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Diamond Market in 2010

21 december 2009

The year 2009 has revealed that competition between major diamond mining companies is already a reality and this is the very thing which will define any further development of the diamond market. The current financial situation of diamond miners is such that any attempt of an outright price war between them may appear pernicious for all. Therefore trying to decrease diamond mining costs will become the basic area of competition. First of all it means that diamond mining companies will restrict or terminate their operations at marginally profitable diamond fields. The first hints of this process were apparent as early as the spring of 2009 when De Beers stopped prospecting their projects in Congo and rejected the Verkhotina Diamond Field (in the Arkhangelsk Region of Russia), while ALROSA ceased developing some of its alluvial deposits and the Zarnitsa Diamond Pipe.

It is probable that in the near future major diamond miners will go on with their plans to slow down operations at their currently money-losing deposits or even reject them. De Beers has already declared a scheduled suspension of operations at its Namaqualand Diamond Mine (South Africa) in the first quarter of 2010. This strategy includes De Beers’ refusal to invest $300 million in the construction of a mine at the АК6 Diamond Field (Botswana) and sell its stake in this project to Lucara, a Canadian company, in November 2009.

At the same time, De Beers has declared it will escalate output and create 175 new jobs at Snap Lake (Canada), where the company is using most up-to-date technologies and where the ratio of average price per carat (now about $110) to net cost (about $30) correlates with the current market realities. Simultaneously, the spokesperson of Debswana (co-owned by De beers and Botswana) said they had approved $539 million worth of capital investments into the Cut 8 Project envisaging a large-scale reconstruction of the Jwaneng Mine whose production costs are even lower than at Snap Lake (about $25 per carat).

ALROSA is pursuing its own program of transferring its mining operations underground: after the Mir Mine it launched the Aikhal Mine and continues to construct the Udachny Underground Mine. Today, the per-carat output cost in Western Yakutia is around $39 while the average price for Yakut diamonds is approximately $90 per carat. It is rather problematic to correlate the cost of Russian diamonds and those produced by De Beers since their prices are more of a tool of the accounting policy that that of the market. However, it is evident that ALROSA will have to look where it can cut expenses to compete in terms of cost.

It is hardly probable that the company will stand to change its investment program related to underground construction. De Beers is not up to it either. Severalmaz (the Arkhangelsk Region) may become an unbiased source of reduced expenses. This project was developed in view of a global shortage of rough diamonds which could bring about higher prices. Even early in 2008 it seemed that these expectations would come true and Severalmaz would bring profit. However, the crisis introduced essential corrections: today the per-carat output cost at the Lomonosov Diamond Mine is nearby $70 while the average price of Severalmaz’s produce does not exceed $50/carat. The way it exists now Severalmaz is annually over one billion roubles in the red which is quite comparable to ALROSA’s net profit during the crisis period. At the same time, Severalmaz has already consumed $0.5 billion worth of investments and mothballing such a complicated in terms of mining geology deposit would require new and heavy expenses.

In 2010, ALROSA will obviously have to take steps toward maximal curtailing losses generated by Severalmaz but preserving the established infrastructure.

Abandoning operations at the diamond fields which proved unprofitable under crisis will substantially reduce the necessity to intensify the development of mineral resources bases. Today, the probability of discovering new diamond fields with easy geological and mineralogical conditions is extremely small. There are no easy credits and free funds to invest into new projects. Most likely, in 2010 major diamond-mining companies will resort to substantial reduction in their spending for geological prospecting.

The labour market condition in the United States, Japan and Eurozone will remain a fundamental factor defining global demand for diamond jewelry in 2010. Some experts believe that unemployment there will reach its peak in March 2010, while others expect it in the next autumn. In any case, according to forecasts, the general condition of the labour market in 2010 in the countries which happen to be major consumers of diamond jewelry will be worse than in 2009. Again, this circumstance will not miss having its negative impact on the export-oriented economy of China; therefore it is hardly possible to expect any appropriate offset for the dropping demand due to the Chinese market’s growth. As a whole, the diamond jewelry market in 2010 will look weaker than in 2009.

A weak diamond jewelry market foreshadows a wistful future - the rally which took place in the second half of 2009 on the rough market may come to its finish in the coming year, so some kind of market correction is seen as highly probable.