachny mine is expected to be converted to an underground operation in the next two to four years, and Botswana’s Jwaneng and Orapa mines are expected to go underground shortly thereafter.
Given that it can take more than a decade and $1billion to take a diamond project from discovery to production, there have been a very limited number of significant new projects in development since the mid-1990s. Projects expected to come online in the next five years, with estimated annual production of 1 million carats or more are Canada’s Renard and Gahcho Kue projects, Botwana’s Ghagoo project, and Russia’s Grib, Lomonosov, Botuobinskaya, and Lomonosovsky projects. Two other projects worth noting are Canada’s Chidliak and Star-Orion projects, which have the potential to be large mines, but are not likely to commence production any time soon.
The intention of this study is to focus solely on the new supply of gem-quality rough diamonds through mine production. The mining of industrial grade (non-gem-quality) diamonds exclusively is not economic, thus, an estimated 98% of industrial grade diamond demand is supplied with synthetic (lab grown) diamonds. However, mines do produce industrial grade diamonds, but only as a by-product. On average, gem-quality diamonds only represent approximately 25% of a mines production, but account for 95% of the value of diamonds produced. It is important to understand that diamond mining is not just about the quantity of carats produced, but also the quality of diamonds produced. That said, for purposes of simplicity, this study is based on the assumption that the supply of rough diamonds is based on the quantity of carats produced, not the value of carats produced.
Global 2012 rough diamond production is estimated to have been 127 million carats, 2013 production is estimated to be 130 million carats. The below chart details the production of the most significant diamond mines in the world, estimated to produce a combined 113 million carats in 2013 (or 87% of estimated 2013 supply). The balance of 2013 global rough diamond production (or 13% of estimated 2013 supply) not included below is composed of small-scale or informal mining operations, where production data is opaque or not available. For example, the Democratic Republic of the Congo (DRC) is the third largest diamond producer in the world by volume, but there is only one commercial producer in the country, so the majority of DRC production data on a project basis is unreliable or not available at all.
Like most industries, the price of diamonds is product of the balance between supply and demand. This is especially true now that there are many diamond producers and no De Beers monopoly. The lead time to bring on new diamond production is long and requires great investment so we can expect to see prices increase until this investment in new mines is justified.