Diamond Producers Aim for Lower Qualities in Today’s Market

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An array of diamonds of various sizes and qualities at Alrosa’s sorting operation in Arkhangelsk. The sizes and qualities of diamonds are distributed unevenly throughout kimberlite pipes and mining companies have learnt to tailor their products according to market conditions. Photo by Russell Shor/GIA

The average value of rough diamonds mined last year dropped sharply according to the latest Kimberley Process (KP) data

The KP reports that world diamond production was 134 million carats, which was valued at $12.4 billion (£10.4 billion) in 2016, or just under $92.50 (£77.30) per carat. That is in comparison to 127 million carats valued at $13.9 billion (£11.6 billion), at $109 (£91) per carat, in 2015. 

Examining the figures more closely, some of the biggest drops in value came from countries where diamond mining is in the hands of the major, sophisticated operations of De Beers, Rio Tinto and Alrosa, in South Africa, Canada and Russia, respectively.   

At the same time, diamond demand in major consumer markets, such as the U.S., China and Japan, has trended towards smaller stones and lower qualities. 

This isn’t entirely a coincidence. 

The major mining companies like to say they dig and sell whatever nature gives them, but technology has given them a way to tweak nature’s generosity. Information tucked into the annual reports of the major mining companies (De Beers, Alrosa and Rio Tinto) shows that they are doing just that – and concentrating their mining on lower quality areas. 

Diamonds are not spread evenly inside even the richest grade kimberlite. In some sections, there may be three carats of rough for every ton of kimberlite mined and crushed. In others, there may be only a half carat. It’s the same with size and quality: one section may yield a high percentage of larger higher quality rough, while other parts of the kimberlite may be sprinkled with a concentration of smaller goods and lower qualities. 

Thanks to highly sophisticated computer modelling technology, geologists at diamond mining sites can better pinpoint specific areas by continually taking core samples, using the data to model the diamond distribution within the kimberlite pipe, and then adjusting their production accordingly. The makes it possible for the diamond miners to be more profitable. They can keep production going at the most efficient levels, with less stockpiling of goods for which there is little demand. 

Large cylindrical pieces of kimberlite pipe are laid out in wooden boxes for geologists to examine.
A geologist examines core samples extracted from approximately 250 feet within Alrosa’s Arkhangelsk kimberlite pipe. Diamond mining companies take many such samples to determine how the diamonds are distributed within the pipe. Photo by Russell Shor/GIA

Interviews at trade shows – Baselworld and Las Vegas this year and Hong Kong late last year – revealed a definite shift in demand towards smaller diamonds and lower qualities. China, for example, which had not previously favoured SI and I1 clarities, was beginnin to embrace them as consumers sought to keep expenses down. Indeed, a recent study by the market research firm McKinsey & Co. found that luxury buyers in China have become much more price sensitive and much more knowledgeable in the past few years.

Comparing the two years shows that 2015 was a difficult period for the diamond industry and that rough prices fell by an average of 15% during the first half of 2016. Average production value in Canada and South Africa fell by nearly 25% – in Canada from $143.52 (£120.01) to $107.18 (£89.62) and in South Africa from $192.57 (£161.02) to $150 (£125.43). Russia’s average value fell in accordance with the market, from $101 (£84.45) to $88.70 (£74.17), but officials announced earlier this year that they had begun to concentrate on production and sales in lower qualities. 

The fall in the average price of Botswana’s diamonds (from $143.73/£120.19 to $138.00/£115.40) was much smaller, mostly probably because of the nation’s dependence on diamond revenues and the huge sway it has over De Beers (it holds a 15% stake) and the fact that De Beers’ largest, cheapest-to-run diamond mines are within its borders.

Diamonds continue to flow from Zimbabwe, but at a much lower rate. The production of just two million carats in 2016 was less than half of that of 2015, though its $50 (£42) per carat value remained unchanged and has been so for several years.

The reason for this precipitous drop is that the country’s government expelled four of the six mining companies operating the large Marange deposit after they refused to merge their operations into the state diamond company, Zimbabwe Consolidated Diamond Corp. The government’s offer was a combined 50% stake in the company with shares apportioned to the size of their assets. 

The companies refused on the grounds that the shallower areas of the Marange deposit have been depleted and that they would have to bear all of the high investment costs of redeveloping the deposit into deep mining operations, even as yield declines.   

Five years ago, the country’s diamond production topped 12 million carats with predictions that it could top 20 million within a few years, but as mining has grown more difficult and costly, production has fallen to just under five million carats, prompting the government, which depends on diamonds for 30% of its revenues, to blame mining companies for the production fall off. 

Rough Diamonds
A close up view of piles of diamond rough shows how the different colours are sorted. Photo by Russell Shor/GIA

Analyst Edahn Golan recently pointed out that despite the huge rise in production from the Democratic Republic of the Congo (DRC), from 14.7 million carats to 23.7 million, the aggregate value has only increased by 7%. He theorizes that the DRC, whose production comes from extensive alluvial diggings as well as a state-run mine, had miscounted its production figures. 

On the export side, there was very little change, with just under 95% of the rough going to five destinations: 39% to India, 30% to the EU/Antwerp, 18% to the UAE/Dubai, 4% to Israel and 4% to China. Dubai and Antwerp are transfer centres where mining companies have their sales offices, while China remains the destination for much of the Zimbabwean rough. This will certainly show a decline when the 2017 figures are released next summer.

Russell Shor is senior industry analyst at GIA in Carlsbad.