Category Archives: SUPPLY & DEMAND

Russian diamond mining giant Alrosa Q3 output drops

Rough diamonds at the Mirny Sorting Center, Republic of Sakha, Russia. ALROSA. image www.worldwidediamonds.info

Russian Alrosa, the world’s largest diamond producer by carat, said Monday its third-quarter production dropped 2% as a consequence of a shift to underground production at one of its mine in the country’s Far East.

The company’s total diamond production for the quarter reached 9.7 million carats, slightly down from 9.9 million carats in the same period a year ago, Alrosa said in the statement.

“The production decrease was mainly driven by the reduction in ore processing at the Udachnaya pipe in line with the company’s plan for the transition to underground mining at the deposit,” the miner said.

Alrosa’s rough diamond sales were up 8% for the first nine months of 2014 compared to the same period last year at 28.8 million carats or $3.7 billion.

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Henry Sapiecha

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Diamond prices set to soar in next decade becaause of increased demand

diamond-demand-prices-set-to-soar-in-next-decade image www.worldwidediamonds.info

Growing demand for diamonds led by the U.S. —the top retail market for precious gems-based jewellery—, followed by China and India, is expected to keep the global diamond market more than healthy in the next ten years, consultancy Bain said Tuesday.

In its fourth annual report on the industry, the experts warn that growth, however, may be jeopardized by lack of access to financing and the need for increased marketing.

According to the consultancy, the market expanded last year by between 2% and 4% at every point in the value chain, from mining to cutting and polishing, manufacturing and retail.

“Looking ahead to the next decade, the outlook should remain strong, as long as the industry can step up its focus on driving demand and sustaining a positive image for the market,” the analysts say in the study “Diamonds: Timeless Gems in A Changing World.”

Henry Sapiecha

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US diamond market to shine despite China, India growth: De Beers

HONG KONG: The United States is likely to remain the world’s largest market for diamonds for the next 15 years despite a growing appetite for the gems from China and India, leading producer De Beers said today.

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China has the fastest growing demand, jumping to a share of about 15 per cent of the world’s diamond market from less than three per cent in 2003.

But it is not expected to overtake the US market’s 40 per cent share for more more than a decade, De Beers CEO Philippe Mellier said.

“China and India, the engine for growth, these two big markets clearly could be as big as the US in the next may be 15 years,” said Mellier, who was in Hong Kong for the Jewellery and Gem Fair.

“For China to go up to 40 per cent share of the world market, it’s still some ways to go,” Mellier said, adding that he expects the Chinese market to grow more than 10 per cent per annum for “many more years”.

De Beers said China’s anti-corruption drive, which has hurt demand for luxury goods, would not affect the diamond industry.

“I think our business is less impacted by that compared to others,” Stephen Lussier, CEO of De Beers Forevermark said, with diamonds usually used at weddings and other “emotional events” in life.

Global diamond jewellery sales were around $79 billion in 2013, up 3.0 per cent compared to 2012, according to De Beers’ first Diamond Insight Report.

Sales are expected to grow in the long-term helped by recovery in the US economy as well as the growth of middle-class in developing markets of China and India.

The company had earlier said it expects “good to very good” second quarter results in India, which has seen increasing demand for the gems.

Founded in 1888 in South Africa, De Beers last year reported $1 billion in operating profit — more than double that of 2012.

Henry Sapiecha

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Term contract pricing in the diamond market- Paying for supply security

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————————PRICING METHODS———————–

A term contract for a commodity is a long term agreement where material is transferred at intervals over the contract duration for a certain price. The price paid can take many forms; fixed price, tiered price, formula price etc. A common pricing form is an indexed price where the price of each delivery references a pricing index. This is typically the corresponding spot market for the type of material being contracted. Various adjustments take place surrounding quality aspects and timing with a quotational period (average of month/quarter + 1/2/3 months of delivery).

————————PRICE DISCOVERY———————–

The essence of a term contract is that the price is being set in the spot market. Now this poses a question for price discovery mechanism – is the spot market an accurate reflection of the total market preferences?

When we look at market efficiency and try to see if the market is thick (enough buyers and sellers to transact), we typically think of liquidity – are enough transactions going through the spot market exchange in order for the prices to be fair? However, this doesn’t go far enough. To be sure the market is efficiently pricing we need to ensure that the right market participants are transacting in the spot market.

If we were to find the equilibrium for the market as a whole (i.e. all transactions through spot), all demand preferences would be ordered from the highest willingness to pay to the lowest and the supply preferences ordered from the lowest cost to the highest. If participants are split into term and spot markets would arrive at the same price as the total market if the highest willingness to pay buyers and lowest cost sellers entered into the term contract. These market participants hold preferences that always lead to transactions regardless of the price. This then leaves the more marginal players in the spot market to arrive at the clearing price and quantity.

Ins4Luckily, the incentives are such that market participants act in this way and self-select. Those with high willingness to pay want to enter into term contracts to ensure security of supply and avoid volume risk. Those with the

Luckily, the incentives are such that market participants act in this way and self-select. Those with high willingness to pay want to enter into term contracts to ensure security of supply and avoid volume risk. Those with the lower willingness to pay would not want to lose their flexibility and so will be less inclined to enter long term agreements.

Inefficient outcomes can occur when term contract buyers are receiving material but have a willingness to pay less than the market clearing rate. In this case the buyer would want to leave the long term contract and be replaced by the high bidders in the spot market.  This process might take some time, but as an intermediary measure, material could be resold (subject to resale clauses etc.) in the spot market in order to increase quantities available here and reduce clearing price.

Ins5 www.worldwidediamonds.info

————————PRICE DISCRIMINATION DYNAMICS———————–

If buyers are willing to reveal their preferences and self-select as being a high willingness to pay by requesting a term contract then we should expect some interesting games surrounding how sellers to use this information. Producers could start charging a premium for the privilege. Any price greater than the market clearing would incentivise high willingness buyers to shift over to the spot market under the expectation that they would achieve the market clearing price and avoid paying the premium.

Buyers would be unlikely to entice over any low willingness buyers into term contracts because of the perverse price effects (market clearing price would increase because it would be set by the high willingness buyers in the spot market). The market would probably shift onto a full spot exchange with the same clearing prices as before any attempt to charge a premium.

However, the fact is that risk is reduced for the buyer and seller under a term contract. Quantities are known in advance and with certainty. There is also a market failure risk with unknown timing problems where supply may be thin for nothing other than mismatches between when producers and consumers enter bids and offers the exchange. This will have positive value and suggest a premium would be paid for by the weaker bargaining party.

————————TERM CONTRACT AUCTIONS———————–

A good way to allocate term contract volumes to those that are willing to pay the most are to use an auction approach in order to help reveal true preferences. Obviously careful planning of the auction would be necessary in order to avoid collusion between buyers. Self-selection could also be used to allocate. If term contracts were offered with an estimated premium attached then only those with the highest willingness to pay would take them up.

Henry Sapiecha

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Evidence from commodity markets that have implemented a competitive auction of term contracts have realised a c3% premium relative to the underlying spot index.

Namibia advances plans of selling diamonds without De Beers

diamond polisher works on a gem in a diamond-polishing factory at NamCot Diamonds in Windhoek, Namibia.image www.worldwidediamonds.info

The government of Namibia confirmed Friday it is going ahead with its announced plans of setting up a company that will separately sell part of the diamonds mined by Namdeb Diamond Corp., the joint-venture it owns equally with Anglo American’s (LON:AAL) De Beers.

Speaking at the World Diamond Congress meeting last month, the country’s Minister of Mines and Energy Isak Katali said the idea is to give diamond dealers and manufacturers the opportunity to buy directly from locals, Rapaport reported.

The project follows the lead of neighbouring Botswana, which began trading 13% of the country’s gems in December, and it depends on a deal with De Beers.

Currently the precious rocks mined in Namibia by Namdeb, the 50-50 joint venture between the government and Anglo’s unit, are sent to De Beers sorting facilities in Botswana and mixed with other De Beers goods. After that, only 10% of the total sent is returned to Namibia, where they are sold through the Namibia Diamond Trading Company (NDTC).

Namibia is renowned for its gem quality placer diamonds that occur along the Orange River as well as onshore and offshore along its coastline.

Henry Sapiecha

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Diamond mining industry recovers on climbing demand

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Diamonds may be forever but their supply certainly isn’t, and that is the main reason why the main companies involved in the business are predicting a “perfect storm” triggered by rising demand and prices.

Until recently, falling commodity prices and rising costs prompted some of the world’s biggest miners, such as BHP Billiton (ASX:BHP), Rio Tinto (LON:RIO) and Anglo American (LON:AAL), to review their diamond business.

But diamonds have regained a place in their hearts, and in their balance sheets.

We expect the demand requirements to grow around 6% per annum for the course of the decade,” said Alan Davies, head of the diamond unit for Rio Tinto, the world’s third-largest diamond producer, according to The WSJ.com. “And when you look at the supply response there hasn’t been a major find brought on for a long time.”

The report adds that for Rio and Anglo American the diamond business is the one delivering some of the healthiest returns these days.

Asia leads demand

De Beers, the world’s largest diamond miner by market value, said last month it expected global demand for polished gems to rise by up to 4.5% this year, boosted by the US market recovery and an ever growing appetite for these precious stones in China and India.

Several of the company’s latest decisions seem to signal De Beers —majority-owned by Anglo American— is also bracing for a rough diamond demand rush.  In January, the firm said it has not ruled out an expansion of its Victor diamond mine in Canada. In March, it revealed it was looking to tap into the new markets, landing later a new diamond exploration license in Angola, the world’s fourth largest producer of diamonds by value, and sixth by volume.

De Beers is not the only one tooting the industry’s own horn. World’s largest diamond producer Alrosa is also anticipating a big jump in gems prices due to both reduced production in the medium term and increasing demand.

Rough diamond prices have, in fact, climbed 3% over the last few months and Bain & Company and the Antwerp World Diamond Centre (AWDC) predict prices for the gems will continue to increase until at least until 2018.