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Rough diamond prices may remain volatile in short term

Dilip Kumar Jha  |  Mumbai 

Rough diamond prices are likely to remain volatile in the short-term due to demand-supply mismatch. Rising consumerism in the rapidly growing two Asian economies — India and China — coupled with speedy return of US consumers have boosted demand of rough diamond for meeting jewellery requirements. In contrast, however, miners that had cut output immediately after global economic meltdown have cautiously started restoring output which may increase supply.

According to a report by the rating agency Crisil, prices of polished diamonds have increased by more than 30 per cent over the past year, in line with the rise in prices of rough diamonds. The strong demand coinciding with lower production has resulted in prices of rough diamonds increasing significantly and surpassing the pre-crisis peak levels of 2008.

“Polished diamond prices have risen 40-45 per cent in the past 20 months due to low supply,” said Gurpreet S Chhatwal, director of Crisil Ratings.

“China and India are at an inflexion point and will see a structural shift in consumer preference for diamond jewellery in the long term, resulting in a strong demand growth,” he added.

De Beers, which controls nearly 40 per cent of the world rough supplies, cut output severely in 2009. But, the output was restored in 2010 which witnessed a rise of 34 per cent to 33 million carats from 24.6 million carats in 2009. Varda Shine, CEO of Diamond Trading Company (DTC), the marketing arm of De Beers had recently said that the mining major plans to raise rough diamond output to full capacity at 38 million carats by 2012.

This means, the rough diamond output is estimated to remain flat this year, an analyst said.

Other miners including Rio Tinto and Al Rosa have also planned to restore mining output cautiously this year which according to the analyst will be insufficient to meet rising demand from the two Asian emerging economies — India and China.

China and India, the fastest growing in the world, are likely to continue with their double-digit growth in the medium term. The in China and India, have grown by around 25 per cent in 2010, and contributed to around 20 per cent of the global consumer demand for diamond jewellery in 2010, as against 12 per cent in 2008.

India, the world’s largest diamond processing hub, imported roughs worth $7.5 billion in 2009 as compared to $12-13 billion in previous years as mining companies cut their output drastically. De Beers reported an annual diamond production at 24.6 million carats, 49 per cent below the level of 2008. Similarly, Rio Tinto reported by 33 per cent annual production cut to 14.026 million carats in 2009. The two companies control over 95 per cent of the world’s rough diamond availability.

Jewellery sales in the US market, which accounts for around 40 per cent of the global diamond consumption, is estimated to have increased by seven per cent in 2010, driven by recovery in consumer spending and inventory restocking by retailers. The US market is likely to sustain the recovery in consumption over the medium term.

Subodh Rai, Head, Crisil Ratings, said, “While rough diamond prices may be volatile over the short term because of temporary demand-supply mismatch, the prices will remain stable over the medium term, as the supply is expected to increase with the De Beers group likely achieving full production capacity and Rio Tinto’s Argyle mine commencing underground operations.”

First Published: Tue, May 03 2011. 00:59 IST