Haul trucks at the Nyurbinskaya mine, Sakha Republic, Russia. Source ALROSA, used with permission.


Below are responses to emailed questions:

June 2016
Question: (on the general diamond market)
What’s your current view on the diamond market? 

Reply:
The diamond industry is in better shape than it was a year ago now that the supply/demand picture has begun to stabilize. However, the stabilization in 2016 is more related to supply strategy implemented by the diamond producers more so than a pickup in demand. The industry really needs demand growth from the U.S., China, and the emerging markets to drive the demand side of the equation in the coming years in order for the industry to remain sustainable over the longer term without supply intervention.


June 2016
Question: (on diamond investing)
What really matters when investing in a diamond? 

Reply:
In my opinion only the rarest, most highly demanded diamonds should be considered "investment quality." Given the inherent illiquidity of diamonds, a relatively significant price appreciation is necessary in order to compensate the holder for the illiquidity. Higher-quality colored diamonds and the absolute highest-quality whites (e.g. flawless, colorless, ideal cut) are the most likely to be viable investments.

That said, I prefer to refer to high-quality diamonds as a "store of value" more so than an "investment" since they don't pay the holder a dividend or cash flow. Diamonds arguably have the highest value-to-weight ratio of any “investible” hard asset, and diamonds held for price appreciation can be worn as jewelry and enjoyed; so I would say these are the positive attributes. However the illiquidity, i.e. the ease of easily selling a diamond at market price, is the biggest drawback to holding a diamond for this purpose.


May 2016
Question: (on diamond marketing)
How effective is marketing and advertising on diamond demand?   

Reply:
Historically diamond marketing campaigns have been very effective, possibly one of the most effective campaigns in history. However, since the De Beers monopoly went away over a decade ago, a lot of the profound marketing pioneered by De Beers aimed at the general diamond industry went away as well. The industry has since acknowledged this, which led to the recent formation of the Diamond Producers Association. 


May 2016
Question: (on synthetic diamonds)
How will synthetically grown diamonds influence natural diamond demand in the future?  

Reply:
I think synthetic diamonds will become a new category of diamonds/jewelry. I see synthetics and natural diamonds as two different products and I think consumers will as well once the synthetic industry becomes more established. 

That said, I see synthetic diamonds having a larger impact on non-bridal diamond jewelry market share (e.g. solitaire earnings and pendants), as I think the mystique of a natural diamond is more profound when it comes to bridal diamonds and what they represent. 


May 2016
Question: (on diamond investing)
What do you think of diamonds as a mainstream investment?   

Reply:
The investment prospect for diamonds has traditionally been very narrow as only the very wealthy have been able to afford to buy the rarest most valuable "investor-caliber" diamonds. In my opinion, more affordable diamonds have not performed well enough on a relative basis to justify investment after transaction costs and liquidity are factored in.


October 2015
Question: (on diamond production)
Do you have figures on global alluvial diamond production?    

Reply:
Based on my most recent data from Q1 2015, I have commercial alluvial production accounting for 4.8% of global production on a volume basis and 5.4% on a value basis.

In addition, I have 15% of global production volume coming from artisanal mining, primarily in the DRC. However I have this production only accounting for ~1% of global production by value give the deep discount these carats sell for primarily through illegal or inefficient trade ($5-8/ct).


September 2015
Question: (on synthetic diamonds)
Could you explain the general science behind growing lab created diamonds?    

Reply:
There are two primary processes used to create synthetic diamonds “high-pressure high-temperature” or HPHT, and "chemical vapor deposition" or CVD.  

The HPHT process essentially replicates in a laboratory the conditions in which natural diamonds are formed. This process has been incrementally improving since the 1950’s, and is primarily used in the creation of industrial quality diamonds, but is also currently being used to create higher-quality gem-diamonds.

The CVD process involves energizing a combination of carbon and hydrogen gas into plasma, which upon a chemical catalyst grows a diamond. The more advanced CVD processes are being used to create diamonds for high-tech application as well as gem-quality jewelry.


September 2015
Question: (on synthetic diamonds)
Does the public accept synthetic diamonds as real?    

Reply:
Well, they are real in the sense that they are chemically identical to natural diamonds and possess the same aesthetic characteristics of natural diamonds. 

However, I think increasing the scale of marketing, branding, and general customer awareness of lab-created diamonds is necessary to educate the wider customer base, a lot of which may not understand the difference between synthetics and diamond stimulants, like cubic zirconia or moissanite. I think this will come with time, especially if the larger diamond retailers and department stores adopt the merchandise. 


September 2015
Question: (on the future of the diamond industry)
How has the diamond industry changed in recent years, and what does the future hold for the industry?    

Reply:
I see new competition and technology continuing to have the largest impact on the industry.

At the production end, I think the biggest change has been the restructuring of De Beers, which opened the door for competing miners and impacted the way that the industry sells some of its rough. 

Traditionally, rough diamonds have been almost exclusively sold by De Beers and the Russians to a select group of wholesalers, cutters, and manufacturers via long-term contract arrangements. Now more rough is being sold through tender and auction by some of the emerging producers, which has influenced price transparency for the industry.

On the retail side, online companies such as Blue Nile have provided end-customers with a more transparent, price competitive option for buying polished diamonds by providing a widely accessible destination for aggregate polished diamond price information. 

I also see the emergence of higher-quality, lower-priced synthetics as an example of how technology is affecting the industry.


September 2015
Question: (on monetary policy)
Are lower interest rates good for the U.S. dollar since lower rates tend to be good for the economy, which is good for the USD?    

Reply:
Lower interest rates tend to be correlated with increased leverage, which is good for an economy to a certain extent (quantifying that "extent" is the key). If leverage is used in moderation and results in controlled economic growth, it tends to be healthy for the domestic economy, thus resulting in a relative strengthening of the country’s currency; that is until an economy becomes over-leveraged. 

However, the US economy became over-leveraged towards the end of last decade, and subsequently crashed --but since the U.S. is the largest economy in the world, the result was a global flight to safety, which included a flight to the U.S. dollar. So this seems counterintuitive. The point being that the implications are different for the USD than any other currently because USD is the global reserve currency and the U.S. is the largest economy in the world. 

So based on this theory, the only factor that should weaken the USD, or shall I say strengthen other currencies against the USD, is healthy economic growth in other countries relative to the U.S.


August 2015
Question: (on diamond prices)
What’s your current view on diamond prices?   

Reply:
I have rough prices down 13% over the last 12 months. This can mostly be attributed to reduced lending availability to the industry at the wholesale and manufacturing levels, and reduced end-buyer demand in China, Europe, and Japan. I think rough prices will come in further as there is still excess polished in the market making it uneconomic to buy rough and convert it to polished in a lot of categories. I think the miners will have to lower prices further if they want to sell the majority of new production in coming months


August 2015
Question: (on diamond trading)
Why isn’t there a futures market for diamonds?  

Reply:
1) Diamonds lack fungibility. There are ten thousand different categories of diamonds.
2) Futures trade with multiple expirations, so given multiple expirations and the thousands of categories of diamonds there would be way too many future contract lines.
3) Wholesale diamond transactions tend to be private and thus transaction data is relatively unavailable.
4) Industry players want to keep diamond transactions private and opaque. There is really no incentive for industry participants to disclose transaction information at the wholesale level. If anything, this would reduce their operating edge.
5) The diamond market is relatively small market compared to other commodities traded on futures exchanges.

In my opinion the closest thing the industry has to an exchange market is BlueNile.com. The advent of this company and others like it provided the first widely accessible destination for aggregated diamond price information, which has in essence created a visible “market” for retailed polished diamonds.


June 2015
Question: (on synthetic diamonds)
How much of a threat are synthetic diamonds to the natural diamond industry, and does this apply to Canadian diamonds as well?  

Reply:
The threat of synthetic diamonds taking market share away from naturals applies to the industry as a whole, Canadian miners included.

Actually, the emergence of high-quality synthetics may have a greater impact on demand for Canadian diamonds relative to diamonds produced elsewhere in the world. Perhaps the primary appeal of Canadian diamonds is their association with being guaranteed ethically sourced, which is also a primary feature of synthetics; so in a sense Canadian and synthetic diamonds are both competing for the same consumer that values this attribute of diamonds above all else. 

While there will be a certain percentage of diamond consumers automatically drawn to synthetics given their lower price point, environmental friendly and ethically sourced nature, I think the ultimate success of synthetics as an alternative to naturals will be limited to the success of marketing them to the larger diamond consumer market.  

The global natural diamond market is as large as it is because of the success of De Beers' marketing campaign in the 20th century. The jewelry industry is heavily driven by branding and marketing.   

In addition to the challenges of successfully implementing their own branding and marketing campaign, I see the synthetic industry’s biggest challenge being competing directly with the already established seemingly resilient consumer image and appeal of natural diamonds.


May 2015
Question: (on diamond investing)
Do you believe diamonds will become an investment class?  

Reply:
The ultra wealthy are utilizing highest-quality diamonds as a portfolio diversification tool, especially in Asia. 

On a relative basis, the market currently invested in diamonds is very, very small; take out investment in publicly traded diamond miners and jewelers and that numbers gets even smaller. So, there is a lot of room for growth.

That said, on a real basis (inflation adjusted), the performance of most diamonds has really not been that impressive compared to other asset classes. Only the highest quality, rarest, most desired diamonds have outperformed: the blues, the pinks, the reds and larger flawless whites. With the price point of these diamonds starting in the high-tens and hundreds-of-thousands of dollars, the investor base is limited. 

The only way I see the mainstream investor, say the investor that currently has a portion of their portfolio allocated to gold, making an allocation to physical diamonds is if a liquid standardized investment fund, like an ETF, is made available.  However, I only see a fund like that succeeding if the fund in itself becomes so popular that it drives its own liquidity.  Given that there is no diamond futures market and given how opaque and complex relative diamond pricing can be, it really limits the amount of risk that market makers, the liquidity creating professional traders, will take on, thus limiting the liquidity and success of a fund like that.

For the foreseeable future, I see the appeal of diamonds as an investment limited to high-net-worth individuals, those looking to store value, using diamonds as an additional portfolio diversification tool, with the added benefit being the very high value-to-weight ratio diamonds provide. 


May 2015
Question: (on diamond investing)
What are the good and bad aspects of diamonds as an investment, both for individual and institutional investors?  

Reply:
I would start off by saying that I don’t really see diamonds as an “investment,” maybe I am getting into semantics here, but I see them more as a "preservation of capital." The same goes with gold, fine art, vintage cars etc. None of these items pay a cash flow and there is a cost associated with holding them. That said, the highest quality examples of these items have historically maintained their value on a real basis, adjusted for inflation. 

I see holding high-quality diamonds as a way to maintain wealth in a world of fiat currency degradation as global central bank stimulus continues seemingly indefinitely and firm anti-deflationary policy is the priority of the day.

Typical options for storing wealth are equities, bonds, and real-estate. At the moment I think equities are at a precarious level, and debt yields are artificially low due to central bank policy. I do like real estate, especially if it's paying a cash flow, but there are certainly risks there too, especially a lack of liquidity.

So there is a basis for why people may want to hold investment-grade diamonds. Very high-quality diamonds are probably the most valuable tangible item relative to their size, and historically, the rarest, highest-quality diamonds have held their value and even appreciated in inflation adjusted terms. 

I would say the downside to diamonds as an investment are 1) the cost of carry: wealth is tied up in an asset that generates no interest or cash flow; in addition, there are insurance costs and safe keeping costs, 2) a lack of liquidity: the cost to transact could be as high as 25% both ways after commissions and the price spread, 3) a lack of price transparency since transactions primarily take place in private settings, 4) the minimum investment can be very high, in the tens or hundreds-of-thousands of dollars.


April 2015
Question: (on diamond production)
What do you make of the Bain reports saying diamond supply will start declining in 2019?  

Reply:
I have a similar forecast. However, as with any commodity, if reduced supply leads to higher prices, and prices rise enough, more projects will become economic which will eventually lead to new supply. 

It's worth noting that the time span from discovery to first mine production generally tends to be longer with diamonds than with other mined commodities. It takes about a decade.  

So looking 10 years out you can get a pretty good idea what supply will look like including production from new projects. At the moment there are only 5 mines in development with scale to produce >1M carats annually. 

I think higher prices would also drive the recycling market which is probably more active than it has ever been in the past --thanks to Internet pawning and overall greater price transparency and competition. 

Also, higher prices would widen the relative discount of synthetic diamonds, improving the appeal there. In addition, I expect synthetics to come down in absolute price in coming years as the production technology improves.


April 2015
Question: (on synthetic diamonds)
Why do we still use natural diamonds in industry despite the fact that lab-created ones are more effective and have become cheaper?  

Reply:
Regarding industrial diamond use, mining low-quality natural diamonds is not economic, thus industrial-quality diamonds are only mined as a byproduct. Over 99% of the world's industrial-quality diamonds are synthetically produced, primarily in Asia.

Regarding natural gem-quality diamonds used in jewelry, there is a certain allure that comes with a natural diamond that most consumers still value; there is no indication that this will change anytime soon. 


March 2015
Question: (on synthetic diamonds)
If lab-created diamonds can be mass-produced, does this, then, diminish their value?  

Reply:
Short answer, yes. I definitely expect to see the price spread between lab–grown and natural diamonds widening further.  

As technology for synthetic diamond production becomes more efficient, prices will continue to come down as supply increases; and I think we will see the exact opposite with mined diamonds: the price will increase as economic supply is incrementally depleted. 

I estimate that there are only 5 new large-scale (>1 million carats of annual production) diamond mines in the world being developed right now. Global diamond production by volume peaked in the first half of 2011, and has been in a downward trajectory since. 


March 2015
Question: (on synthetic diamonds)
Synthetic diamonds are cheaper than naturally mined stones and it is too early yet to know their resale value. What might your prediction be?

Reply:
As technology advances, the economics of producing synthetic diamonds will incrementally improve, pushing down prices; I see this as inevitable. 

I would say with confidence that a synthetic bought today will be worth less 5 years from now (wholesale), I would not say the same thing about a higher-quality natural diamond.  

That said, I think its worth noting that whether a diamond is synthetic or natural, it still needs to be cut/polished and retailed, which can account for as much as 80% of the final cost of a diamond. 


March 2015
Question: (on synthetic diamonds)
What is your take on lab-grown diamonds? Would you buy one yourself? 

Reply:
Personally, I have no problem with lab-grown diamonds. Since they are chemically identical to natural diamonds they possess the same aesthetic characteristics as natural diamonds; they can be considered more environmentally friendly; and while they are not significantly less expensive than naturals at the moment, I see the price differential incrementally widening as we move forward.

However, obviously problems arise if lab-created diamonds are not identified as such (i.e. sold as naturals).


November 2014
Question: (on diamond investing)
How do diamonds compare with precious metals as investments? 

Reply:
High-quality (note emphasis) diamonds are rarer than gold, and more valuable on a value-to-weight and size ratio. Diamonds are less liquid, and pricing is less transparent.


November 2014
Question: (on diamond production)
How much current diamond production comes from artisanal mining? 

Reply:
I estimate that about 135 million carats (including gem, near-gem, and bort) will be mined this year globally.  

Of that, I estimate about 80% or ~105 million carats will be mined by commercial operations including open-pit, underground, tailings production, and placer/alluvial mining.  

About 20% or ~25 million carats will come from artisanal miners, with the majority of artisanal production coming from the DRC, Sierra Leone, Guinea, and Ghana. Looking at DRC for instance, there will probably be around 15-20 million carats produced there this year, and about 90% of those carats will come from artisanal mining.  The DRC represents the large majority of the world’s artisanal diamond mining by volume produced.


November 2014
Question: (on diamond investing)
Are certain types of diamonds better investments than others

Reply:
Yes! The higher the quality and rarity relative to demand the better (e.g. high-quality pink and blue diamonds or larger flawless colorless diamonds). Favor quality over quantity. 

Typical engagement-ring-quality diamonds, in the $2k-10k price level, I would not qualify as “investment grade."


November 2014
Question: (on diamond investing)
What are the good and bad points to diamonds as an investment? 

Reply:
I would start off by saying that I don’t really see diamonds as an “investment” per se, maybe I am getting into semantics here, but I see them more as a "preservation of capital." The same goes with gold, fine art, vintage cars etc.  None of these items produce a cash-flow, and there are costs associated with holding them. That said, the highest quality examples of these items have historically maintained their value on a real basis (adjusted for inflation). 

So I see holding high-quality diamonds as a way to maintain stored wealth in a world of fiat currency degradation that is a result of central bank stimulus and firm anti-deflationary policy.

Traditional options storing wealth have been equities, bonds, and real-estate. I would argue that equities are currently unstable and relatively unpredictable. Bond (debt) yields are artificially low due to central bank policy. I like real estate, especially if its paying a cashflow, but there is certainly risk there too and other headaches that come with it.

So that is the basis for why people may want to hold “investment-grade” diamonds. Now to your specific question:

Good: Very high quality diamonds are probably the most valuable tangible item relative to their size.  Historically they have held value and even appreciated in real (inflation adjusted) terms. There is an ongoing debate that diamonds and gold are intrinsically worthless since they do not create value by generating cash-flow, but they have been valued by mankind for thousands of years; something about the human condition values these “precious things”, I don’t think that’s going to change anytime soon.

Bad: There is a cost of carry (no interest or cash flow being paid) and insurance cost/safe keeping cost. But most importantly diamonds lack relative liquidity. The cost to transact could be as high as 25%-in and 25%-out as a result of commissions and the “bid/ask spread” (the price spread in which sellers are willing to sell, and buyers willing to buy) tends to be wide. There is also a lack of price transparency, since transactions primarily take place in private settings (diamonds do not trade on an exchange like stocks, oil, gold etc, its a broker market).


July 2014
Question: (on synthetic diamonds)
Perhaps it is the subject of another article but I have been reading that today it is possible to produce un-natural diamonds so well that even a jeweller cannot spot them without sending them off to a laboratory to have them tested.
 
Since diamonds are a token of love, sentiment and romance do you think that in the main Chinese women would prefer to have the real deal rather than something that looks just as good but is made in a factory as opposed to being directly dug out of the earth?

Reply:
Surveys have continually showed that most women prefer natural diamonds and are willing to pay a premium for them.

That said, I think there is a market out there for synthetic diamonds, and the industry is only in the early stages. Appeal for synthetics right now primarily comes from those concerned with environmental implications and human rights issues surrounding some natural diamonds. Other customers are attracted to a lower price point. Only time will tell how much this demand evolves.


June 2014
Question: (on diamond recycling)
Will recycling (ie. diamond reselling) play much of a role in filling diamond demand?

Reply:
The industry saw a greater than usual amount of customers selling-back diamonds in 2008/09 and the subsequent years following the financial market collapse as people out of work were liquidating assets to cover living expenses.
 
But looking at the larger picture, America's Baby Boomer generation bought approximately 40% of the global diamond supply for over 20 years, equating to possibly a half a billion carats that could end up in the hands of new owners in the coming years. These diamonds will be gifted to family members, or resold, the later having the greatest impact on industry dynamics. Carats that are sold back to dealers and retailers, are often re-cut, reshaped, reset, and resold as “new” diamonds.
 
Global recycling of diamonds has probably grown from less than 1-2% to over 5% of global supply over the last couple of decades, with America and more specifically the Baby Boomer generation the most significant driver. The internet has also played a role in accommodating consumers looking to sell their diamonds, not only by providing an additional channel to sell, but also by improving diamond price transparency.

Its worth noting that even at the high end of estimates, recycling of diamonds relative to supply has been minimal compared to the recycling of other store of value assets such as gold, of which approximately 35% of supply comes from recycled sources. 


June 2014
Question: (on diamond demand)
Diamond demand is growing, particularly due to recent interest from China. Do you see that demand being sustained? Will new demand from other countries surface in the future?

Reply:
Yes, the biggest boost in demand for diamonds over the last decade has definitely come from China where the current generation is the first to adopt the Western tradition of giving diamond engagement rings. The number of urban Chinese brides being given a diamond engagement ring has increased from less than 1% to greater than 50% over the last 20 years; and half of China’s population of 1.3 billion is considered urban. The Chinese jewelry market has tripled in size over the last seven years, moving it from the 5th largest market in the world to the 2nd in that time (only behind the U.S.). 
 
The trend of giving diamond engagement rings is also growing in India. Diamonds have a solid legacy in India, and the rapid growth in middle class households and growth in personal disposable income there is having a significant benefit on the industry.

Consumer demand aside, India is currently the largest diamond importer and diamond cutter/manufacturer in the world by carat volume. However, over the last couple of years, a troublesome current account deficit and a historically weak rupee led the Indian government to hike import duties on gold and diamonds which put a damper on demand. Conditions appear to be improving though as recent parliamentary elections have resulted in improved economic confidence in India, which should lead to a boost in demand. Just this past week Anglo American specifically mentioned that they believe India in particular will have a significant positive impact on De Beers in the second half of 2014.  


May 2014
Question: (on monetary policy)
When the Fed buys mortgages, long bonds, from the banks and other financial institutions, they get cash or pretty to close to cash..right?  T-Bills. They then are then expected to do what? Lend to “whomever” wants a loan.. but they don’t.  Do they use that money themselves to put into the stock market and commodities?  Thus driving p/e s and commodities higher, thus profiting from this.  Do they lend to hedge funds etc, that use this money who in turn purchase futures in various markets, thus driving them higher.  My question is what are the mechanics involved, and am I correct in my thinking of the process,  as I described it.

Reply:
Remember that the ultimate goal of this "process" is to spur growth by making borrowing or "leverage" less expensive. Borrowing theoretically get less expensive as interest rates decrease. The Fed can aim to reduce interest rates by using Open Market Operations (OMO) or more specifically remove toxic assets from balance sheets in the process using a targeted version of OMO called Quantitative Easing (QE): 

1. The Fed has the power to create money out of thin air (remember our currency is not backed by anything tangible, which makes this possible)
2. The "new" money is used to buy federal government securities like treasuries, or other assets like mortgages, from banks that are designated as the Feds Primary Dealers (Citigroup, JP Morgan etc.) 
3. The banks now hold the newly printed money as reserves in place of the securities which they sold to the Fed 
4. Since the banks now have more cash in the form of reserves on their balance sheets, the cash can be lent out overnight to other banks that need the cash to cover their reserve requirement (a reserve requirement is mandated amount of cash that banks need to hold on a nightly basis relative to the deposits they hold for their customers)
5. The cost (interest rate) of cash lent from banks to other banks overnight is dependent on supply/demand 
6. The new cash held by the banks that sold securities to the Fed, increases the supply of cash available in the system for lending bank-to-bank, which in theory could lead to a lower borrowing (interest) rate, which in theory could trickle down through the economy increasing leverage in the system

Now to answer your specific questions:

“Do they use the (new) money to (buy) stocks and commodities?”

The banks do not use the new cash reserves to buy stocks and commodities directly, but because the new cash balances tend to decrease interest rates, the banks may more aggressively speculate or leverage positions in stocks and commodities as a result of the lower interest rates in the system.

“They then are then expected to lend to “whomever” wants a loan?”

Again, the banks hold the new cash as reserves; which essentially provides them the option to more aggressively lend to other banks overnight; which theoretically keep rates in the system down as long as there is an "over supply" of reserves. Note: the banks theoretically can lend to whomever whenever because of the way fractional reserve banking works, regardless of their excess reserves (because they can borrow reserves to meet their reserve requirement from another bank or even the Central Bank). Also note: the Fed currently pays banks interest on reserves, which provides the banks with an additional incentive to hold cash reserves. 

“Do they lend to hedge funds etc, (which) in turn (is used to) purchase futures in various markets, thus driving them higher”

Again, while lending of reserves from banks to hedge funds is not as direct as you imply, the more cash reserves in the system, the more interest rates are theoretically effected, and interest rates effect asset purchases, which effect asset prices. 


May 2014
Question: (on monetary policy)
Because of low rates, hedge funds, co’s etc. can get loans cheap, and in the case of hedge or/and other funds, utilize the borrowed money to purchase financial futures or commodities, thus “artificially” elevating whatever asset they “invest” in?  As for companies, they borrow and purchase their stock, retire it, thus reducing supply causing the price to go up.. at the same time their costs can decline due to lower borrowing expenses, which also improves the bottom line..which again can cause the shares to increase in price?

Reply:
Your examples of how lower interest rates effect asset prices is correct.  Easy Fed policy tends to incentivize a rotation out of lower yielding securities to fund speculation in higher yielding assets.  Just remember that the effect of all of this can be a reduction in purchasing power (inflation) of our fiat currency (dollars); thus these increases in asset prices tend to be nominal.  Government data tends to understate this effect, so globally traded assets or commodities like gold can provide a better basis for the nominal degree of asset price increases.


April 2014
Question: (on diamond market structure)
I'm a bit confused as to how the diamond market today operates. Is it still an oligopolistic market facing a kinked demand curve or is price set by the market dynamics?

Reply:
It is probably accurate to refer to the industry as an oligopoly, as 5 major players produce most of the worlds supply. That said, the industry is much more fragmented now then it was even just a decade ago.  This can be seen here.

Since there are more producers now, companies such as De Beers do not have the pricing power that they once had, but they still do have pricing power given that they still produce ~20% of global supply from mines that produce a wide array of product --of which reliable supply is not only valuable but necessary for diamond manufactures (cutters and polishers), so the manufacturers are willing to pay a premium to an extent. 

Regarding pricing, ultimately the demand for polished diamonds from consumers drives the price.  That said, the spread between polished and rough diamonds does vary.  At the moment rough is "expensive" relative to polished, and this may last until the manufactures are squeezed to the point where they can no longer afford to buy rough at the current price levels. 

Its worth noting that over the last few years a tremendous amount of new global demand has come from Asia where brides are being given engagement rings for the first time, and this has led to boosted prices.


April 2014
Question: (on diamond production)
Do you have an analysis and/or review of the actual (diamond production) for 2013?

Reply:
Since some companies/governments publicly disclose official production data, and others do not, it makes it difficult to accumulate official results in total.  The Kimberly Process probably offers the best official cumulative annual data, which is broken down by country, but 2013 data has not yet been released.


March 2014
Question: (on diamond production)
What percentage (of mined diamonds) are estimated to be gem quality?

Reply:
I estimate that approximately 40% of global mined production is gem (fine jewelry) quality with the balance being a scale of bort to near-gem (which can also be used for jewelry).  Using this number, 2014 estimates work out to about 54 million carats. 


March 2014
Question: (on diamond production)
I was wondering if you could please help me in finding out the per carat selling price of rough diamonds and per carat cost of production of diamonds in USD for African mines like Orapa, Jwaneng, Venetia and Cullinan. 

Reply:
Thanks for the kind words. I am using an average per carat price of around $140-160 for Orapa, Jwaneng, Venetia. Please note that this data is strictly an estimate as De Beers does not publicly disclose this information. 

Cullinan produced diamonds with an average carat value of $163 during Petra Diamonds 2013 fiscal year.


March 2014
Question: (on diamond production)
I was wondering if you had any information on either of these two points:  one, a breakout of which mines that produce ultra-high quality diamonds (the kind that polish out to 2 or 3 or more carats and DEF color, VVS1 and better);

two, how diamond investment funds might impact near- and long-term diamond supplies. As I'm sure you've read, Bain's Global Diamond Report 2013 believes the market to be balanced for the next 4 years and after that, for demand to outstrip supply.  Do you see any change in that timeframe that would be driven by investments?

Reply:
Regarding what mines produce “ultra-high quality” diamonds, this is a great question, but unfortunately there is not a precise answer.  Diamond mines produce as assortment of different quality stones (ie. from industrial quality to very valuable gem-quality), which varies by mine.  

For example, most mines will produce at least some 3+ carat, D, VVS1 diamonds, but some mines will produce more of these than others. The more high quality diamonds that a mine produces relative to the mines total production output effects the mines average price per-carat produced.  

So, I think that the best response that I can give you is a list of mines with the highest average price per-carat of diamond recovered.   But again this is not a perfect metric because even if a mine produces a lot of very valuable diamonds, the mines overall production output of low quality diamonds can dilute the mines average price per-carat (ie. while Argyle has a history of producing some of the most valuable pink and red diamonds in world, unpopular brown diamonds, most of which are classified as industrial quality, account for the majority of Argyle’s production making the mine's average carat value produced among the lowest in the world). 

These mines are producing a lot of very high quality diamonds relative to the mines total output:
  1. Letseng, Lesotho
  2. Orange River, Namibia
  3. Debmarine offshore operations, Namibia
  4. Koffiefontein, South Africa
  5. Kao, Lesotho
  6. Karowe, Botswana

As far as how diamond investment funds might impact near- and long-term diamond supplies, investment demand for physical diamonds is primarily coming from high-net-worth individuals, primarily in Asia, buying high quality stones and putting them away in safe boxes.  Currently, diamond investment only represents a tiny fraction, probably less than 1%, of total diamond demand, compared with about 40% for gold, so there is definitely room for that number to grow.   

I think there are investors out there that would like the option of buying diamonds to diversify their hard asset, gold-heavy portfolios, and I think situations like the one in India where the government is artificially making gold less appealing by raising import duties in an effort to reduce the current account deficit, will naturally draw more attention to diamonds as an investment. 

The global investment community is beginning to take notice of physical diamond investing, and this can be seen through the emergence of new business created attempting to securitize physical diamonds for investors.  

But even if demand for physical diamonds as an investment doubles or triples over the next few years, the relative percent of demand for diamonds that investment represents is not significant enough to move the needle much in my opinion. 


February 2014
Question: (on diamond production)
What is the difference between conglomerate and Kimberlite?

Reply:
A conglomerate is essentially a cemented gravel rock (a solid version of the loose rock that currently being mined at Marange in Zimbabwe). A kimberlite pipe is a geological formation created when molten rock is "piped" from beneath the earths crust to the earths surface. 

The gravel and conglomerate beneath the gravel at Marange was most likely deposited from a kimberlite pipe upstream. 


February 2014
Question: (on diamond production and demand)
I wanted to have your opinion on the Alrosa 'IPO'. Do you see big changes for the producer? for its rival De Beers? 

About the (diamond) market, how has it been so far this year? Is China still driving demand even with a slower growth? You said that even with the new mining projects going on until 2016, the production won't be enough to meet demand. Do you see the rough diamond prices rising a lot in the future?

Do we know all the reserves in the world? What about Africa?

Reply:
In 2010 Russia announced that it would be raising $50billion over the next 5 years by privatizing stakes in state-owned companies such as Novorossiisk Commercial Sea Port, Russian Railways, oil major Rosneft, and banks VTB and Sberbank.  ALROSA is latest example of this.  

Regarding the IPO, Putin has insisted that public offerings of Russian state firms are to be done on the Moscow Exchange, ruling out more liquid, deeper markets in Hong Kong, London, and New York, limiting access to Western investors.

As far as changes to the company, in addition to the IPO, ALROSA is streamlining its business by selling off non-core asset like a natural gas unit, and real estate that is not related to the diamond business.  

ALROSA is striving to be the outright largest diamond player in the world.  At the moment they are the largest diamond producer in the world in terms of carats produced, however, De Beers is still the largest in terms of total value of diamonds produced. 

Note:
  • In the late 1980’s De Beers controlled almost 90% of global diamond supply, Today De Beers only controls about 35-40% of supply
  • ALROSA currently has 9 primary diamond mines, 10 alluvial mines, and 2 mines in development all in Russia.  The company also holds a 32.8% stake in the Catoca mine in Angola, Africa, which is their only mine outside of Russia
  • ALROSA is currently exploring for diamonds outside of Russia with joint venture partners in Africa in an effort to expand the company's geographic property hold
  • ALROSA has a more aggressive exploration program than De Beers, and it would appear that ALROSA will outpace De Beers as the outright largest diamond player in the world over the next few years

Regarding the diamond market in general, a rise in new demand for diamonds is coming out of China where the current generation is the first to adopt the Western tradition of giving diamond engagement rings.   The number of urban Chinese brides given a diamond engagement ring has risen from less than 1% to more than 50% over the last 20 years (note that half of China’s population of 1.3 billion is now urban).   This is a longer-term trend that continues to play out.

Its easier to forecast new diamond supply than new demand given that it takes about 10 years to take a new diamond project from discovery to production.   So looking 10 years into the future, you can get a pretty good idea of how much new production will be coming online based on the current state of the projects out there right now. Globally there are only 6 projects in development estimated to eventually produce in excess of 1 million carats a year.  So, there is not a lot of new production coming online in the foreseeable future, and quite a few existing mines are approaching depletion levels. 

Also I find it interesting that at the moment rough diamonds are trading at historically "expensive" levels to polished diamonds.  This can be attributed to easy credit fueling speculation.  This is being compounded by rough inventory holders bidding up rough prices at auction to increase the theoretical value of their inventory.   Ultimately this is not sustainable as market forces will prevail, when the buyers of rough (the cutters/polishers and jewelry manufacturers) are squeezed to the point that they can no longer make money at current price levels.  Diamond banks are beginning to realize this (ABN AMRO and Antwerp Diamond Bank to name a few) are beginning to tighten credit to rough diamond buyers, which will naturally lead to rough suppliers reducing prices.  For clarification, rough diamond suppliers (the miners) sell approximately 60% of their inventory via long-term contracts where they set the prices of their diamonds for buyers.  The balance of sales are conducted through auctions and one-time sales where current market forces prevail. In the late 1980’s when De Beers controlled almost 90% of global diamond supply they would sell all of their rough via long-term contracts, and they controlled enough supply where they had the power to fix prices. Today De Beers only controls about 20-30% of supply, so they have nowhere near the pricing power they had decades ago. 

It is very difficult to quantify reserves, globally or by country, as economic reserves fluctuate based on prices (a higher diamond price increases the number of economic reserves, but a lower price may make those same reserves not economic to mine). That said, I would say that Russia has by far the largest economic diamond reserve base in the world. 


February 2014
Question: (on diamond production)
Do you know if anything came of the Popigai crater claim or not? 

Reply:
I did see this story when it came out. The anecdotes that I have heard were that these are very low quality industrial grade diamonds. I find it strange that there has not been a follow up to this story since, which seems indicative that these are not gem-quality diamonds or economic to produce.




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