Shining on – the diamond trade

Materials World magazine
1 Dec 2009

David Hargreaves of Fairtrade Gemstones, Surrey, UK, spoke at the Global Mining Investment Conference in London, UK, on 30 September. Michael Forrest summarises

Mineral markets have a propensity forexciting and depressing investors, on occasions both at the same time. But what of the collapse in the diamond market seen in 2008/09? While it is too early to tell whether it was a bubble or definitive shift, it was certainly dramatic.

‘A sea change has occurred in the diamond industry during this decade,’ said David Hargreaves, CEO at Fairtrade Gemstones, Surrey, UK, in a keynote speech at the Global Mining Investment Conference in London, UK, on 30 September.

‘Prior to the millennium, the industry was a cosy place to be. De Beers effectively controlled the world’s rough (uncut) trade by its own production, its sales links with Russia’s Alrosa, and the overwhelming power of its Diamond Trading Company’s sight-holder system.’

South Africa and its immediate neighbours Botswana and Namibia were in the top five gem diamond producing countries, accounting for 35% of global gemstone production. In South Africa, De Beers controlled most of the Kimberley mines and had joint venture production with the governments of Namibia and Botswana that essentially support those countries economically. ‘De Beers also had a major influence over the south Africa stock exchange with Anglo American as a major shareholder,’ noted Hargreaves. It seemed that the world’s gem diamond industry was to continue under De Beer’s virtual monopoly.

Time for change

In 2001, change began first and foremost under the new majority government in South Africa. The regime demanded that the black majority should have a greater say, particularly when it came to exploiting the country’s mineral endowment.

The resulting policy was Black Economic Empowerment, under which the newly enfranchised majority would have, by right, a stake in investment and employment in what was predominantly a white-owned mining industry. This left doubts about what the future might hold and a number of companies moved their headquarters offshore, with De Beers and Anglo both selecting London as their new home.

De Beers also chose to privatise itself and the company dissipated its giant trading company stockpile. Then, under EU pressure, the company was forced to break its marketing agreement with Alrosa on anti-competition grounds.

The result was the end of its trading monopoly and increasing production from outside of De Beers’ traditional territory – the company invested heavily in exploration and production in Canada. At the time, BHP Billiton and Rio Tinto, both based in Australia, were also consolidating their positions across the globe.

Hargreaves told the conference, ‘During the decade up to 2008 world output of diamonds was about 160-180 million carats of all qualities and growing at least 10% per year, perhaps reaching 15% annually with new Indian and Chinese interest’. This put pressure on the industry to produce more stones.

With the De Beers monopoly history there was a rush to stake claims and raise money for new diamond companies. A growing market and price increase confirmed the speculation.

‘The bulk of rough stones from the world’s gem diamond mines are under 0.5 carat in weight, and in the two years to 2008, the going rate in the increasingly important auction tender system had advanced from US$30 to US$50 per carat.’ Diamonds were the place to be for the budding mining entrepreneur. Later that year, ‘small stones [reached] US$80 per carat’, while large stones were breaking records.

Come the crunch

The global economic crises may have come home with the collapse of Lehman Brothers in September 2008, but in reality the seeds of over extended credit – national, industrial and domestic – had long been in place and a major correction was overdue.

Diamonds are a discretionary purchase and were among the hardest hit sectors. Hargreaves noted, ‘Market prices for smalls fell in a straight line [from US$80] to US$30/carat in November, by which point no-one was turning up at the diamond auctions’.

At these prices those miners still in production preferred stockpiling to selling at below cost. Even De Beers had to rely upon its fellow shareholders to provide interest-free loans to keep the banks at bay’. Other major producers such as Rio Tinto and BHP Billiton were spared, Hargreaves said, as their exposure to diamonds was just part of their overall business.

In the past months there has been a resurgence in the price of small diamonds. Prices have risen to US$40-45/carat ahead of the Christmas season, which accounts for over 70% of annual diamond sales. Although this is good news for the industry, a recovery to pre-2008 is, in the near term, unlikely.

Entrance to the market has been eased by De Beer’s effective abandonment of its monopoly on rough sales and now a retailer or wholesaler can, said Hargreaves, ‘find a friendly cutter, polisher and designer and cut out a lot of middle people’. By moving direct from mine to shop the provenance can be maintained and any ‘blood diamond’ tarnish countered.

The cost of mining in many of the old sites in South Africa is rising and new discoveries are slowing globally. The 2008 Metals Economic Group annual survey of exploration expenditure confirmed that eight per cent of the global spend of exploration US$14.4 billion was for diamonds, a value that had been falling year on year since 2004.

This does not mean that the amount of money invested has fallen, in particular, Petra Diamonds in South Africa was well rewarded with its operations in the old De Beers Cullinan mine, with a 507 carat white diamond find in September valued at over US$20m.

However, finding diamondiferous kimberlite pipes is not easy and, according to Hargreaves, only one in 100 could support an economic mine. The economic downturn has constrained the appetite for exploration in Angola and the Democratic Republic of the Congo to refocus attention on more politically stable regions.

Hargreaves predicted a time of continuing change for the diamond industry with record stories of success, survival and failure.

Further information: Fairtrade Gemstones