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Prospects for global diamond business in 2012

31 january 2012

The past year, 2011, despite the ongoing global economic crisis was definitely the best in the history of the global diamond business and in the Russian diamond industry. However, the decline in the fourth quarter associated with the second wave of crisis should be a very disturbing factor for industries engaged in the production of luxury goods. To outline possible scenarios for the year ahead, let us consider the major segments of the world diamond pipeline taken separately.

World diamond output

Historically it so happened that the world’s diamond production is dominated by four major companies which have managed to maintain their stability and strengthen their leading positions in this market segment riding out the first crisis wave due to a coherent policy (Table 1).

Table 1

Diamond output of the world's largest companies in 2007-2011

The table compiled by the author is based on the data from the Kimberley Process for 2007-2011, Annual Reports of Anglo American, De Beers, BHP Billiton, Rio Tinto, ALROSA and Catoca for 2007-2011.
* Catoca included. The output value is based on diamond sales.
** Author’s estimate

The sharp decline in demand for rough and polished diamonds in 2009 led to a significant decrease in performance, and the proportion between the sectors in the diamond business changed dramatically. In 2010, the share of the world's largest diamond mining companies in global diamond output was less than 70% in carat terms, but about 90% by value. If in 2010 the market was recovering, in 2011 demand significantly outpaced supply, as it had been anticipated by leading diamond industry analysts. Assuming that these proportions remained unchanged despite the crisis in the diamond sector, the author carried out a preliminary assessment of the global diamond output in 2011.

In 2011, most of the major diamond miners achieved a record financial performance, and the same was true for the total performance of the diamond cutting and jewelry industries.

De Beers. A diamond is forever.

The beginning of the third millennium is marked by radical reforms undertaken by the giants of the world diamond industry. Since 2000, De Beers turned into a private company from previously being a public one, and on the other hand last year ALROSA was restructured into an open joint-stock corporation. At this is not the end of strategic changes taking place within the frameworks of the two pace-setting diamond mining companies, but rather they enter a new phase in their development.

Despite the decision taken by Anglo American, a mega mining holding, which offered to buy a 40 percent stake in De Beers owned by the Oppenheimers for $5.1 billion, the family does not cease its almost a century old ownership of the diamond business. On the contrary, operating on both ends of the diamond pipeline and indirectly controlling the world's largest diamond mining company, they continue to manipulate the global diamond business, and the company’s motto, “A diamond is forever” so well thought up and now legendary, keeps going strong.

This event has significantly changed the situation in the structure and organization of the world diamond market. Anglo American, having captured control over De Beers, may now be more flexible and mobile - depending on the movement of commodity markets - in their future relocation of revenues into more profitable segments and thus to maintain stability in times of crisis.

ALROSA, the world’s leader in diamond output

ALROSA Group remains an absolute leader in diamond output in terms of carats. Besides, if we take into account Catoca’s diamond output in Angola, then totally ALROSA Group is bringing to grass about 40 million carats of diamonds annually. In 2011, the company’s diamond sales are expected to exceed the coveted milestone of $5 billion.

In 2011, BHP Billiton and Rio Tinto decreased their carat output because of transition to underground mining, but nevertheless their financial results from diamond sales exceeded the 2010 numbers greatly due to a sharp rise in prices for rough diamonds. However, they cannot compete with the two heavyweights in global diamond production - ALROSA Group and De Beers Group.

To assess and forecast performance in major segments of the global diamond industry the author used a ternary diagram which helped to define the world diamond market metrics (see Table 2 and 3).

Three scenarios are reviewed for the global diamond business taking into account the current state of the global economy. The first one - and most likely - deals with a possible sharp deterioration of environment in the diamond market due to the global economic crisis going from bad to worse. The third scenario is optimistic suggesting that it will be possible to localize the crisis in the euro zone, while the growth in demand for rough and polished diamonds from China, India and the Middle East will maintain the levels reached in 2011. The second option is a medium between these two scenarios.

Table 2

Global diamond pipeline in 2006-2011

$ billion

* Kimberley Process data
** Author’s estimate

Table 3

Forecast for global diamond market in 2012

$ billion

In the medium to long term, demand for diamonds will grow due to depletion of large diamond mines and large-scale transition to less efficient and costlier underground mining. Rough prices will increase accordingly. In the near term they are unlikely to decline.

Diamond manufacturing, polished sales and diamond jewelry sales will largely depend on the condition of the global economy.

Yuri Danilov, Ph. D., Deputy Director, Department of Regional Subsoil Management Economics, Institute for Regional Economics of the North at Ammosov North-Eastern Federal University