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In my last blog post, I discussed how, contrary to popular myth, diamond prices do not always increase. In 2014 and 2015, diamond prices were down. But what does the future hold for diamond prices.
There was an article in Rapaport magazine last November which addressed this issue. It reported on the expectation of DeBeers’ executives that the annual supply of rough diamonds mined is about to peak and plateau at around 160 million carats. By 2030, they expect the annual supply of rough diamonds mined to decrease to around 115 million carats.
There is some finite supply of diamonds in the world. In 150 years of exploration, only 60 commercial mines have been discovered and only 7 of those are major producers. As the end of the commercial life of the existing mines appears on the horizon, diamond mining companies’ have resorted to exploring all over the world, often in extremely remote locations with brutal climates (i.e. northern Canada and Siberia) and “challenging natural obstacles” to overcome in unearthing diamonds.
The costs of exploring and mining in these new locations is significant. One DeBeers’ executive even suggested that, “maybe all the diamond mines have already been discovered.”
Add to this scenario,the emerging markets in India and China caused by their increasing prosperity and growing middle classes. This will add significantly in the future to the demand side of the equation.
So, we have an utltimately limited and annually declining supply of rough diamonds that is increasingly expensive to find and extract. This will be combined with growing populations of people who believe they can afford and who will increase demand for diamonds. If this future of limited and declining supply combined with increased demand materializes, diamond prices will increase in the foreseeable future.
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Many of my customers think that diamond prices always increase. And for much of the history of the diamond industry, that was pretty much true. When I first started in this industry in 1992, Debeers controlled about 80% of all the rough diamonds coming into the market. For decades,it was Debeers company policy to manage the supply of diamonds to the trade, increasing it sometimes and withholding at others, in order to maintain stable and modestly growing diamond prices. The reason the Hull Loan System accepts only diamonds as collateral on loans is that, historically, diamond prices have been very stable, which is what you want in collateral: stable value.
But now, the three largest diamond mining companies, Debeers, Alrosa and Rio Tinto together only account for about 60% of the rough coming into the market. There are more players and more competition. In many ways, 2014 was a very different year for the industry. Demand slowed, especially in China (a big emerging market) resulting in increased competition among manufacturers to sell their inventory and declining prices as a result of that competition. At the same time, the diamond banks tightened credit terms to the diamond manufacturers, insisting on greater financial transparency and less casual accounting practices from them, and refusing to finance 100% of their rough purchases as they have in the past.
As a result, Rapaport magazine reported that polished diamond prices fell for the 3rd consecutive year. The RapNet Diamond Index for a laboratory graded 1 carat diamond fell 8.7% in 2014; prices for a 3 carat fell 6.6%. Smaller diamond prices declined too: 0.30 carat by 6.5%.
While the 1st quarter of 2015 was better, the decline resumed in the 2nd quarter as reported by Rapaport: “RAPI (price index) for 1 carat diamonds fell 1.6% during the second quarter of 2015 and was down 15.3 percent from a year earlier.”
This discussion relates entirely to interdealer markets: where wholesalers and retailers buy from manufacturers, not to retail prices. But it is these markets, the prices that retailers, especially, have to pay to acquire inventory that determines loan value.