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Rough diamond prices recover

18 may 2009

Rough diamond prices have bottomed but a sustained recovery in the diamond sector is not likely until demand for polished diamonds from the jewellery market gets going, says

That’s the view of RBC Capital Markets analyst Des Kilalea who pointed out rough diamond prices have risen between 15% and 20% since the market bottomed in the middle of April.

Kilalea commented, “the recent recovery in rough diamond prices may be presenting an illusion that there has been a significant recovery in demand for diamond jewellery. In fact, most retailers report quite the opposite.

“The major concern in cutting centres is that polished prices, though higher, are not leading the recovery. The surge is being driven by inventory rebuilding and this will slow unless there is pull through at the retail end of the jewellery market,” he said.

Kilalea pointed out rough prices were responding to the drastic action taken by major diamond producers De Beers, Alrosa and Rio Tinto in chopping production and temporarily starving the market of diamonds.

He said the May tender of rough from Gem Diamonds had realised around US$1,600/carat which compared with below $1,100/carat in the previous two tenders. Despite the improvement these prices were still well below levels of $2,500/carat realised in the first six months of 2008.

Kilalea commented the higher prices would provide additional cash flow for Gem’s Letseng mine in Lesotho.

“While the rough price recovery may not be sustained at current levels the marginal impact of prices which are around 20% higher for many diamond mines will be significant and present the first opportunity in nearly nine months for cash generation,” he said.

The other main threat to the recovery in rough prices is the resumption of production from a number of major mines that had been shut down earlier this year such as De Beers’ huge Jwaneng operation in Botswana.

Kilalea commented, “the impact of higher sales by De Beers now that the Jwaneng mine in Botswana has been returned to production after a 50-day shutdown is a worry to diamantaires.

“At full production Jwaneng produces 16m carats a year valued in a normal market at around $2bn. If the mine’s production all finds its way to market it could add some $110m monthly to potential rough supply, assuming prices have fallen 35%.

“That is a lot for the market to absorb even if liquidity conditions have improved. It may also be worth noting that, traditionally, cutting centre activity slows into the northern hemisphere summer and this could result in the increase in the pace of activity to slow.”

Kilalea added, “daily evidence that global unemployment has not yet peaked does not give us confidence that the retail jewellery market has come through the storm as yet, though some evidence of a bottoming in global economies is starting to show.

“The issue is the sustainability of the ‘green shoots’. That Debswana has kept the Orapa 2 plant in Botswana shuttered is evidence that De Beers and the Botswana government do not see the market healthy enough to restart this large producing unit.

“While rough prices may have bottomed and the short-term benefits of higher prices to the likes of Harry Winston, Petra Diamonds and Gem Diamonds will be positive, a sustained recovery is probably still a way off and our investment stance remains cautious.”