Diamond Prices Could Fall In 2012 As Supply, Demand In Balance

Diamond prices could fall about 10% to 13% in 2012 as the supply and demand fundamentals are roughly in balance and diamond recycling starts to finally impact the market, said a diamond-industry consultant.

Chaim Even-Zohar, managing director for Tacy Ltd, an Israeli-based diamond consultancy, said based on research his firm does with Indian firm Pharos Beam Consulting in Mumbai, about $15.2 billion in rough diamond production was done in 2011, which was about $22 billion in polished value. Retail sales globally were about $70.8 billion.

He spoke Monday at PDAC2012, the Prospectors & Developers Association of Canada’s annual convention, which runs through Wednesday in Toronto.

He said the $15.2 billion equates to production of about 125 million to about 130 million carats in 2011, with an average price per carat of USD$121.60 for global rough prices. That figure includes smuggling and underreporting. Based on the 2011 price per carat, he expects 2012′s prices to be 10% to 13% below that level.

Supply and demand should be roughly in balance for 2012, Even-Zolar said. But he noted that for the first time this year that when compiling data for supply and demand tables, his firm is adding a new category: diamond recycling.

“It’s something we’ve never before taken into account,” he said.

The reason is the post credit crisis “new normal,” he said, as U.S. households start to have to pay off debts and sell off valuables such as jewelry, including diamonds.

The figure could be as much as $1 billion for 2012, he said. Even-Zohar admitted there’s not a lot of hard data to back up the idea, but there is anecdotal evidence. He said many of these scrap diamonds are coming to Indian cutters to be recycled; these are usually old, unfashionable styles.

While the precious metals market deals with scrap metal all the time and works it into their supply outlooks, it’s a different story in the diamond industry. “The problem is diamonds last forever,” he joked.

ABOUT A BILLION DIAMONDS OUT THERE

Even-Zohar estimated since mining started in “ancient times” the global stock of diamonds is about 5.2 billion carats, but only about 15% to 20% were “cuttable.” In all, he estimated that the world has about 700 billion to 1 trillion polished diamonds floating about and at current prices that’s worth about $1 billion to $1.5 billion in consumers’ hands.

Of that figure, about 40% to 50% of existing diamonds are in the U.S. The greatest demand for diamonds still comes from the U.S., which saw about 38% market share last year. Indian was about 12% and China at 11%. That figure will begin to shift in coming years as Chinese and Indian consumers start to become wealthy enough to buy the gemstones.

DIAMOND CARTEL BROKEN UP

The diamond market is beginning to act more like a commodity market because the diamond cartel has been broken up. That means price volatility will be greater, Even-Zohar said.

DeBeers, the long-time diamond giant and controller of the diamond trade, was bought by Anglo-Platinum in November 2011, “is out of the picture,” he said.

Having a group like DeBeers kept price volatility to a minimum, he said. But they also were big advertisers and now are no longer mounting their huge marketing campaigns, so the industry has lost a central body in marketing.

ZIMBABWE HOLDS SUPPLY FUTURE

Zimbabwe could hold the future of the diamond industry. The Marange a diamond field, could easily supply 25% of the world’s supply by value and 30% by volume by 2015, Even-Zohar said.

There are about 11 to 16 operable mines and each could produce about 10 million carats per annum, he said, and conceivably produce as much as 110 million to 160 million carats a year, which would double the current global output.

He pointed out the quality of the diamonds in the Marange is lower, which is one caveat.

“Zimbabwe could be a problem,” Even-Zohar said.

He said this not only for a potential supply disruption, but also because of the political situation of a country run by current president, Robert Mugabe. Mugabe has sought to nationalize mines and other resources, and non-governmental organizations have accused him of many human rights abuses and other atrocities.

Even-Zohar said despite the concerns many have, “as an industry, we must find a way to work with him.”

Zimbabwe is a signatory to the Kimberley Process, which was put in place to monitor the movement of rough diamonds in an effort to eliminate “blood diamond” trade which was funding rebel armies. The process was to prevent money sold from the diamond trade to overthrow governments. Even-Zohar pointed out concerns about funding rebel movements is not an issue anymore.

The coalition itself is coming under fire. Some non-governmental organizations are concerned that diamonds from the Marange are mined under threats from security forces which makes the Kimberley Process toothless.

The U.S. is seeking changes to the pact to add a section where human rights would be monitored. Even-Zohar said human rights considerations are an important factor, but the Kimberley Process is not the right vehicle to root out abuses.

People involved with the pact “are not equipped to determine human rights violations,” he said.

He’s not sure where this addition will go as the pact is a consensus document and all parties must agree to the language.

Even-Zohar offered an alternative that may solve many issues. “The problem is corruption…. Of all the issues I’d like the Kimberley Process to address is to work on transparency and good governance. The Kimberley Process has not prevented a single diamond from coming to the market. We’d be better off with official monitoring because at the end of the day those diamonds will reach that wife or that mistress,” he said.