For the past two decades, since DeBeers* ceased being a monopoly and was legally required to eliminate its stockpile, diamond pricing has solely been the result of supply and demand. Today, the two largest diamond producers, Russia and Botswana, account for 60% of rough diamond supply. The remaining 40% comes from a variety of smaller producers.
Most diamonds come from large mines that require intensive capital outlay. They must operate at efficient output and are on tight budgets. Additionally, the countries where diamonds are mined derive significant partnership profits, royalties, and tax revenue from these diamonds. With even tighter margins diamond exploration budgets have been dropping. Known mine output is set to slowly decrease during the coming decades. (see graph 2). On average, new mines take 10 years to develop. As a result, for the next decade — or longer — the maximum diamond supply is expected to stabilize and slowly decrease. With no increase in production, escalating mining costs, and growing global wealth, there should be higher demand for a more limited supply of diamonds.
Mines are extremely expensive to operate. Below a rough diamond price threshold, mines must close – or severely limit their output. The economic reality of diamond mining in the 21st century requires that a diamond mine’s entire monthly output must be sold at full price to remain viable. Either current pricing justifies full output, or, in slow consumer periods output must be reduced quickly in order to maintain prices and mine viability. As output cannot be increased beyond normal levels, in stronger demand periods, prices rise.
The price of diamonds remains quite stable even in slow economic times. For example, with the global economic collapse in late 2008 there was a natural drop in demand. For a short time in early 2009 there was an oversupply. Prices of polished diamonds dropped 20% — still far less than stocks. However, within six months, mine output shrank to the point where prices recovered. By early 2010 polished diamond prices had recovered to their prior peak.
Since then, with growing demand in China and the US economic recovery, prices of polished diamonds have risen 50% above their prior peak, a function of maximum available supply and demand. More recently we witnessed an economic slowdown in China. In reaction to slowing demand, short-term polished diamond prices fell 5%. However, this resulted in a 40% drop in rough diamond output at the mines. Accordingly, polished diamond prices very quickly began to recover and DVD quality diamonds increased 7% in the first two months of 2016.
This dynamic never changes. There are no new mines of significance on the horizon. As a result, maximum diamond production has remained flat for a number of years (see graph). Given the nature of diamond mining it is not possible to significantly increase the output of any major mine. In terms of diamonds sold versus production costs, many mines are marginal. As mines get older, they require digging deeper, production costs escalate, ore grades drop and prices rise.