Price-prediction of Diamonds- Examination of Alrosa Analysis

Hi Paul,

I read your analysis and see the common sense.
But would like to hear your opinion on the new initiative formed by the Surat Diamond manufacturers.

http://www.idexonline.com/portal_FullNews.asp?SID=&id=34375

"...More than 200 Surat-based diamond manufacturers decided to invest in a rough diamond sourcing consortium. The cooperative intends to raise more that $200 million to buy rough directly from producing countries and mining companies and sell the goods in Surat to their members and non-members.


The Surat Diamond Sourcing (India) Ltd (SDSL) will reportedly open buying offices in producing countries such as South Africa, Botswana, Namibia, Tanzania and Zimbabwe."

Do you think it will also be a cause for price increases in the near term?
Could Surat become the next World Rough Diamond Center and hurt Antwerp's present position as a Rough Center?

Any thoughts?

Hi Yoram,

I think that this initiative highlights the importance of securing a supply of rough.

Considering a future shortage, it is in the cutters' best interest to reach long-term-supply-contracts. For the suppliers-miners however, the opposite might be most attractive, a minimum of long-term-contracts and a majority of spot-transactions, possibly through tenders.

Live long,

Written by Paul-Antwerp:Hi Yoram,

I think that this initiative highlights the importance of securing a supply of rough.

Considering a future shortage, it is in the cutters' best interest to reach long-term-supply-contracts. For the suppliers-miners however, the opposite might be most attractive, a minimum of long-term-contracts and a majority of spot-transactions, possibly through tenders.

Live long,

I agree.
Both systems will be strenuous on the medium & smaller sized manufacturers cutting mainstream products.
It does look like a rough (literally ) ride ahead.

Wonder if (as you say) suppliers-miners will jump of the consortium initiative?

few points:
1: China's economy can't continue to grow on exports they have reached near saturation and the backlash has started to grow more intense. A conversion to a local based economy is going to be painful.
Everyone seems to assume they are going to keep growing at the same rate.... not going to happen, look at what happened to Japan when they switched to a more local market economy.
2: India is in the same boat but seems to be trying to grow local markets more than export at all costs.
3: real wages adjusted for inflation have been going down world wide.
4: economics 101: prices will only rise as far as the customer is willing to pay.

The huge question is will consumers pay 55% higher prices in today's money?
Honestly I doubt it.

When I hear overly rosy predictions the one thought comes to mind is:
"real estate prices are going to keep going up" we all know how that worked.

Karl,

Check the price of your groceries this week and imagine how many items will have gone up 55% by 2018. Considering past experience, I know that my groceries clearly cost about double of what I used to pay 8 years ago.

Your argument is in economic terms that the world will go through a decade of deflation. Let us all hope that this is not the case, considering that the world's population is continuing to rise and we will need economic expansion to simply feed more people.

Your comparison to real estate is invalid. Looking at the number of vacated houses in the US, it is clear that there was an over-supply. Alrosa's analysis clearly shows supply declining and struggling to get back to the same level.

Most importantly, you stating this analysis as rosy is not correct. It is good news for miners, but it is very bad news for all other actors in this business, ranging from cutters to wholesalers and retailers. However, we cannot simply dismiss it because it is bad news. We have to deal with it.

Live long,

Written by Paul-Antwerp:Most importantly, you stating this analysis as rosy is not correct. It is good news for miners, but it is very bad news for all other actors in this business, ranging from cutters to wholesalers and retailers. However, we cannot simply dismiss it because it is bad news. We have to deal with it.

We are already..., no?

Written by Paul-Antwerp:Karl,

Check the price of your groceries this week and imagine how many items will have gone up 55% by 2018. Considering past experience, I know that my groceries clearly cost about double of what I used to pay 8 years ago.

Your argument is in economic terms that the world will go through a decade of deflation. Let us all hope that this is not the case, considering that the world's population is continuing to rise and we will need economic expansion to simply feed more people.

Prices can go up 55% due to inflation but it is not a supply driven price increase they are talking about.
They are talking about an increase due to supply, not currency devaluation.
A supply driven increase would be in constant dollars.
Hence where I said:
"The huge question is will consumers pay 55% higher prices in today's money?
Honestly I doubt it."

Written by Paul-Antwerp:Karl,

Your comparison to real estate is invalid. Looking at the number of vacated houses in the US, it is clear that there was an over-supply. Alrosa's analysis clearly shows supply declining and struggling to get back to the same level.

There was a shortage of housing in many markets due to easy money.
That shortage was in many ways artificial.
The same easy money drove diamond sales.
The only rough shortage today is that some miners decided to leave them in the ground for now.
It will be funny when a new mine is found or consumers turn to man made diamonds and they lose money on doing so.
MMD is another topic but it is waiting in the wings for a miss step by the mining companies.

Easy money is not driving diamond sales today. What are you basing your position on?

A new mine takes 10 to 15 years to become productive, well beyond the time-span of the analysis.

And MMD is not ready to fill a void of 40 million carats, nor are the customers ready to buy that volume of MMD as a valid alternative.

Live long,

Written by Paul-Antwerp:Easy money is not driving diamond sales today. What are you basing your position on?

Sorry if I wasn't clear I was talking about the housing boom causing a shortage then exploded. The same easy money was driving diamond sales at that time.
Was not talking about today.

Just received a phone-call asking me what MMD are. Sorry for the confusion, it is an acronym for man-made-diamonds, synthetic diamonds in other words.

Karl, your claim that easy money was driving diamond-sales recently up to two years ago has no basis.

Live long,

Written by Paul-Antwerp:
Karl, your claim that easy money was driving diamond-sales recently up to two years ago has no basis.

Live long,

You seriously believe that easy credit and the wall street insanity before the crash didn't drive diamond sales higher?

Karl,

If the basis of your claim is a belief, there is no point in discussing this.

Demand for diamonds in the US has been almost flat over the past ten years, no indication whatsoever that an extraordinary situation sparked a sizeable part of total demand. And currently, demand is not down in the absence of that extraordinary situation.

Live long,

Ditto observations by Paul (above),

Here in the N.Y.C. Diamond District (I hesitate to make a similar definitive observation for the industry as a whole), I can tell you that there has been absolutely no correlation - one way or another - such as you suggest.

What drives the price of diamonds, at least on the demand side, is young men who want to get married and young women who insist on diamonds being a part of that deal. I see no signs that either of these is changing as a function of the recession and neither of these things is limited to the United States. Indeed, most of the growth in the industry is in other markets where the diamond engagement tradition isn’t so solidly ingrained. The world population continues to grow at an alarming rate and this too is very likely to continue. I think the world is a long way from getting a diamond into the hands of everyone who wants one, I think we’re a long way from people deciding that they aren’t really very useful, I think that we’re a long way from people deciding that some cheaper alternative would work just fine for the purpose, and I think we’re a long way from the supply ramping up to a level where the supply side becomes the primary driving force on prices rather than demand. As they get more expensive, we may see some changes in what people buy but I see the overall dynamic as remarkably stable.

Written by denverappraiser:What drives the price of diamonds, at least on the demand side, is young men who want to get married and young women who insist on diamonds being a part of that deal. I see no signs that either of these is changing as a function of the recession and neither of these things is limited to the United States. Indeed, most of the growth in the industry is in other markets where the diamond engagement tradition isn’t so solidly ingrained. The world population continues to grow at an alarming rate and this too is very likely to continue. I think the world is a long way from getting a diamond into the hands of everyone who wants one, I think we’re a long way from people deciding that they aren’t really very useful, I think that we’re a long way from people deciding that some cheaper alternative would work just fine for the purpose, and I think we’re a long way from the supply ramping up to a level where the supply side becomes the primary driving force on prices rather than demand. As they get more expensive, we may see some changes in what people buy but I see the overall dynamic as remarkably stable.

I agree Neil.
And thanks Paul for the article.

Consider Chinese are ageing, and Indians and Arabs have very young poulations and rising GDP - they will definetly be demand driving nations.
MMD's will be a new / different / fashion market I think.

But on the supply side I hear from Rio sources there is a lot of diamond potential in Zimba.
I also hear that the Rapaport ban is an overreaction and that most diamond mining is positive for the people from that country.

Its all complex and the modelling is difficult because it is hard to predict what people will do.

Paul I am not sure that bigger and more expensive can keep going up faster than smaller (although I do agree it is likely).
The thing is that when the gap gets too big pave becomes more popular etc

I just read this presentation (http://www.allanhochreiter.co.za/diamond_presentation_pdfs/Diamonds_June_2010.pdf) by a South-African analyst at the June Botswana Resources Conference.

He follows a method in line with Neil's and Garry's comment about demographics. The final prediction is in line with mine, and higher than Alrosa's, with a predicted average yearly price-increase of 7%.

Live long,

Here is the predicted price-index of diamonds of AllanHochreiter (Pty) Ltd.



Live long,

Just wanted to let everyone know i have updated the Pricescope diamond chart with the latest info. It is showing an up trend as well.

http://www.pricescope.com/wiki/diamond-prices/diamond_price_chart

Written by Karl_K:few points:
1: China's economy can't continue to grow on exports they have reached near saturation and the backlash has started to grow more intense. A conversion to a local based economy is going to be painful.
Everyone seems to assume they are going to keep growing at the same rate.... not going to happen, look at what happened to Japan when they switched to a more local market economy.
2: India is in the same boat but seems to be trying to grow local markets more than export at all costs.
3: real wages adjusted for inflation have been going down world wide.
4: economics 101: prices will only rise as far as the customer is willing to pay.

The huge question is will consumers pay 55% higher prices in today's money?
Honestly I doubt it.

When I hear overly rosy predictions the one thought comes to mind is:
"real estate prices are going to keep going up" we all know how that worked.

True there are signs of some bubbles in China, but they are producers, so they will have mechanisms of compensations if the bubble goes bust (may be Australia needs to watch for the real state bust in China that will slow their exports) they do not need the west much since they can enjoy what they produce inside their emerging markets, on the other hand it is here in the states where we are consumers and the shelves of our stores will get less and less goodies but yet more expensive.
yes they will lose some on their holdings of our T bills, but they can have more growth since their population will enjoy the standard of living we are losing in the west, and they are already dumping most of those dollars on buying mines in Africa.
we dug ourselves deep in a hole where the logical thing to do is to stop digging more but we just do the opposite.
Our debt is astronomical and our attempt to slash our debt by debasing our currency is only hurting the Dollar that will not be worth the paper and the ink on it very soon.
We are unfortunately witnessing a shift of wealth from west to the east.

Written by PS:Just wanted to let everyone know i have updated the Pricescope diamond chart with the latest info. It is showing an up trend as well.

http://www.pricescope.com/wiki/diamond-prices/diamond_price_chart

If you factor in inflation, the price now is cheaper than years back even if it is more. it will be nice if a graph shows the price of diamonds compared to Gold...it will be interesting data to look at!

Written by Doc_1:

Written by PS:Just wanted to let everyone know i have updated the Pricescope diamond chart with the latest info. It is showing an up trend as well.

http://www.pricescope.com/wiki/diamond-prices/diamond_price_chart

If you factor in inflation, the price now is cheaper than years back even if it is more. it will be nice if a graph shows the price of diamonds compared to Gold...it will be interesting data to look at!

Absolutely right, Doc,

In the past 10 to 15 years, the price of diamonds has been relatively flat and certainly cannot be compared to the huge leaps upward that other commodities made.

Are we at the dawn of a big catch-up-race?

Live long,

Written by Paul-Antwerp:

Written by Doc_1:

Written by PS:Just wanted to let everyone know i have updated the Pricescope diamond chart with the latest info. It is showing an up trend as well.

http://www.pricescope.com/wiki/diamond-prices/diamond_price_chart

If you factor in inflation, the price now is cheaper than years back even if it is more. it will be nice if a graph shows the price of diamonds compared to Gold...it will be interesting data to look at!

Absolutely right, Doc,

In the past 10 to 15 years, the price of diamonds has been relatively flat and certainly cannot be compared to the huge leaps upward that other commodities made.

Are we at the dawn of a big catch-up-race?

Live long,

Am afraid yes, wait until the Chinese realize that we will keep our reckless monetary policy despite their warnings and that they better turn to their own market rather than exporting to us and their appetite open to diamonds and platinum more than what it already is, they have a potential billion customer...lol.
rough diamond price spikes not far ago tells you the story!

woops so much for no new mines.
Want to bet there are more in the area since they tend to be in groups?

Rio Says India Diamond Project Is Biggest Global Find in Decade
http://www.businessweek.com/news/2010-09-22/rio-says-india-diamond-project-is-biggest-global-find-in-decade.html

demand based price pressure on polished:
"There is a message here to manufacturers. The "optimistic prices" didn't meet their full hopes. Prices, says a trader, "were a war" at the recent trade fair. The buyers, mostly Indians, couldn't afford the higher prices because they don't have the demands to justify these prices. The sellers couldn't budge because they need to cover their costs. "

http://www.idexonline.com/portal_FullEditorial.asp?id=34504

Written by Karl_K:woops so much for no new mines.
Want to bet there are more in the area since they tend to be in groups?

Rio Says India Diamond Project Is Biggest Global Find in Decade
http://www.businessweek.com/news/2010-09-22/rio-says-india-diamond-project-is-biggest-global-find-in-decade.html

Do not get your hopes up too high, Karl.

The biggest diamond discovery in the past 10 years does not mean much since there has been almost no diamond discovery in that period.

More important, this project is in the pre-feasability-phase, meaning that it still needs to be established whether any diamonds can be extracted in a cost-efficient way.

And do look at the numbers, projected content is 27.4 million carats. Compared to a yearly production of 160 million carats, and assuming a 10 to 20-year life-span of this project, this is still little more than a drop in a rather big sea.

Live long,

Written by Karl_K:demand based price pressure on polished:
"There is a message here to manufacturers. The "optimistic prices" didn't meet their full hopes. Prices, says a trader, "were a war" at the recent trade fair. The buyers, mostly Indians, couldn't afford the higher prices because they don't have the demands to justify these prices. The sellers couldn't budge because they need to cover their costs. "

http://www.idexonline.com/portal_FullEditorial.asp?id=34504

The article is about prices of rough diamonds being up at least 30% compared to last year, while the same is clearly not true for prices of polished diamonds. The latter are clearly up, but it is difficult to impossible to also bring them up 30% in one year's time. Nevertheless, prices of polished are clearly up, and will continue that upwards trend. It is clear that the market of rough diamonds is much more volatile, but nothing in this article contradicts any of the Alrosa-predictions, nor the content of my article.

Live long,

Karl

As far as discoveries and natural resources we are hitting the hockey stick and we exploited our planet in the last 200 years...good luck!

As far as prices
The whole picture will be clear if we see it as dollar is going down rather than the price is going up, unfortunately it is not only the dollar but every fiat currency on the planet however they are falling at a less speed than the free falling of the dollar like a stone off the cliff.
So tell me how many dollars helicopter Ben is printing i will tell you how high the price of diamond is going, a reminder ...look at the price action of gold/silver.

Written by Doc_1:Karl

As far as discoveries and natural resources we are hitting the hockey stick and we exploited our planet in the last 200 years...good luck!

As far as prices
The whole picture will be clear if we see it as dollar is going down rather than the price is going up, unfortunately it is not only the dollar but every fiat currency on the planet however they are falling at a less speed than the free falling of the dollar like a stone off the cliff.
So tell me how many dollars helicopter Ben is printing i will tell you how high the price of diamond is going, a reminder ...look at the price action of gold/silver.

I disagree with you that new diamond rich areas are not waiting to be discovered.
As far as exploration many areas of the world are just getting started in being explored for diamonds.
Everyone scoffed about Canada having diamonds and now off the top of my head and I may be recalling wrong they are around 20% of the market.

But I do agree about fiat currency. Not often that gets brought up here.

Written by Karl_K:I disagree with you that new diamond rich areas are not waiting to be discovered.
As far as exploration many areas of the world are just getting started in being explored for diamonds.
Everyone scoffed about Canada having diamonds and now off the top of my head and I may be recalling wrong they are around 20% of the market.

But I do agree about fiat currency. Not often that gets brought up here.

I doubt, and if that is the case you have to get the prices way up to justify opening and operating new mines, with the stagnation in the world it is simply next to impossible.
unfortunately we are in a global recession if not depression that will make maintaining what is already operating a tough task.
Humans had as i said exploited the rich easy access natural resources and left with the lower yielding poorer more expensive to extract ones.
You may see a picture of two people sitting on a nugget of copper that is very large and on the surface of earth. now they have to dig miles deeper to get much lower yielding copper. same applies to, oil, natural gas, diamonds........etc, times for easy extraction are over.

We hit the hockey stick on the exponential curve, from there, there is no turning back, too sad, but true!!!!

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