Diamond production: learning to count and getting to know all main players
We open a series of publications to discuss the international diamond industry. The sector is full of myths and some of them are quite easy to dispel. We will start from the most general matters, production statistics being one of them.
Myth #1: There are too many diamonds produced
As Dr. A.J.A. Janse, an Australian diamond exploration consultant, notes in his GIA-vetted “Global rough diamond production since 1870” comprehensive study, diamonds from alluvial deposits have been known since antiquity, and production from primary deposits (kimberlites, and later lamproites since 1985) began only in the 1870s.
Over the last 135 years annual production has risen from c.1 million carats a year in 1872 to its absolute peak of 176.7 million carats in 2005. The total global production from antiquity to 2018 is estimated to be close to 5.9 billion carats.
Looking over centuries, numbers may look impressive but there are three things we want to point out:
- share of industrial diamonds in total production;
- per capita numbers;
- current stagnation of the sector and depletion of existing mines.
Industrial diamonds cover over 80% of the overall diamond industry. These diamonds are used in manufacturing electronic goods such as flat screens, medical equipment, and production of abrasive. Industrial diamond is mostly used in the form of nanoparticles. Production of abrasive largely controls the global demand for industrial diamonds. Effectively, this means that jewelry has consumed not 5.9 billion carats but rather around 1.2 bcf.
People versus diamonds. It is estimated that the world population reached 1 billion in 1804. It was another 123 years before it reached two billion in 1927, and it took only 33 years to reach three billion in 1960. The UN estimated that the world population reached 7 billion in October 2011 with close to 7.7. billion currently.
Accrued diamond production per capita numbers for these years were, respectively, zero for 1804, 0.2 bn carats (0.1 carat per one living person) in 1927, 0.7 bct (0.2 carat per capita) in 1960 and only 0.8 carat per capita currently. Again, we are talking gross numbers that need proper deduction of industrial stones for “retail” share analysis.
Industry experts note that the middle part of the society has grown rapidly through XX century, and that drove demand for diamonds. This process is still in its very early stage in many developing countries, and the trend will most likely continue.
Harry Winston study indicates that polished diamond supply stands for about 30 million carats per annum, or 1.1 billion stones with average stone size approximately being 0.03 ct, or less than 0.3 ct of diamonds per every living being for one’s entire lifetime.
Stagnation. After hitting an absolute maximum of 176.7 mct in 2005, global production actually started decreasing, and it is decreasing rather fast. Four years later the world produced 29% less raw diamonds, and production numbers remained moderate for a whole decade. There were signs of rebound in 2016 and beyond, primarily due to stabilized output in Russia, rebounding Australia and ramping up Canada.
Volumes do not mean everything for diamonds (as it is for gold). For example, 2017 production growth of nearly 20% resulted in mining companies revenues growth by 2% overall as the production increase came mostly from mines with lower-quality assortments (Bain consulting firm data). Anyway, each year adds only 2.5% to the global amount of diamonds in circulation (again, don’t forget that only ⅕ of that is jewelry quality and size stones.
Bain notes that “diamond supply will reach 163 million carats in 2019, but it will not be enough to meet demand”.
Looking ahead, the picture can be painted in much darker colours: existing deposits are depleting and many mines will reach full exhaustion stage in coming decades. Fancy Colour Research, a reputable voice in the industry, in its note entitled “The Last Diamond Unearthed: The Countdown is On!” project that unless new large resources are discovered, in 61 years we will see the last diamond produced from the ground.
Myth #2: The market is monopolized by De Beers
This has not been the case for a decade already.
The diamond market was entirely controlled by one company, De Beers, for most of the twentieth century. In the late 1800s, during the diamond rush in South Africa, Cecil Rhodes accumulated as many mining properties as possible and created the De Beers Consolidated Mines Limited. Since the diamond industry was relatively small, the company was able to control every aspect of the industry, especially focusing on distribution.
It was under Ernest Oppenheimer that De Beers and its Central Selling Organization signed exclusive agreements with suppliers, structuring the entire industry in its favor. If you’re up for interesting bedtime reading, there are plenty of books on De Beers amazing story and conspiracy behind it. Online we recommend DiamondSpot (some best parts are in French though).
De Beers monopoly status started diminishing from 1990s, and its market share went from 84% to less than 40% very quickly. The process was fueled by many factors: USSR collapse (and Russia’s intention to sell its diamonds on its own), a series of antitrust class actions in the US and Europe, and emerging independent production in many regions of the world.
Chart below composed by industry research specialist Paul Zimnisky presents a very good step-by-step illustration of the market going completely competitive.
Currently, De Beers’ revenues represented roughly ⅓ of the global market, almost in line with Russia’s Alrosa. Three second tier players (Rio Tinto, Dominion Diamonds and Petra Diamonds) come to as much as 11% combined, and the remaining quarter of the market is fragmented between nearly two dozens of independent miners. Thus, the used-to-be monopoly has long lost its opportunities to rule the market.
South African hegemony is deep history as well. The country left #1 position in late 1930s (double check on the year) and doesn’t make even in top five these days. In fact, as DGems diamond consultant Michael Atzmon puts it, “the market has suffered an earthquake every 10 or 5 years starting from 1980s: it was Australia, Botswana and Namibia at first, and Canada one decade later”.
TheSparklr has main producing regions nicely mapped, go have a look, and if you’re up for per country analysis, here are the latest annual numbers for all key countries.
Coming back to economics
We discussed the world and its population a bit. The matter is, people got much wealthier over the last century. According to Groningen University, global GDP increased 37-fold from 1900 till 2000 (in adjusted currency value), and another 42% between 2000 and 2017.
Per capita numbers rose more than 7x as well but more importantly, the world saw a massive shift in wealth distribution: over the last 10 years about 1 bn people moved from poverty to satisfactory income, and the world welcomed another 20 mn millionaires (most of them in Asia, specifically China).
This means much larger audience for any precious stones, and diamond are the first to see this new demand. But let’s not rush into demand studies, we’ll discuss it in further chapters. And we’ll dispel more myths for you!
Conclusion
Diamond industry has evolved greatly over the last 50 year moving from complete monopoly to competition and market pricing mechanisms. Production of diamonds is slowing down and it can’t catch up with the world population and increasing prosperity of people on the planet.
The industry is pretty diverse both in terms of players and geography, which, in our view, limits risks of price manipulation, pumps and dumps, conspiring actors and unpredictable moves. As these risks are eliminated, we get more certainty about our choice of collateral for DGems.
Our next chapter will touch upon another touchy issue, synthetic diamonds… Coming soon!
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