Why diamond mining is falling and how this can affect their price

Every year, fewer and fewer rough diamonds reach the market, although, as the data shows, the world's reserves of these stones are constantly growing. Thanks to the use of modern technologies, new deposits are discovered. Although reserves are constantly increasing and many of them have not yet been discovered the production is falling and will decline in the coming decades due to the unprofitability of starting projects. So the questions remain: how soon and how will this affect diamond prices in the future?

Diamond mining is falling

Chart 1: Diamond production in 2005 - 2020 (million ct)

Source: Bain & Company

In 2005, 177 million carats of diamonds were mined. It was a historic peak and the beginning of a downward trend. The collapse came in 2009 and it took the market 8 years to rebound. However, it has never returned to the state from 2005–2008, when the average annual production was 171 million carats. The trend is still downward. Over the past 16 years, the average has reached 140 million carats. Last year, however, only 113 million carats were extracted, not matching the forecast of approximately 138 million carats. The reason for the lower extraction are restrictions related to COVID-19, including production downtime lasting several weeks.

Chart 2. Distribution of diamond use in the world

Source: The Global Diamond Industry 2020–21, Bain & Company

Gem-quality diamonds account for approximately 20% of the extraction. In 2019, the three largest mining companies accounted for 61% of the diamond supply.

Chart 3. Share in the global extraction of diamonds in 2019

Source: ALROSA

The company that extracts most diamonds in the world is the partly state-owned ALROSA, based in Mirny, Russia. The company mines mainly in Russia and Africa. In the coming years, it wants to become the largest supplier of coloured diamonds.

Production forecast in the coming years

Production is expected to decline further in the coming years. The consulting company Bain & Company forecasts that production in the conservative scenario will fall on average by 1-2% annually to the level of 115-120 million carats in 2030. In the optimistic scenario, a decline by 0-1% is forecasted.

Chart 4. Diamond supply forecast in 2019-2030 in the optimistic and conservative scenario

Source: The Global Diamond Industry 2019, Bain & Company

Diamond market expert Paul Zimnisky expects a continued decline in the next decades and estimates production in 2040 at 60 million carats. Zimnisky indicates in his analysis that only 14 will remain from the currently operating 50 commercial mines by 2040.

Reasons for declining diamond mining

The mining industry is currently struggling with many problems. More large mines close down than start up new operations. The necessity to dig deeper makes the projects unprofitable, and the infrastructure requires enormous investment expenditure. A good example is the closure of the Argyle mine operated by Rio Tinto. Diamond mining ceased to be profitable there, because the stones had to be excavated from deeper and deeper deposits, therefore operating costs increased.

While the Argyle mine supplied 90% of the world's pink diamonds mined, the need to dig deeper made it unprofitable. Due to this mine closure, the supply of these stones will be very low in the future, which could have a significant impact on their price.

Chart 5. Forecasts of closed and launched mines for 2018-2024

Source: ALROSA Investor Day 2020, 10 March 2020

One of the largest mining companies - Alrosa - estimates that by 2024, a total of 7 large mines, producing about 30 million carats, will be closed. During this time, 4 projects will start operations, which will provide the market with 8 million carats annually. Although the projected decline in supply will be around 15%, from 148 million carats in 2018 to 126 million carats in 2024, according to data provided by ALROSA, the decrease in value terms will be as much as 30%, from $ 1.65 billion to 1 . $ 15 billion.

Reasons for declining diamond mining

Diamonds differ from each other, so their price will vary greatly. Gem-quality stones, suitable for setting in jewellery or as investment assets - account for about 20% of the extraction. The rest are diamonds used mainly in industry. Mines that extract high-quality stones are able to bear higher operating costs and dig deeper. Those whose reserves are low-quality diamonds will be closed. It is not profitable to mine diamonds when the average price per carat of mined stone does not exceed the operating costs in the long term.

From the data provided by Alrosa and presented in the graph above, it appears that the average price of a carat mined in the Argyle mine was $ 13, although it accounted for 90% of the world's pink diamond production.

About 95% of the stones supplied by Argyle were of poor quality and only 5% were of adequate gem quality. The closure of this mine, although in quantitative terms has made a huge hole in the supply (-14 million carats), in terms of value it is only $ 182 million. This is one of the reasons why a decrease in diamond supply does not necessarily translate into an increase in price.

On the other hand, within 4 years, new mines will be launched, in which the expected price of the mined carat volume will be 10 times higher than that in Argyle. In addition, mines will be able to obtain a higher profit margin on better quality stones, which could ultimately lead to an overall increase in diamond prices.

The second aspect to keep in mind is how the diamonds are mined. Out of the 40 kimberlite mines currently in operation, about half are underground or have the intention to continue this way. The rest are opencast mines that account for most of the extraction. Unfortunately, their resources are running out, so the mining companies are forced to switch to underground mining. Consequently, investment expenditure and operating costs will increase.

Open-pit mines are cheaper and what's more, the ratio of obtained diamonds to the amount of rock excavated is greater than in underground mines. It is estimated that the average operating costs for opencast mines are $ 30-65 per ton of processed rock. Mining diamonds from underground is more expensive and average operating costs start at $ 150 per ton. The necessity of digging deeper and insufficient diamond prices mean that many projects are put out of operation and there are no new ones to replace them. This later accounts for the decrease in the supply of diamonds.

Diamond prices may rise

Theoretically, as supply decreases, the price of diamonds should rise. However, as history shows, this is not necessarily the case. In the years 2014-2016, the extraction of diamonds remained at a constant level. The price of rough diamonds, however, fell as mining companies cut their margins. Polishing mills bought cheaper and cheaper raw materials, but decided not to increase their margins, and eventually the price of a cut diamond also fell. All this time, the operating profits of jewellers and retailers remained steady, even though the jewellery sales rose.

During the discussed period, sight (closed trade meetings held 10 times a year, alternately in London, Johannesburg and Lucerne) participants, traders, dealers and wholesale buyers of diamonds and diamond jewellery gained the most. They took over the margins that were previously lost by the mines.

Mining companies must focus on effective projects if they count on higher margins. One of the steps is to disable unprofitable mines and increase investment in innovation aimed at reducing costs, not increasing production. It is estimated that the diamond shortage will be approximately 159 million carats at the end of this decade. In order to reduce the demand-supply gap, diamond mining companies can significantly increase their prices. If the remaining market participants maintain their margins, the price of diamonds in the retail market will start to rise rapidly.

There is a lot of potential ahead for the diamond mining companies. In 2018, the value of uncut diamonds excavated was $ 17.4 billion and cut diamonds were $ 25.3 billion. Despite the fact that in the process of cutting and polishing, most diamonds processed lose 50-60% of their weight - however, the greatest revenue is generated by jewellers, who e.g. in 2018 generated USD 76 billion from the sales of diamond jewellery. Therefore, one of the most profitable ways to invest in diamonds is to buy a cut diamond and set it in jewellery.

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