Forecasting prices for rough diamonds can be a thankless task, considering that diamonds are not an exchange-traded commodity and do not have any single price benchmark.

Analysts unanimously agree that prices for rough diamonds will rise in the long-term thanks to growing demand and the gradual decline of world production. But their opinions diverge in forecasting short-term trends: some expect prices to climb 10% this year, while others expect them to drop 10%.The chief analyst at Russian diamond miner Alrosa, Leonid Tolpezhnikov spoke about what the company expects from the market this year and in the long-term.

Price forecasts for 2012

Alrosa forecasts that average annual world prices for rough diamonds will increase by 3-4% in 2012, Tolpezhnikov said.

Alrosa’s forecast is relatively moderate compared to the latest analytical forecasts. BMOCapitalMarkets expects rough diamond prices to rise 9% in 2012, Russia’s Finam is forecasting growth of 9.7%, and VTB Capital is projecting a gain of 10%. But there are also pessimists. WWW Diamond Forecasts Ltd. expects prices for rough diamonds to drop 5.1% in 2012, while Tacy Ltd. Diamond Industry Consultants forecasts that prices will plunge 10-13%.

Metropol has the closest forecast to the one of Alrosa, projecting that world prices will climb 3%, though Metropol’s analysts think there could be a stronger gain in the second half of the year.

Alrosa analysts estimate that the average world price for rough diamonds was $132 per carat in 2011. BMO has a similar estimate of about $133, while Tacy estimates the average price at $121.60.

“Alrosa is sticking to a fairly conservative forecast. We, like many other market players, note that the current year will not be the easiest for the industry. Nonetheless, we have made it through the downward phase of the market, and positive signs are emerging on the market that indicate we can expect market growth,” Tolpezhnikov said.

He said price volatility for rough diamonds this year will be far more muted than in 2011. “The dramatic rise in prices last year and the subsequent steep drop were the result of the significant number of speculative operations that took place on the market,” Tolpezhnikov said. “Speculators have now left the market and, judging by the situation, this process will not resume. Speculative demand arose due to the excessive availability of credit to buy rough diamonds. Now, banks that work with the diamond market have significantly reduced the amount of lending to the sector and simultaneously raised their requirements for borrowers. We also do not expect in 2012 another wave of the crisis that could have an impact on the state of the global economy and, consequently, on consumption. The measures of macroeconomic regulation that are being used at the moment are quite effective.”

Alrosa prices

Alrosa did not give a forecast for average prices for its own rough diamonds in 2012, but its guidance for revenue is $5.074 billion, a 15% increase over 2011. The figure for 2011 is also unknown, and will be disclosed in the company’s annual IFRS statement. In the first nine months of 2011, the average sales price for Alrosa’s rough diamonds was $121 per carat ($102 in the first quarter, $119 in the second, and $142 in the third), up from $84% in 2010.

Analysts forecasts for 2012 range from $120 to $145 per carat.

Sergei Filchenkov of Metropol forecasts that the average price for Alrosa’s rough diamonds in 2012 will increase by 3% compared to the anticipated average sales price in 2011.

Dinnur Galikhanov of Aton believes the average price for Alrosa’s rough diamonds will rise slightly compared to last year’s price, reflecting the negative macroeconomic climate. Alrosa’s premium to average world prices, due to the quality of stones and an increased share of auctions in sales, will grow to $35 in 2012 from $25 last year, he predicted. This is a conservative forecast based on a sales analysis by the Diamond Trading Company, the largest sales and distribution arm of De Beers, that anticipates a slump in demand, Galikhanov said.

Denis Gabriyelik of Aton said a forecast of $120 per carat for the average price of Alrosa’s rough diamonds is also conservative, and the figure will probably be higher. The average price in the first half of the year will be $130-$135, Gabriyelik forecast.

The average prices of individual producers can differ dramatically based on the quality of the stones from different deposits. The average sales price of De Beers rough diamonds exceeds $200 per carat, Alrosa’s prices (based on published preliminary financial results) are in the range of $120-$130, while the average price for rough diamonds from the Letseng deposit in Lesotho (Gem Diamonds), for example, was $2 776 per carat.

Gokhran’s storehouse

Prices could theoretically be affected by the additional supply’s hitting the market from stockpiled reserves. However, Tolpezhnikov said there are currently no major sources on the market that could have such an impact. “According to certain estimates, during the last phases of crisis, reserves of rough diamonds were stockpiled in Antwerp, but India’s polishing facilities are still markedly undersupplied, so these supplies will be swallowed by the Indian market and will not affect world prices,” he said.

He said supplies from the Russian state repository Gokhran, which has stockpiled at least $1 billion worth of rough diamonds bought from Alrosa in 2009, will also not affect the market. “Gokhran operates in line with budget targets. It is supposed to earn from sales the amount specified in the Russian budget. For the current year, Gokhran’s plan for sales of precious metals and stones (which include all types of valuables, not just rough diamonds) is about $300 million. The world market for rough diamonds is estimated at $10 billion-$12 billion. In other words, even if Gokhran sells just rough diamonds in the amount of $300 million, this will not have an impact on the market,” Tolpezhnikov said.

Threat to prices from Marange

However, the market has recently seen another potential source of additional supply – Zimbabwe with its huge Marange deposit. Analysts think this country has strong potential. Tacy, for example, believes that Zimbabwe could account for up to 30% of world production in carats by 2015. A number of analysts think Zimbabwe could more than double rough diamond production to 20 million carats in 2012.

Many market players think that a large supply of diamonds from Zimbabwe could force prices down, and the problem is not just in the growth of supply from Zimbabwe. Exports of rough diamonds from Zimbabwe were for a long time subject to a ban by the Kimberley Process due to suspicions of smuggling and violations of human rights in their production. The KP sanctioned the resumption of sales of Zimbabwe diamonds only in November 2011, but the status of diamonds from Marange is still unclear: the producers are subject to sanctions from the United States, the European Union, and the U.K. and cannot supply rough diamonds to these countries. As a result, Marange producers are now selling rough diamonds in India, reportedly at half the market price.

Tolpezhnikov downplayed the “Zimbabwe factor.” “There are currently no official data on the volume of production in Zimbabwe and the resource potential of that country, and the claims of potential production of 20 million carats come only from the mouths of unknown sources. Therefore, we are wary of these claims and are guided in our forecasts primarily by the data of the Kimberley Process, according to which annual production in Zimbabwe amounts to about 8 million carats. Based on this, we do not expect that the situation with Zimbabwe will somehow significantly affect the state of the market,” he said.

Analysts’ forecasts for 2012 differ not only because of differences in the methods of calculation, but also due to the different factors that analysts take into account. Tacy, for example, expects the reuse of gem diamonds to have an impact on the market. Tacy believes this is a new post-crisis phenomenon, where polishers are receiving items that were sold by their owners to pay off debts (usually obsolete or out of fashion). Other analysts, meanwhile, do not mention such a development.

Production hits plateau

“It’s possible to say that world diamond mining has already passed its peak, which was recorded in 2005 at about 175 million carats,” Tolpezhnikov said. “World production of rough diamonds has now reached a plateau. We are not seeing sources of rough diamonds that would significantly increase supply on the market, and do not expect dramatic surges in diamond mining in the next ten years.”

Consulting firm Bain estimates that global production in 2011 increased slightly from 133 million carats in the previous year. Bain forecasts that the industry could recover to pre-crisis production levels of 150 million-160 million carats by 2017, and increase output to 175 million carats by 2020 thanks to the launch of a number of new projects. However, Bain anticipates that after 2016 production will grow only slightly.

Tolpezhnikov said that within the context of the plateau there might be local jumps or drops in production volume, but they will be temporary and will not have a major impact on the general state of the market. Rio Tinto, the world’s third largest diamond miner, plans to launch an underground mine at the Argyle deposit in Australia in 2013, which will enable it to increase production from 7.4 million carats mined in 2011. But, according to the plans, the underground Argyle mine, known for its unique pink diamonds, will already be depleted by 2019 and production will again return to the current level in 2020.

All major producers are currently facing the problem of gradual depletion of existing deposits. “Essentially, the market is currently supplied primarily by deposits discovered before the 1970s,” Tolpezhnikov said. “Major diamond deposits can be mined for several decades – first open-pit, then underground mining, but their resources are still not infinite. New major deposits comparable, for example, with the producing deposits in Western Yakutia, have not been discovered for a long time.”

Depletion of deposits is also a factor constraining production growth because companies try to extend the life of their assets. “This, by the way, is also one of the reasons that producers don’t strive to increase production dramatically. It is better to ensure a stable supply over a long period, selling rough diamonds at rising prices, than to extract everything in a few years,” Tolpezhnikov said.

Demand

Unlike supply, which will remain stable, demand for the industry’s end products – that is, jewelry and cut diamonds – will grow, Alrosa believes. This growth will be driven primarily by the rapidly developing economies of India and China. Bain estimates that the middle class in China and India could grow from 193 million households in 2010 to 469 million in 2020.

“The middle class population in these countries will be large just by the fact that these countries have very large populations. The 469 million that Bain analysts are forecasting is more than the whole population of the United States, which is currently the biggest consumer of jewelry and cut diamonds,” Tolpezhnikov said. “And it should be understood that these are people who have only recently begun to earn enough in order to be able to afford cut diamonds, so they will buy them.”

Bain thinks consumer markets will shift. While before the crisis the United States accounted for about 44%, this share is now falling and is expected to shrink to 35% by 2020, while the share of the emerging markets of China and India will grow to 30% from no more than 20% before the crisis.

Alrosa expects these markets to grow even faster. The company’s analysts estimate that these countries each accounted for about 10% of global demand for jewelry and cut diamonds in 2011, but in 2020 their combined share will double to 40%.

“At the same time, we don’t expect a decline in demand in regions that are historically major consumers. The European market is already fairly saturated, but recent years have shown that sales volumes there are not falling. The U.S. market, analysts estimate, is still far from saturated. These are markets with an already established culture of consumption of items with cut diamonds – they are, for example, an integral attribute of weddings and family celebrations,” Tolpezhnikov said.