Diamond supply, rarity and prices

[miraj]

The question of diamond rarity has always been on the back of my mind, so I did some research and would like to share what I found with fellow diamond enthusiasts. Since I’m an amateur not in the business, I hope more knowledgeable people will point out errors, provide guidance, maybe fill in some gaps, or point me to posts on PS that explain more. I should caveat that there are thousands of nuances that are being left out because I wanted to get a high-level idea of the industry. So here goes…

Rough diamonds are not rare: about 127 million carats of diamonds were mined in 2015 alone. But to get to those rough diamonds, you have to move a LOT of dirt: to get one carat of rough diamond, a typical mine processes one to 10 tonnes of ore (5,000,000 to 50,000,000 carats of ore). I couldn’t find any good information on the size distribution of rough diamonds, but I did see that 90% of diamonds are less than 0.1 carat. These rough diamonds cost about $110 per carat. The mines make about 25% margin on the rough diamonds.

Only 20%-30% of the rough diamonds are appropriate to use for gemstones, the rest are used for industrial purposes. So that leaves about 31 million carats of gemstone-quality rough. Rough diamonds are sold to cutters in some curious manners, which has undergone a lot of disruption with the de-cartelization of De Beers.

The rough diamond are cut into shapes and then polished, and lose over 50% of weight in the process. So we’re down to under 16 million carats of polished gemstone diamonds – still a lot available. The cutters only make about 1% margin.

The polished diamonds go to wholesalers, who sell to jewelers and retailers. Jewelry manufacturers make about 4% margin when they sell to retailers. The retailers make about 8% margin selling to consumers.

Some researchers [Vaillant & Wolf; Scott & Yelowitz] looked at some online diamond retailer databases and shared data on the various characteristics (color distribution, clarity distribution, certificate, cut, polish, symmetry, size, etc). I’m assuming their databases are representative of what the whole gemstone-quality diamond market looks like. So if we apply the characteristics they describe, we can get a sense for rarity.

So let’s apply some decent standards: D-H, FL-SI2, GIA, Ideal-Very Good cut. The researcher data base is 75% D-H color; 95% is FL-SI2; 73% is GIA; 90% is Ideal-Very Good cut. If we multiply each of these (assuming they are each totally independent variables for simplicity), we can get a ballpark for how many decent polished diamonds are created every year: 7.6 million carats.

About 2.1 million marriages occur in the US every year. Add 730,000 in Japan, 275,000 in the UK, and 114,000 in Australia and we’ve got a total 3.2 million engagements that are typically formalized with a diamond (I’ll call this first-world engagements). So that means about there are 2 carats of decent diamonds available per person – nice! Of course if you add in China and India – the up-and-coming markets – then you add a ton more people and the diamonds available per capita drops.

If we apply the very strict standards (D-E, FL-IF, GIA, Ideal/Excellent cut), then we are down to 61,000 carats. And if we only look for most strict diamonds created than 2.5ct, then we are down to 9,700 carats per year and 3,880 diamonds at most. So that means only 1 in 824 first-world engagements can have a 2.5ct+ diamond that meet very strict standards. That sounds quite uncommon, but not quite “rare” to me.

Further questions:
* What is the size distribution of rough diamonds? …Of polished diamonds?
* How can I account for the diamonds that are gemstone quality but too small to be considered?
* What is the average price per carat at each step? (rough vs gem-quality rough, cut/polished, polished wholesale, jewelry manufacturing, retail)

Sources:
Bain: http://www.bain.com/Images/bain_diamond_report_2016.pdf
Vaillant & Wolff : https://halshs.archives-ouvertes.fr/halshs-00853384/document
Scott & Yelowitz: http://yelowitz.com/ScottYelowitzEI2010.pdf
Paul Zimnisky: http://www.paulzimnisky.com/global-rough-diamond-production-estimated-to-hit-over-135m-carats-in-2015
MBA students: https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/107/Global_Diamond_Industry.pdf
UN World Marriage Data 2015: http://www.un.org/en/development/desa/population/theme/marriage-unions/WMD2015.shtml

 

[Paul-Antwerp]

Hello Miraj,

Rarity is a very difficult factor to define. Then again, I would not necessarily use rarity as a validation for a diamond’s value.

I have not redone all your calculations, you seem to have taken your time reading up, but I do disagree with some of your figures.

- I cannot retrieve where you validate 20 to 30% of rough diamonds being gemstone-worthy. My estimate would be 15% at best. If so, the rest of your deduced figures also change dramatically downwards.
- I see you quoting a 50% yield from gem-quality-rough. Even of the very best rough, that is a high figure. I would estimate an overall yield, over all qualities of gem-quality-rough to more around 35%. Again, this affects your other resulting figures.
- The research based upon online-retail-databases is highly flawed. Aside from the limited number of online-diamonds, owned by a retailer or marketed through a closed-channel, the huge majority of online-retail-diamonds are virtual diamonds, wholesale-owned. In very negative words, these are diamonds that did not manage to find a better way to be marketed. In a worldwide scope, this is a relatively limited part of all diamonds, and thus not a basis to get extra findings from.

But back to your point of rarity. I agree, diamonds are not really a rare object. If one contacts a jewelry-professional with a not too outrageous demand, probability is high of that professional locating a number of options for sale within limited time.

Then again, the figures you researched show another aspect of rarity. You brought up that mines work with an operating margin of about 25%, cutters 1%, and jewelry in total about 12%. Does that not strike you as weird?

If diamonds were not rare, for sure both the jewelry-sector (manufacturers and retailers) would make a higher margin. Definitely cutters would not want to accept working for virtually nothing. And miners would have a problem making more than the rest of the supply-chain combined. These figures clearly show the power of the miners.

Then again, if you have followed the diamond-news in the past year, you must have noticed the gloom and doom of the miners. A number of mines has shut down because they are not profitable anymore. Thus, while the miners are taking the majority of the profit, mines are still going out of business. This can only be because the cost of mining is high, and while diamonds may not be rare, it is rare to mine them at a lower cost than current.

Let’s take this one step further: I read today that between 2000 and 2013, a total of $7 billion has been spent on exploration of new diamond fields. The result is meagre with only one diamond deposit of significant size found. Now, I am not saying that there possibly are not more diamond deposits to be found. I do not know. But clearly, if they are there, more will need to be spent on exploration.

And that poses another problem. Miners are not exclusively diamond-miners. And where they can use their budgets to explore potential diamond-deposits, they can also search for other minerals. Reality is that the 25% operating margin of diamond-miners is probably not enticing enough compared to other minerals. So, even if we have a decent production unearthed right now, the desire and need of other minerals might well cause rarity in future.

Now, let’s move to real rarity. The above has clearly shown the power of diamond-miners. Now, while all retailers will tell you that a diamond’s value is based upon the 4 C’s, please understand that the C of Cut-quality does not exist in rough diamonds, and is thus immaterial for diamond miners. To put it bluntly: miners do not care about Cut-quality, instead push diamonds down the pipeline, based upon exaggerated detail of size-color- and clarity differences. The more they can make the consumers believe that a D-color is worth 15% more than an E-color, the higher the reward they get for their rough.

With the entire industry ‘held hostage’ by the 3 other C’s, real Cut-quality in polished diamonds is undeniably rare. Many jewelry-retailers have never seen the very best in Cut-quality. More important, they very often have no idea where to source it, as many here on PS have already experienced. It is not necessarily because they are unknowing or lazy, the fact that these diamonds are truly rare is probably more important.

As a result, one still sees, even here on PS, a lot of diamonds passing by because they are ‘good enough’. In reality, they are only ‘good enough’ for two reasons:
- Because finding a better one is a relatively difficult task,
- Because the customer is often not prepared to pay a small premium for the true rarity of Cut-quality

Sorry for rambling. I think that I have offered a lot of food for thought.

Live long,

 

[denverappraiser]

127M carats is just over a ton. Total. For a whole year. For the whole world. On the scale of such things, that's pretty rare.

The online databases are definitely NOT a good sampling of the industry. The majority of the industry is those tiny things on the bezel of your watch and in those cluster rings at Walmart.

Even if it were easily available, average price per carat would be a hugely deceptive statistic in terms of what you're doing. 'Wholesale' is not a fixed number even for a specific stone, much less trying to generalize it to the whole industry. Prices range from $40/carat to $40M depending on details and context.

 

[Texas Leaguer]

Interesting topic Miraj. You have done some homework and have laid out a logical structure. Paul and Neil have already presented some qualifiers. I'll just make some general comments.

In terms of rarity, size of course matters. Of the diamonds produced by moving all those tons of earth, most are only suitable to make accent diamonds. As you get into the larger sizes, rarity increases exponentially. So averages really miss the essence of the story - at lease as it relates to the diamond shopper here. When you take into consideration color and clarity, colorless to near colorless eye-clean and above represent a very small percentage of mined diamonds.

The assumption that mining companies generally make 25% margin is no longer a given, if it ever was. As mentioned, high profile mining companies have left the diamond business altogether in recent years. Not because there are greater profits to be made elsewhere, but because there are diminishing returns for extracting the rough from the ground. Old mines are being depleted and/or they are becoming more costly to operate. New mines are not opening up.

So, it can both be true that diamonds are not all that rare from an earth science perspective, but extremely rare in the market. (It's like the idea that astronomers have detected asteroids made of platinum- that doesn't make the platinum in your ring any less valuable).

Paul mentions cut quality - there is a reason that diamonds have been traditionally cut to maximize weight at the expense of light performance. Reducing yield beyond a certain point was not seen as a prudent use of very precious material. GIA developed a cut grading system that supported that proposition. In fact precision cuts on the top colors and clarities are even more rare in the market. And that is because this material is indeed extremely rare.