Figuring It Out…

On two different sides on the globe, simultaneously mining conferences took place – one in Perth, Australia and the other in London, U.K. The producer and investor audiences in both places listened to forecasts on the future of the diamond businesses: one expert predicted huge price increases and even greater rough shortages; the other was concerned with stock overhang, stagnant polished prices and markets with an oversupply of rough.

What troubles me is the tremendous discrepancy in the figures used – two world’s apart. Surely, one would imagine, when figures and forecasts are based on solid research –the results should be quite similar with discrepancies occurring in an “acceptable range”. WH Ireland's London-based analyst James Picton told his audience at Ross Louthean’s World Diamond Conference in Perth, that with demand for rough diamonds increasingly outstripping supply, it was a good time to be a producer. “Diamond miners are facing a boom decade ahead with prices tipped to increase up to 40 percent by 2012, by which time a $4 billion shortfall is expected between supply and demand.”

Wow! Worldwide mining output today is $8 billion. A $4 billion shortage would mean that we need 50% more mines. Says Picton: “We've got one big new mine coming on, Diavik in Canada, which can do about $550 million at full output, started this year, but there are no other Diaviks coming in that decade. It can only drive prices up by at the very least 20 percent in real terms, and probably closer to 40 percent over that period we're talking about." A 40 percent increase in real terms means an increase in excess of worldwide inflation.

In fact, Picton says that the additional amount needed to restore a demand and supply equilibrium would be equivalent to the output of all De Beers’ currently producing mines together, plus another Diavik mine. “It can't be done ... commercial kimberlites take a long time to discover. The Ekati mine in Canada took nine years of hard slog to discover and six or seven years to bring into commercial production - the time lags are just too late," concludes Picton.

In London, this writer, speaking to the Mining Journal’s Mining Conference, was less upbeat. We identified threats and challenges that may negatively impact diamond prices in the years ahead. The current overhang of rough and polished stocks is enormous, in excess of $1 billion above normal stocking requirements. The record high industry banking debt in the four major cutting centers, of some $9 billion, will severely strain the business. With Supplier of Choice and other producers’ policies streamlining the pipeline and reducing the number of worldwide diamond industry players, the industry’s liquidity position is further stressed. Some bankruptcies or distress selling in the next few years cannot be ruled out, which may impact prices.

Any future scenario, we said at the conference, must take into account the possible impact of synthetic (“cultured”) diamonds on the market. Price guru Martin Rapaport has estimated that the prices of polished may go down to settle at the level of “cultured diamonds” – and much depends on how many new producers of gem quality synthetics will come onto the market.

In Perth, Picton reportedly told journalists outside the conference, that this is “probably the most sustained healthy period of supply and demand from the point of view of the diamond producers that I can remember." In London, I told the audience that rough prices had yet to reach again their historic high of the late 1990s – but we are getting there. The prices between rough and polished are still largely out of sync. There are distortions in the rough market that make the demand for rough presently rather “hot” – but this strong demand is not triggered by buoyant polished markets.

Picton ascribes great importance to optimistic De Beers’ targets. “With De Beers target demand conservatively tipped to grow 50 percent within a decade, and few mines on the horizon, the gap between supply and demand was expected to reach US$4 billion by 2012,” he stresses. In London, we told the audience that, in the past, steep rough price increases were sustainable through the artificial maintenance of supply and demand equilibrium in a supply controlled cartel environment. In a competitive environment, the rules of the game are changing and it all depends on the demand side. A conservative growth in annual demand of some 2.5% per year, in line with expected GDP growth, would certainly be matched by rough diamond production increases in similar quantities.

Branding programs may generate premiums on certain polished (and certain rough), but the market growth achieved through higher prices doesn’t require new mines. Prices will fluctuate – but, in the next decade, we strongly take exception to the view that we need the equivalent of another Botswana, Namibia, South Africa or Diavik in order to restore a supply and demand balance.  It is certainly intriguing how such a divergence of expectations and views can co-exist simultaneously.

And, on a different subject, on the third side of the globe, the Middle East, there is another diamond story to figure out. One of the region’s largest Arab news services is Al Bawaba (see: www.albawaba.com). It was quite interesting to discover that Al Bawaba is a faithful reader of IDEX Online. Within hours after we published last week our exclusive story on Libya’s strongman Muammar Kadhafi’s control of the Oryx Mine in the DRC, our story was quoted almost verbatim by that news service and beamed all over the Arab world.

With considerable pride, some facts of our story were miraculously and cosmetically “strengthened”. Says Al Bawaba: “Libyan leader Muammar Kadhafi has joined the ranks of exclusive diamond traders by establishing the world's first largely Arab-owned and controlled diamond mine. The head of state has become the new main shareholder in the Sengamines operation in the Democratic Republic of the Congo (DRC).”  In our story, we never said that Kadhafi “established” the mine – he didn’t. (He bought shares in Oryx Natural Resources and it was that company that established the mine.) We also never said Kadhafi was the “main” shareholder – he isn’t. (However, by virtue of appointing the executive chairman and through the extension of considerable loans, the Libyans do exercise considerable control.) All of the remaining parts of the Al Bawaba story are literally what IDEX published.

The DRC’s Minister of Mines and many of his senior advisers attended the London mining conference. Some members of the circle surrounding the minister voiced concern about this publicity. “Libyan involvement will not help my president in getting confidence from the U.S. and other western countries,” said one official. With the relevant NGOs and OECD member states getting ready to investigate Oryx in the wake of the recent UN Panel’s report on the plundering of natural resources in the DRC, the Kadhafi involvement indeed is something President Joseph Kabila could do without. “Will the DRC government – which is also partner in Sengamines – try to change the mine’s ownership structure?” we asked a Kabila confidante at the conference. “No way,” was the answer. “Money speaks, don’t you understand?” Now we do. We should have figured that out alone. Now we only wonder whether Al Bawaba will quote IDEX again – within hours.