Out of the world's top three diamond miners by volume, only De Beers is expected to increase production, as diamond output at Russia's Alrosa (RU:ALRS) and diversified-major Rio Tinto (LN:RIO) declines, more than offsetting the De Beers boost.
Combined, the three companies represent approximately 70% of global diamond supply by volume.
De Beers, 85%-owned by Anglo American (LN:AAL), is estimated to produce 34.6Mct worth US$5.7 billion in 2018 - enough to maintain its status as industry-leader in terms of value produced. The production figure represents a modest year-on-year increase of 1.2Mct, with the boost expected to primarily come from the company's Jwaneng mine in Botswana, the richest diamond mine in the world in terms of value produced.
In 2018, Jwaneng is estimated to produce 13.5Mct worth $2.7 billion, which compares with 11.9Mct worth $2.3 billion in 2017. The mine, itself, represents 17% of global diamond supply by value on an annual basis and, with an estimated resource of over 350Mct, has a remaining life of 25 years.
At current estimates, De Beers would be producing at approximately 95% of production capacity in 2018, compared with 91% last year and only 80% in 2016. De Beers' strategy of "producing to demand" over the past two years has reduced the company's excess inventory to more normal levels. It held as much as 12Mct of ‘excess' inventory at the end of 2015, yet the company now only holds 3-4Mct over minimum operating levels, the lowest figure since 2014, according to estimates.
At the moment, De Beers market share by value produced and sold is 37%. This is down from 45% a decade ago and from over 80% in the late-1980s before the industry restructured. With no new advanced-stage kimberlite projects in the works and production close to capacity, it is unlikely the company's market share will significantly revert to higher levels in the short-to-medium term without an acquisition, which even then would be limited by antitrust restrictions.
Alrosa is expected to be the world's largest producer by volume in 2018, with output of 36.6Mct. This is down from 39.5Mct last year, with the production decrease attributed to lost output at the company's Mir mine following an accident last year that led to the operation flooding. It was also hit by a decrease in production at the Jubilee mine - a result of normal depletion.
Mir produced 2.8Mct last year prior to the accident and 3.2Mct in 2016. In an investor presentation from January, Alrosa accounts for zero production from the Mir mine through 2020.
Jubilee, meanwhile, has been Alrosa's largest producing mine by volume for the past two years, however production is estimated to decrease from 10.1Mct last year to 8.2Mct this year and further to 5.9Mct in 2019 on falling grades.
The Catoca mine in Angola
Offsetting some of the lost production at Mir and Jubilee will be the commencement of production at the company's newest mine, Verkhne-Munskoe, which will begin commissioning later this year and ramp up, by 2020, to 1.8Mct of annual commercial production.
Similar to De Beers, Alrosa has reduced excess inventory levels in recent years and is currently sitting on its lowest level of inventory since 2014, estimated at 17-18Mct. Compared with the company's minimum operating inventory of approximately 13Mct, Alrosa's current implied ‘excess' inventory level is about 4-5Mct.
Alrosa has hinted the company's sales plan in 2018 is 41Mct which, relative to 2018 production guidance of 36.6Mct, implies a flush-out of the remaining excess inventory this year.
Not included in the production and sales figures above, Alrosa also holds a 41% stake in the Catoca joint venture. The partnership operates the Catoca mine in Angola, which is estimated to produce 6.7Mct this year and is also developing the industry's most prospective new project, Luaxe, estimated to be a top-five ranking mine globally (by production volume) when it finally commences full production at some point after 2022. As a note, Alrosa does not receive in-kind production from the Catoca partnership.
The industry's third largest producer by volume is diversified mining major Rio Tinto. Rio only has interests in two producing diamond mines, its 100%-owned Argyle mine in Australia and a 60% stake in the Diavik mine in Canada.
By volume, 76% of the company's net production is estimated to come from Argyle - the largest mine in the world in terms of carat volume produced. The majority of the mine's production is low quality in terms of size and colour, and the mine's economics are driven by the occurrence of fancy pink diamonds that fetch a significant premium to white and most other fancy coloured stones. In 2018, Argyle's production is expected to decrease by 3Mct year-on-year to 14Mct.
Argyle production commenced in 1983 and, at one point, produced as much as 40Mct annually, making it arguably the industry's most important mine. However, as a result of normal depletion, annual production has dropped to 14-17Mct in recent years.
In 2016, Rio took a $241 million impairment charge on Argyle after reassessing mine-life expansion economics and, this month, cut the mine's recoverable diamond reserve estimate to 39Mct, thus reducing the remaining minelife to less than three years.
With Argyle production set to cease in 2020, there is a pending global supply gap until commercial production begins at Luaxe in (or around) 2022, at which time the government of Zimbabwe also expects to significantly ramp up production with conglomerate mining at its Marange fields.
With global diamond production expected to decrease in 2018 and producer inventories at multi-year lows, a demand increase should allow for diamond price upside.
A 2-4% increase in diamond demand is quite possible this year given the backdrop of a strong global economy, healthy US consumer sentiment, signs of a stronger mainland Chinese market, and the Diamond Producers Association increased budget fueling the return of generic diamond marketing. This scenario could translate to a real 3-5% increase in rough and polished diamond prices this year.
Through the end of February, the impact has already been evident as rough prices are up by approximately 1% year-to-date, according to the Zimnisky Global Rough Diamond Price Index. Surveyed polished prices are up 0.5%.
Looking forward to the remainder of the year, demand estimates could disappoint if tighter-than-expected economic policies in developed economies push interest rates higher than expected, resulting in downward revisions and de-risking of financial markets. This could negatively impact consumer sentiment and discretionary purchasing power.
More specific to the diamond industry, primary medium and longer-term risks include an acceleration of trends already negatively impacting demand, such as changes in social norms and consumer appetite - for example decreasing marriage rates and changing consumer preferences of younger generations.
More recently, an unfolding story of a banking fraud in India involving at least two large industry players in the manufacturing and retail business will likely have a negative impact on all segments of the industry. Concerns range from damaged consumer perception of diamond jewellery, primarily in India, to strained financing availability in the Indian diamond manufacturing industry. The latter will likely directly impact demand for rough diamonds in the short term.
While at this point the magnitude of the impact is unclear, longer term, the situation is potentially severe enough to offset some or all of the favourable industry dynamics mentioned above.
*Paul Zimnisky is an independent diamond industry analyst, author of the Zimnisky Global Rough Diamond Price Index and publisher of the subscription-based State of The Diamond Market monthly industry report. Paul can be reached at firstname.lastname@example.org and followed on Twitter @paulzimnisky.