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06 april 2012

Price forecasting for diamonds is a kind of occupation which cannot be viewed as the most rewarding thing taking into account that diamonds are not commodities and do not have any common benchmark. Experts unanimously agree that in the long term rough diamond prices will rise due to increased demand and a gradual decrease in global production. But in predicting short-term trends expert opinions vary: some expect a 10-percent rise in prices this year, others – a 10-percent drop.

Leonid Tolpezhnikov, Head of Analysis at ALROSA, told Interfax how the company sees the situation in the market this year and in the long term.

Forecast 2012

ALROSA estimated that the annual average of world prices for rough diamonds in 2012 will go up by 3-4% compared with the previous year, Leonid Tolpezhnikov said.

ALROSA’s forecast looks quite moderate compared with current expert estimates. BMO Capital Markets expects a 9% growth in the value of rough diamonds in 2012, Russia’s Finam predicts a rise of 9.7%, while VTB Capital says it will be 10%. WWW Diamond Forecasts Ltd. is pessimistic about the future of the diamond industry expecting diamond prices to drop by 5.1% in 2012. Tacy Ltd. Diamond Industry Consultants forecasts a decline of 10% to 13%. Metropol produced an outlook which is closest to that of ALROSA - the consultancy opines that global diamond prices are to rise by 3%. The Metropol analysts believe a bit greater climb in prices is possible  in the second half of the year.

According to ALROSA experts, the average world price for rough diamonds in 2011 was $132 per carat. A similar estimate was offered by BMO - about $133/carat. Tacy’s evaluation was $121.6/carat.

ALROSA adheres to a fairly conservative forecast. We, like many other market participants, note that this year will not be the easiest for the industry. However, today it may be said that we have passed the downturn phase in the market and there are positive signs pointing to a possible market growth", Leonid Tolpezhnikov said.

In his view, volatility of prices for rough diamonds in 2012 will be significantly lower than in 2011. "The sharp rise in prices last year and the subsequent sharp decline was a consequence of a significant amount of speculative trading that took place in the market,” Leonid Tolpezhnikov said. “At present, speculators left the market and apparently this process will not resume. Speculative demand arose because of the excessive availability of credit for purchasing rough diamonds. Now the banks that work with the diamond market have significantly reduced their lending to the industry and simultaneously increased their requirements for borrowers. We also do not expect the next wave of crisis to emerge in 2012 and to affect the state of the world economy and - as a consequence - the consumption of goods. The currently used measures of macroeconomic regulation appear to be quite efficient."

Prices offered by ALROSA

ALROSA has not volunteered its own forecast for average rough prices in 2012, but voiced a landmark in terms of revenue - $5.074 billion (an increase of 15% vs 2011). The performance indicator for 2011 is also unknown, it will be published in the company’s annual financial statement under IFRS. The average selling price for diamonds offered by ALROSA for the first 9 months in 2011 was $121 per carat (in Q1 it was $102, in Q2 - $119, in Q3 - $142) compared with $84 in 2010.

Analysts' forecasts for 2012 differ between $120 and $145 per carat.

According to the forecast given by Sergei Filchenkov of Metropol, the average price for diamonds offered by ALROSA in 2012 will increase by 3% compared to the expected average selling price in 2011.

Dinnur Galikhanov of Aton believes that the average price for ALROSA diamonds will slightly increase compared to the last year reflecting the adverse macroeconomic environment. In 2012, ALROSA will enjoy a higher premium to the average world price for diamonds due to the quality of goods and increased number of auctions in marketing reaching $35 from $25 a year earlier, he said. This is a conservative prediction based on a sales analysis of Diamond Trading Company (the largest marketing arm of De Beers) reflecting a fall in demand, Dinnur Galikhanov said.

According to Dennis Gabrielik of Discovery, the average diamond price forecast for ALROSA at $120 per carat is also conservative and it is more likely that the final figure will be higher. Dennis Gabrielik predicts the average price to be $130-$135 per carat in the first half of the year.

Average selling prices of certain rough diamond producers may differ significantly due to the specific characteristics of stones mined on different diamond fields. For example, the average selling price of diamonds produced by De Beers exceed $200 per carat, while prices offered by ALROSA (based on the published preliminary financial results) are in the range of $120-$130 per carat, whereas the average selling price for diamonds, for instance, from the Letseng Mine in Lesotho (Gem Diamonds) was $2, 776 per carat.

Gokhran’s vaults

In theory, prices can be influenced by additional influx of rough to the diamond market from previously accumulated stocks. However, according to Leonid Tolpezhnikov, there are no significant stocks currently unloaded on the market, which could lead to this situation. "By some estimates, during the recent crisis Antwerp accumulated stocks of rough diamonds, but the diamond cutting capacities in India are still significantly underutilized, which means that these stock will be absorbed by the Indian market and will not affect world prices," he said.

In his opinion, the market will equally not be affected by supplies from Russia’s Gokhran (state repository), which is known to have accumulated diamonds worth at least $1 billion bought from ALROSA in 2009. "The Gokhran operates in accordance with the state budget assignment and is expected to gain from sales the sum, which is spelled out in the budget of the Russian Federation. The Gokhran’s plan for the current year is to sell about $300 million worth of precious metals and stones (which includes all kinds of values, not just diamonds). The global diamond market is valued at $10-12 billion, that is even if the Russian state repository will sell $300 million worth of diamonds only, this will not produce any impact on the market,” Leonid Tolpezhnikov said.

Threat of Marange

However, the market is recently taking note of yet another potential source of additional rough - Zimbabwe, with its largest Marange diamond field. Experts believe that this country has a great potential - for example, Tacy said that Zimbabwe can provide up to 30% of world diamond production in terms of carats by 2015. There is a variety of opinions, that Zimbabwe may more than double its diamond output bringing it to 20 million carats in 2012.

Many market participants believe that the inflow of a large number of diamonds from Zimbabwe to the market will cause prices to fall - and the problem is not just in an increased overall supply from Zimbabwe. Diamond export from Zimbabwe has long been under a taboo imposed by the Kimberley Process (KP) due to suspicion of smuggling and human rights violations during mining. KP has authorized the resumption of Zimbabwe's diamond sales in November 2011, but Marange diamonds still have an ambiguous status: manufacturers are under sanctions introduced by the U.S., European Union and United Kingdom and cannot deliver diamonds to these countries. As a result, to sell their production the miners from Marange are now selling rough to India at prices twice as low compared to regular rates, according to market participants.

Leonid Tolpezhnikov said that ALROSA is reserved with regard to the “Zimbabwe factor." "There is no official mining data on Zimbabwe and its resource potential at present, while statements about potential production of 20 million carats come only from the lips of some “sources.” Therefore, we treat these claims with a fair restraint and in our forecasts we are focused primarily on the data of the Kimberley Process, under which annual production in Zimbabwe is about 8 million carats. For this reason, we do not expect that the situation with Zimbabwe may produce a major impact on the state of the market,” he said.

Expert forecasts for 2012 vary not only because of the difference in their computing methods, but also because of the difference between the factors which experts take into account making their assessments. For example, Tacy expects that the market will affected by recycled diamonds. According to Tacy, this is a new post-crisis phenomenon: diamond cutters started to receive for further processing goods that were sold by their owners to pay their debts (these are usually old-fashioned diamonds). Other experts, however, did not mention this phenomenon.

Plateaued output

"We can say that the world's diamond production has already passed its peak recorded in 2005 and is about 175 million carats,” Leonid Tolpezhnikov said. “Today, global output of diamonds reached a plateau. We do not see rough sources, which would significantly increase supply in the market and do not expect any significant spikes in diamond production over the next decade."

According to consultancy Bain, global diamond output slightly increased in 2011 over 133 million carats a year earlier. Bain predicts that by 2017 the industry will be able to reach pre-crisis indicators within the range of 150-160 million carats and by 2020 to drive production to 175 million carats - due to the launch of several new projects. At the same time, Bain noted that after 2016 production will be rising insignificantly.

Leonid Tolpezhnikov said that within the plateau trend there may be local peaks or sags in diamond production, but they will be temporary, not long and will not have a material impact on the overall condition of the market. For example, Rio Tinto, the third largest diamond mining company in the world, plans to launch an underground mine at Argyle, Australia, in 2013 which will boost its diamond output compared to 7.4 million carats mined in 2011. However, according to the plan, the underground mine at Argyle, famous for its unique pink diamonds, will be terminated as early as 2019 and in 2020 the company’s output will come back to the current level.

Gradual depletion of the existing diamond fields is now facing all major miners. "In fact, the market is now supplied by the mines which were discovered before the 1970s,” Leonid Tolpezhnikov stated. “Large diamond deposits can be developed for decades - first by way of open-pit mining and then by underground mining, but their resources are still not infinite. For a long time there have been no discoveries of new large diamond fields comparable, for example, with the existing deposits in Western Yakutia."

Depleting diamond fields are one of the factors limiting production growth also because miners tend to extend the life of the asset as long as possible. "Incidentally, this (depletion of deposits) is also one of the reasons why mining companies do not seek to substantially increase production. It is better to maintain stable supply for a long time by selling rough at increasing prices, than to extract the entire volume within a few years,” Leonid Tolpezhnikov said.


In contrast to supply, which will remain stable, demand for final goods produced by the industry will increase, ALROSA believes. The main reason is the rapid development of India’s and China’s economies. According to Bain, the middle class in China and India may rise from 193 million households in 2010 to 469 million in 2020. "The number of middle class in these countries will be great just due to the fact that these countries have a very large population and 469 million people predicted by Bain experts is more than the entire U.S. population, which today is a major consumer of diamond jewelry,” Leonid Tolpezhnikov said. “It should be understood that these are people who have only recently begun to earn enough money to afford diamonds, so they will buy them."

According to Bain, consumer markets will be redistributed: if before the crisis the United States accounted for about 44%, now this percentage is going down and will drop to 35% by 2020, whereas the share of such emerging markets as China and India will rise to 30% from below 20% before the crisis.

As it is expected by ALROSA, these markets will grow even more rapidly: according to the company’s experts, they accounted for about 10% of globally consumed diamond jewelry in 2011, but in 2020 their aggregate share will rise to 40%.

"We do not expect reduced consumption in the areas which are historically major consumers. The European market is already quite saturated, but the last few years demonstrate that sales there are not falling. According to experts, the U.S. market is still far from saturation. And it is already an established market which has its own culture of consuming diamond jewelry - for example, diamonds are an inherent part of weddings and family celebrations there," Leonid Tolpezhnikov stressed.

According to ALROSA, global demand for diamond jewelry in the next decade will grow more than 1.5 times. "Supply in this case will remain almost unchanged,” Leonid Tolpezhnikov said. “Thus, there is a fundamental reason for significant increase in prices for rough diamonds. Still, rough prices will rise more slowly than prices for jewelry: the latter’s cost includes a lot more inflation components, such as prices for gold and other precious metals, cutters and jewelers labor."