fbpx

Diamond Economics

Polished diamonds of the categories in Defined Diamonds have appreciated 5% on average per year, for the past decade. On the supply side, most rough diamonds come from Botswana, Canada and Russia. They are mined by various entities and partnerships between government and public companies. Since the dismantling of the DeBeers cartel in the late 1990s, and contrary to historic myth, there are no monopolies left, no reserves or big stockpiles. Like other mined products, what is mined is sold shortly thereafter to pay operating expenses and earn some profit.

Key diamond pricing factors

Supply and Demand

In the 21st century, diamond prices are purely a function of supply and demand. Overall, global wealth and demand is increasing while diamond exploration is dropping and existing mine output is decreasing.

Competition

Like all manufacturing, diamond polishing is an extremely competitive endeavor with small margins. The price of loose polished diamonds (PTP) on the open market is determined by the supply and demand. Any large margins are earned at the retail end of the sale when diamonds are set into jewelry and sold in a store.

Mining & Exploration

Exploration budgets are declining and there are no new large mines on the horizon. It takes ten years for a major mine to begin production. Supply is now flat and will likely decrease while global wealth and demand continue to expand.

Diamond Price Economics

For the past two decades, since DeBeers* ceased being a monopoly and was legally required to eliminate its stockpile, diamond pricing has solely been the result of supply and demand. Today, the two largest diamond producers, Russia and Botswana, account for 60% of rough diamond supply. The remaining 40% comes from a variety of smaller producers.

MOST DIAMONDS COME FROM LARGE MINES THAT REQUIRE INTENSIVE CAPITAL OUTLAY

They must operate at efficient output and are on tight budgets. Additionally, the countries where diamonds are mined derive significant partnership profits, royalties, and tax revenue from these diamonds. With even tighter margins diamond exploration budgets have been dropping. Known mine output is set to slowly decrease during the coming decades. (see graph 2). On average, new mines take 10 years to develop. As a result, for the next decade — or longer — the maximum diamond supply is expected to stabilize and slowly decrease. With no increase in production, escalating mining costs, and growing global wealth, there should be higher demand for a more limited supply of diamonds.

MINES ARE EXTREMELY CAPITAL INTENSIVE TO OPERATE

Below a rough diamond price threshold, mines must close – or severely limit their output. The economic reality of diamond mining in the 21st century requires that a diamond mine’s entire monthly output must be sold at full price to remain viable. Either current pricing justifies full output, or, in slow consumer periods output must be reduced quickly in order to maintain prices and mine viability. As output cannot be increased beyond normal levels, in stronger demand periods, prices rise.

The price of diamonds remains quite stable even in slow economic times.

For example, with the global economic collapse in late 2008 there was a natural drop in demand. For a short time in early 2009 there was an oversupply. Prices of polished diamonds dropped 20% — still far less than stocks. However, within six months, mine output shrank to the point where prices recovered. By early 2010 polished diamond prices had recovered to their prior peak.

Since then, with growing demand in China and the US economic recovery, prices of polished diamonds have risen 50% above their prior peak, a function of maximum available supply and demand.

More recently we witnessed an economic slowdown in China. In reaction to slowing demand, short-term polished diamond prices fell 5%. However, this resulted in a 40% drop in rough diamond output at the mines. Accordingly, polished diamond prices very quickly began to recover and DVD quality diamonds increased 8% in the first two months of 2018.

This dynamic never changes. There are no new mines of significance on the horizon.

As a result, maximum diamond production has remained flat for a number of years (see graph). Given the nature of diamond mining it is not possible to significantly increase the output of any major mine. In terms of diamonds sold versus production costs, many mines are marginal. As mines get older, they require digging deeper, production costs escalate, ore grades drop and prices rise.

*DeBeers was the name synonymous with diamonds between 1900 and the late 1990’s. They controlled over 70% of diamond supply through their own mines and contract purchases from major producers such as Russia. They also maintained a stockpile of diamonds in order to match demand with supply and control pricing.

Today DeBeers exists in a much smaller form. Their supply monopoly has disappeared. The reasons for this involved market forces and legislative changes. Today as a result, DeBeers, the former monopoly, does not market more than 35% of global rough diamond production and like other producers maintains no stockpile. Now only rough diamonds maintained by mining companies are those that are being sorted on their way to market.

In late 1990’s DeBeers lost its contract to buy all of Russia’s production. After Botswana, Russia became the world’s second largest producer and is responsible for 30% of global supply. Other producers followed suit. DeBeers was left with its sales partnership in Botswana, some small mines in South Africa and Namibia, as well as difficult and expensive mines in Canada.

What this means for you

The price you pay for Defined Diamonds reflects only the mine and manufacturing costs — without the huge markup you would pay at a retail jeweler. Being able to buy the right diamonds at the PTP price is critically important from an investment perspective — especially when you choose to sell in the future.

For more information about Defined Diamonds, feel free to call +1 (888) 818-7552 (+1 (646) 669-7057 International) any time.