“Outlook for Diamond Market Positive”

“The outlook for the diamond market is positive with a significant supply-gap anticipated in the coming years, as demand continues apace in the emerging markets,” says Johan Dippennar, CEO of Petra Diamonds which is emerging as a new producer and supplier of rough diamonds. With this perspective, Petra plans to steadily increase its rough production and develop the company’s stature as an important supplier to the world market.

The CEO shares some of his views about current and anticipated market trends.

The US Market:

The diamond market and rough diamond prices (if we are referring to the rough prices in the US market, then we should specify what quality of rough, not sure if there is much rough business in US other than the large sizes), he says, have already recovered strongly in the important US market in 2009-10, as evidenced by the steadily increasing volume and value of polished diamonds (sounds a bit different from ground realities)and improved sales reported there by leading diamond retailers.

Festive Season Expectations:
As the diamond market now enters the pre-festive season, Dippenaar adds, expectations are for a continued improvement that could end with robust retail sales in the fourth quarter.

Production Trends:
He believes that though production of rough diamonds according to K.P. data, declined 25 per cent to 125 million carats (worth US$ 8.6 billion, giving a global average value of US$ 69 per carat), the supply is expected to be considerably higher in 2010 though this might not reach the previous high of 168 million carats, valued at US$ 11.9 billion in 2007. He expects global production may rise to around 140 million carats (valued at US$ 11bn) by 2011 and might then remain flat for some years, before starting to decline again.

Supply side constraints, according to him, are mainly due to the fact that the world’s largest diamond mines are now past then peak, and can no longer be operated at previous levels of production. Besides, in some cases, open-pit operations have to move underground. This may naturally limit the volumes which can be extracted from the ore-body.

Whilst some underground mines may now be coming on stream, in the next few years, current estimates, according to him do not forecast significant new supply to counter-act the present declining trend.

Supply from Zimbabwe:
However, there is expected to be new supply of lower quality rough from Zimbabwe coming to the market, depending upon political developments and KP issues being resolved. But, at this point of time there is, according to Dippenaar, not enough factual data to actually determine the scale of Zimbabwe’s future production; of course there are some reports that suggest the potential for large annual output, but there is considerable debate as to whether the geology of the alluvial deposits there could sustain high production levels over an extended period of time. Some commentators are of the opinion that the potential Zimbabwean production will help in sustaining the cutting and polishing capacity that was created, especially in India, to manufacture the large volumes of lower value rough that came from Argyle. These developments require watching.

Russian Stockpile:
Higher levels of supply can also come from Russia, where the state’s Gokhran establishment currently holds stocks purchased from Alrosa during the period of weak demand and lower diamond prices. The Russian Government and Alrosa are expected to continue the marketing of their diamonds in an orderly manner.

Demand Trends:
Demand for diamonds is expected to continue growing, while a significant growth in the supply to the market may emerge in the next 3 to 5 years. (please get this clarified as it seems to contradict what is said earlier about no new mines and plateauing and then contraction of rough supplies) The fastest growing new consumer markets for diamonds are China and India, both of whom are recording double-digit growth year on year. The industry has added importance in both the regions as India is already the world’s leading diamond cutting and manufacturing industry, while China is likewise developing as a highly competitive manufacturing sector and the government has put fixed incentives in place to assist expansion of this industry.

Dippenaar, therefore, feels that the outlook for this industry is positive, particularly for the rough diamond producers who will be supplying their output to an increasingly tight market. As competition for rough diamonds intensifies, there could be continued contribution (should that be contraction?) of the traditional diamond pipe-line, as more companies opt for vertical integration. This trend is expected to continue, according to Dippenaar as rough diamonds become more scarce. Petra’s strategy will therefore be to step up its production in the coming years to benefit from this trend. Petra which stepped its production in 2009-10 to 1,164,856 carats from 1,099,367 carats in the earlier year is going ahead with its plans to double its production by 2013-14 and triple it by 2018-19, as prices of rough diamonds remain strong and the company has been able to sell whatever it produces at substantially improved prices.