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The outlook for the diamond market is good. A shortage of rough supply is expected over the next ten years as a result of global production remaining constant and demand continuing to increase. This will result in continued price increases in the short to medium term. The market will be favourable for at least five years for any company bringing successful new projects onstream. Prices will be increasing and good projects will be valued by both trade buyers and the stock markets. At some point the market will correct but, although some decrease in rough prices may occur at this stage, much of the recent gains would have become entrenched into the market.

Global diamond production is dominated by Africa which constituted 61% by carats, as shown in Figure 1. The major producers within Africa are the DRC and Botswana which each producing 21% of Africa’s output. South Africa contributes 10% to global production and Angola a further 5%. Contributions by CAR are typically 1% of global production.

Global production increased from 50Mcts in 1980 to 160Mcts in 2004 (Figure 2). The world’s production is dominated by four companies, namely De Beers, Alrosa, BHP Billiton and Rio Tinto which, together, are responsible for 70% of global production.

The reserves associated with the four major producers have steadily been decreasing and no new large mines are expected to come onstream in the near future. Production is likely to remain around the 160Mct level for the next ten years (Figure 3).

The value of the rough global diamond market was recorded at US$12bn in 2004 and is estimated to reach a value of US$13bn in 2005. The diamond pipeline represents the evolution of diamonds from extraction through to the consumer. The associated increase in value along the pipeline is estimated to be 5.4 times from mine production of rough diamond to the retail sales of polished goods in jewellery. The value of the final sales in 2004 was US$65bn.

The demand for diamonds is generally measured in relation to the manufacturing capacity and the demand for jewellery going forward. At present, there is a manufacturing over-capacity. In the short to medium term there will be insufficient natural rough diamonds available to keep all the manufacturing facilities operational.

The world diamond jewellery demand is estimated to be growing at an annual rate of approximately 5.3% per annum over the forecast period. This is based upon using the economics outlined in the International Monetary Fund’s World Economic Review (April 2005). The projected demand of diamond jewellery is based upon the real GDP growth for the major diamond consuming countries.

The United States’ diamond jewellery market, which represents 50% of total international diamond jewellery sales, is growing broadly in line with consumer spending (Figure 4). Markets in Japan and Europe grow less quickly compared with their general consumer spending, whilst markets in China, India and the rest of the world generally grow quicker than consumer spending.

The demand for large high quality diamonds is expected to outweigh those of the smaller, low quality stones.

The future demand is expected to continue to increase for the next ten years (Figure 3), with the maximum relative percentage increase coming from the Asian markets.

Diamond prices are notoriously difficult to predict due to the whims of fashion and jewellery trends. Over and above this, there are over 16,000 different polished diamond price categories as a result of the various combinations of colour, clarity, cut and size within each individual stone. The historical rough prices are shown in Figure 5.

Since 2001, diamond prices have increased rapidly. This was due primarily to increased demand associated with greater marketing spending and depleted stocks. The surge in rough prices was also a result of other factors including lower finance costs, a polishing over capacity, a weak US$, active encouragement for consumer spending and definite supply shortages in many diamond categories because of production difficulties. Since mid 2003 diamond prices for rough stones have increased to a greater extent than those for polished stones, creating a price squeeze on diamond cutting and polishing factories.

Over the next five years the outlook for diamond prices remains positive, with prices for both rough and polished, rising at an average annual rate in excess of 5%. Thereafter, the market is expecting a slight short-term correction in rough prices and the current moderate growth of polished prices to continue. This will partly close the gap that has opened up between rough and polished over the past two years. The market expects margins in the polished pipeline to continue to be squeezed.