Diamond Demand - Solitaire Internationalsolitaireinternational.com/images/2508110558exclusive...Diamond Demand in India, China To Stay Robust: Study 70 INTERNATIONAL AUGUST 2011 Edward

Edward Sterck is a London-based research analyst

at BMO Capital Markets. He

specialises in researching listed

diamond, PGM and uranium mining

companies as well as evaluating the

supply/demand economics of these

sectors.

Diamond Demand in India, China To Stay Robust: Study

INTERNATIONAL AUGUST 201170

Edward Sterck, BMO Capitals Market analyst, offers an in-depth overview of polished diamond prices, global diamond demand, and rough diamond production in the near future. Here are some excerpts from his research paper which he shared exclusively with Solitaire.

he last several years have proved turbulent for the diamond industry. During the global financial crisis (GFC), the prices of both rough and polished diamonds declined dramatically before starting a recovery process from the middle of Q2/09. Today, rough and polished diamond

prices in many categories appear to be trading at nominal all-time highs. What is the near-, mid- and long-term outlook for diamond supply and demand and are current prices sustainable?

Polished Diamond Demand to Almost Double by 2020Turning first to polished diamond demand, analysis of historical data shows that demand for diamond jewellery and thereby polished diamonds can be closely linked to changes in disposable income at a household level. On a national level, this can be broadly correlated to GDP growth.

Sources: BMO Capital Markets, IMF, WWW International

-20%-15%-10%

-5%0%5%

10%15%20%25%30%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per

cent

age

Cha

nge

(%)

EU - Change in GDP EU - Change in Diamond Demand

USA, US$6.9B, 39%

Europe, US$3.0B, 16%

Japan, US$1.7B, 10%

Rest of Asia, US$1.3B, 7%

India, US$1.6B, 9%

Other, US$2.5B, 14%

China, US$1.0B, 5%

USA, 15.4Mcts, 50%

Japan, 4.4Mcts, 14%

India, 1.7Mcts, 6%

China, 0.9Mcts, 3%

Rest of Asia, 1.8Mcts, 6%

Other, 3.4Mcts, 11%

Europe, 3.1Mcts, 10%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2000A 2002A 2004A 2006A 2008A 2010A 2012E 2014E 2016E 2018E 2020E

Dia

mon

d C

onte

nt in

Dia

mon

d Je

wel

lery

(US

$M)

OtherRest of AsiaChinaIndiaJapanEuropeUSA

DiavikOrapa (doubles)

Argyle

Jwaneng

Venetia Ekati Catoca

0

20

40

60

80

100

120

140

160

180

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

Mcts

Diamond Production (Mcts, lhs)

Forecast

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2006

A

2007

A

2008

A

2009

A

2010

A

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Rou

gh a

nd P

olis

hed

Dia

mon

d S

uppl

y an

d D

eman

d (U

S$M

)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Diam

ond Inventory (Mcts)

Rough Diamond Year End Inventory Polished Diamond Year End Inventory Rough Diamond Supply Polished Diamond Demand

Inventory Restocking

0

1000

2000

3000

4000

5000

6000

1948A 1953A 1958A 1963A 1968A 1973A 1978A 1983A 1988A 1993A 1998A 2003A 2008A 2013E 2018E

BMO Rough Diamond Index Gold Index

2010Rebased to 1948 = 100

2006A 2007A 2008A 2009A 2010A 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E .

Rough Diamond Supply (Mcts) 162.1 158.6 149.8 108.5 123.7 125.0 133.8 149.1 149.8 155.5 157.8 158.3 158.2 157.4 157.7Rough Diamond Supply (US$M) 14,541 15,912 16,663 10,392 16,027 17,233 19,984 21,862 22,776 24,347 25,494 25,835 26,136 26,507 26,819

Rough Diamond Year End Inventory (Mcts) 54.4 39.7 45.0 38.5 34.3 27.0 20.0 20.0 25.0 30.0 35.0 35.0 35.0 35.0 35.0Rough Diamond Year End Inventory (US$M) 3,271 2,816 2,286 2,402 2,606 2,180 1,750 1,718 2,226 2,752 3,313 3,346 3,387 3,452 3,486Rough Diamond Inventory Movement (Mcts) 7.5 -14.7 5.3 -6.5 -4.2 -7.3 -7.0 0.0 5.0 5.0 5.0 0.0 0.0 0.0 0.0Rough Diamond Inventory Movement (US$M) 130 -455 -530 116 204 -426 -431 -032 508 526 561 033 041 065 034

Rough Diamond Supply to Market (Mcts) 162.1 173.3 144.5 115.0 127.8 132.3 140.8 149.1 144.8 150.5 152.8 158.3 158.2 157.4 157.7Percentage Change (%) n/a 7% -17% -20% 11% 4% 6% 6% -3% 4% 2% 4% 0% 0% 0%

Rough Diamond Supply to Market (US$M) 14,411 16,367 17,193 10,276 15,823 17,659 20,415 21,894 22,268 23,822 24,932 25,802 26,094 26,442 26,785Percentage Change (%) n/a 13% 5% -40% 54% 12% 16% 7% 2% 7% 5% 3% 1% 1% 1%

Average Rough Diamond Price (US$/ct) 89 94 119 89 124 133 145 147 154 158 163 163 165 168 170Percentage Change (%) n/a 6% 26% -25% 39% 8% 9% 1% 5% 3% 3% 0% 1% 2% 1%

Rough Supply as Polished Equivalent (Mcts) 29.2 31.2 26.0 20.7 23.0 23.8 25.3 26.8 26.1 27.1 27.5 28.5 28.5 28.3 28.4

Polished Diamond Year End Inventory (Mcts) 13.8 11.2 16.2 14.5 11.3 8.0 7.0 7.0 7.0 7.0 7.0 8.0 9.0 10.0 11.0Polished Diamond Year End Inventory (US$M) 10,353 8,667 11,270 9,632 8,476 6,546 6,028 6,347 6,689 7,070 7,479 9,049 10,788 12,714 14,847Polished Diamond Inventory Movement (Mcts) 1.6 -2.6 5.0 -1.6 -3.3 -3.3 -1.0 0.0 0.0 0.0 0.0 1.0 1.0 1.0 1.0Polished Diamond Inventory Movement (US$M) 1,546 -1,686 2,603 -1,638 -1,156 -1,930 -519 320 341 381 409 1,571 1,739 1,926 2,133

Polished Diamond Demand/Availability (Mcts) 29.0 29.4 28.6 26.0 30.8 27.1 26.3 26.8 26.1 27.1 27.5 27.5 27.5 27.3 27.4Percentage Change (%) 0% 0% -3% -9% 18% -12% -3% 2% -3% 4% 2% 0% 0% -1% 0%

Polished Diamond Demand (US$M) 17,711 18,954 18,471 16,345 18,127 19,706 20,737 21,837 23,012 24,323 25,730 27,241 28,867 30,618 32,505Percentage Change (%) n/a 7% -3% -12% 11% 9% 5% 5% 5% 6% 6% 6% 6% 6% 6%

Average Polished Diamond Price (US$/ct) 611 645 645 628 589 728 787 814 883 898 936 991 1,051 1,120 1,187Percentage Change (%) n/a 6% 0% -3% -6% 23% 8% 3% 8% 2% 4% 6% 6% 7% 6%. .

EU GDP Growth vs. P-Diamond Demand (%)

INTERNATIONAL AUGUST 2011 71

ExclusivE REpORT

BMO has used the IMF’s projections of GDP growth for forecasting polished diamond demand for countries and regions that are established diamond consumers, and projected changes in disposable household income for nations that are emerging diamond consumers.

For the nations and regions with established diamond consumption, such as the US, Europe and Japan, the outlook appears to be one of diamond demand growing broadly in line with a post GFC expectation of recovering economies.

The US remains the world’s single largest consumer of diamonds, with an estimated market share of 38% in 2010, or

2010 Global Polished Demand (US$M, %)

-20%-15%-10%

-5%0%5%

10%15%20%25%30%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per

cent

age

Cha

nge

(%)


USA, US$6.9B, 39%


Japan, US$1.7B, 10%


India, US$1.6B, 9%

Other, US$2.5B, 14%

China, US$1.0B, 5%

USA, 15.4Mcts, 50%

Japan, 4.4Mcts, 14%

India, 1.7Mcts, 6%

China, 0.9Mcts, 3%


Other, 3.4Mcts, 11%


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2000A 2002A 2004A 2006A 2008A 2010A 2012E 2014E 2016E 2018E 2020E

Dia

mon

d C

onte

nt in

Dia

mon

d Je

wel

lery

(US

$M)



Argyle

Jwaneng


0

20

40

60

80

100

120

140

160

180

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

Mcts


Forecast

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2006

A

2007

A

2008

A

2009

A

2010

A

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Rou

gh a

nd P

olis

hed

Dia

mon

d S

uppl

y an

d D

eman

d (U

S$M

)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Diam




0

1000

2000

3000

4000

5000

6000



2010Rebased to 1948 = 100












-20%-15%-10%

-5%0%5%

10%15%20%25%30%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per

cent

age

Cha

nge

(%)


USA, US$6.9B, 39%


Japan, US$1.7B, 10%


India, US$1.6B, 9%

Other, US$2.5B, 14%

China, US$1.0B, 5%

USA, 15.4Mcts, 50%

Japan, 4.4Mcts, 14%

India, 1.7Mcts, 6%

China, 0.9Mcts, 3%


Other, 3.4Mcts, 11%


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2000A 2002A 2004A 2006A 2008A 2010A 2012E 2014E 2016E 2018E 2020E

Dia

mon

d C

onte

nt in

Dia

mon

d Je

wel

lery

(US

$M)



Argyle

Jwaneng


0

20

40

60

80

100

120

140

160

180

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

Mcts


Forecast

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2006

A

2007

A

2008

A

2009

A

2010

A

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Rou

gh a

nd P

olis

hed

Dia

mon

d S

uppl

y an

d D

eman

d (U

S$M

)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Diam




0

1000

2000

3000

4000

5000

6000



2010Rebased to 1948 = 100












Source: BMO Capital Markets

2010 Global Polished Demand (Mcts, %)

Source: BMO Capital Markets

$7 billion. As such, small changes in polished diamond demand from the US can have material impacts on the outlook for the diamond prices and the diamond market as a whole.

De Beers reported in its latest annual report that demand in the US grew by 7% in 2010, some way ahead of reported GDP growth of 4%. The IMF forecasts US GDP growth to average 4% per annum going forward, picking up to 6% from 2016. In terms of polished diamond demand, it seems probable that some momentum from 2010 could be carried through into 2011 for demand growth of 7%, but that a conservative outlook would be for demand to slow to 4% per annum thereafter.


Forecast Global Polished Diamond Demand in Nominal Terms (US$M)

Sources: BMO Capital Markets, WWW International, Bloomberg, IMF

Applying a similar methodology suggests that demand for polished diamonds in Europe will likely be flat through 2011, before picking up to 3% per annum thereafter. In Japan, polished diamond demand is expected to fall 2% in 2011 as a result of the Honshu earthquake, and to grow at a nominal 2% per annum thereafter, in line with the IMF’s forecast for Japan’s GDP growth. However, the full economic effects of the earthquake have yet to be established and there is a potential upside to the outlook for Japan. In the aftermath of the 1995 Kobe earthquake, the money spent on rebuilding prompted growth throughout the Japanese economy and a similar effect could emerge again.

On top of the expected recovery in diamond demand from established consumers, demand for diamond jewellery is growing strongly in the emerging markets where the increasing wealth of the growing middle classes is fuelling demand for luxury goods, albeit from much smaller bases. India and Mainland China are two of the countries in this group which are worth focussing on in particular detail.

BMO Capital Markets estimates that Chinese demand for polished diamonds accounted for 5% or $1 billion of the market in 2010. While this represents a relatively small proportion of the market currently, growth is extremely strong. De Beers reported that Chinese demand for polished diamonds grew at 25% in 2010, significantly ahead of GDP growth of 13%. Looking ahead, momentum into 2011 suggests that growth of 15% may be possible. From 2012 onwards, growth in household disposable income is forecast to average 11% to 12% per annum. This translates into minimum growth in diamond demand of 13% per annum. China is currently under

international pressure to relax currency controls; if this occurs, it could result in an immediate jump in household purchasing power in US dollar terms making diamonds more affordable and potentially increasing demand further.

While the general Chinese populous are new consumers of diamonds, Indians had a long history of buying diamond jewellery until being priced out of the market around the beginning of the Twentieth Century. After all, India was the world’s primary diamond production centre until the discovery of alluvial diamonds in Brazil in the middle of the 18th century. The current growth in the wealth and headcount of the Indian middle class has made diamonds more affordable and brought Indians back into the market as consumers of diamonds.

BMO Capital Markets estimates that India represented 9% or $1.3 billion of global polished diamond demand in 2010. De Beers reports that Indian polished diamond demand grew at 31% in 2010 in dollar terms. Again, some of this momentum is likely to carry through to 2011, potentially resulting in demand growth of 15%. From 2012 onwards diamond demand is likely to grow in line with economic growth at around 10% per annum.

Combining steady demand growth from the established diamond consuming nations and strong growth in demand from emerging consumers results in a forecast of polished diamond demand almost doubling by 2020, resulting in a total market value of over $30 billion in nominal terms.

There are some risks associated with the demand outlook for countries of established diamond demand, not least of which is the ongoing Euro zone debt crisis. However, the unexpectedly strong recovery in demand during 2010, when economic uncertainties still abounded, may provide some comfort.

-20%-15%-10%-5%0%5%

10%15%20%25%30%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per

cent

age

Cha

nge

(%)


USA, US$6.9B, 39%


Japan, US$1.7B, 10%


India, US$1.6B, 9%

Other, US$2.5B, 14%

China, US$1.0B, 5%

USA, 15.4Mcts, 50%

Japan, 4.4Mcts, 14%

India, 1.7Mcts, 6%

China, 0.9Mcts, 3%


Other, 3.4Mcts, 11%


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2000A 2002A 2004A 2006A 2008A 2010A 2012E 2014E 2016E 2018E 2020E

Dia

mon

d C

onte

nt in

Dia

mon

d Je

wel

lery

(US

$M)



Argyle

Jwaneng


0

20

40

60

80

100

120

140

160

180

19

45

19

48

19

51

19

54

19

57

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

20

11

20

14

20

17

20

20

Mcts


Forecast

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2006

A

2007

A

2008

A

2009

A

2010

A

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Rou

gh a

nd P

olis

hed

Dia

mon

d S

uppl

y an

d D

eman

d (U

S$M

)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Diam




0

1000

2000

3000

4000

5000

6000



2010Rebased to 1948 = 100













Sources: George C Blakey (1945 - 1975), Rio Tinto (1976 - 1995), WWW (1996 - 2008)

Has Rough Diamond Production Peaked?Statistics on diamond mines can be difficult to obtain and harder to verify. However, BMO Capital Markets has developed a model that examines significant operations on a mine-by-mine basis. Production has expanded dramatically since the end of the Second World War, growing from 18Mcts to a peak of just over 160Mcts in 2006. In 2006, De Beers liquidated its rough diamond inventory, adding to supply, suppressing prices and resulting in an expansion of diamond inventory in the cutting and polishing centres.

Peak supply to the market occurred in 2006; production began to decline in 2007 before dropping dramatically in 2008 with the onset of the GFC. The GFC resulted in a fall in consumer spending, particularly on luxuries, as well as a curtailment of credit lines to the cutting centres, with a resultant negative impact on demand and diamond prices. Producers responded with a dramatic cut to supply to the market starting in late 2008; the curtailment of supply led to an artificial shortage of rough and prices began to rise through the middle of 2009.

Production has now been largely restarted, although some mines are only being re-commissioned this year. However, the major production centres in Botswana and Russia are now largely mature, with deepening open pits and many mines, particularly in Russia, transitioning to underground operations. Unit costs at existing assets are only likely to increase and production could begin to decline over the next several years.

In other words, new projects need to be commissioned in order to maintain world diamond production at current levels. However, the number of quality undeveloped projects is limited and there does not appear to be anything that can match

Historical and Forecast Rough Diamond Production (Mcts)

Debswana or Alrosa’s core projects in terms of scale and quality.In summary, 2006 appears to have been the year of peak

production. Analysis suggests that production should grow towards but not exceed this high water mark. Looking beyond 2020, a significant amount of money needs to be spent on exploration to find new projects for the 2020s and beyond.

Supply Demand Summary and Diamond Price OutlookWhile estimating the increase in consumer demand for polished diamonds in dollar terms and the supply of rough diamonds in carat terms is relatively straight forward (albeit problematic), linking the two forecasts is challenging. BMO Capital Markets has taken into account changes in rough and polished inventory in constructing a diamond supply demand forecast.

Diamond supply has proven slow to come back to the market. Consequently, in BMO Capital Markets’s assessment, it appears that diamantaires have probably been compelled to reduce working inventory of both rough and polished diamonds to cover demand. Analysis suggests that inventory draw-down is likely to continue through 2013, supporting increases in rough diamond prices as diamantaires compete for supply. At the same time, increasing prices are expected to cannibalize consumer demand for polished diamonds in carat terms. From 2014, rough diamond supply is forecast to be sufficient and an element of working inventory restocking is possible; potentially resulting in continued support for rough diamond prices.

-20%-15%-10%-5%0%5%

10%15%20%25%30%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per

cent

age

Cha

nge

(%)


USA, US$6.9B, 39%


Japan, US$1.7B, 10%


India, US$1.6B, 9%

Other, US$2.5B, 14%

China, US$1.0B, 5%

USA, 15.4Mcts, 50%

Japan, 4.4Mcts, 14%

India, 1.7Mcts, 6%

China, 0.9Mcts, 3%


Other, 3.4Mcts, 11%


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2000A 2002A 2004A 2006A 2008A 2010A 2012E 2014E 2016E 2018E 2020E

Dia

mon

d C

onte

nt in

Dia

mon

d Je

wel

lery

(US

$M)



Argyle

Jwaneng


0

20

40

60

80

100

120

140

160

180

19

45

19

48

19

51

19

54

19

57

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

20

11

20

14

20

17

20

20

Mcts


Forecast

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2006

A

2007

A

2008

A

2009

A

2010

A

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Rou

gh a

nd P

olis

hed

Dia

mon

d S

uppl

y an

d D

eman

d (U

S$M

)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Diam




0

1000

2000

3000

4000

5000

6000



2010Rebased to 1948 = 100












ExclusivE REpORT

BM

O C

apit

al M

arke

ts D

iam

ond

Supp

ly/D

eman

d Su

mm

ary

Tabl

e (M

cts,

US$

M, %

)

-20%

-15%

-10%-5%0%5%10%

15%

20%

25%

30%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Percentage Change (%)

EU

- C

hang

e in

GD

PE

U -

Cha

nge

in D

iam

ond

Dem

and

USA

, U

S$6.

9B, 3

9%

Euro

pe,

US$

3.0B

, 16%

Japa

n,

US$

1.7B

, 10%

Res

t of A

sia,

U

S$1.

3B, 7

%

Indi

a,

US$

1.6B

, 9%

Oth

er,

US$

2.5B

, 14%

Chi

na,

US$

1.0B

, 5%

USA

, 15

.4M

cts,

50%

Japa

n,

4.4M

cts,

14%

Indi

a, 1

.7M

cts,

6%

Chi

na,

0.9M

cts,

3%

Res

t of A

sia,

1.

8Mct

s, 6

%

Oth

er, 3

.4M

cts,

11

%

Euro

pe,

3.1M

cts,

10%

0

5,00

0

10,0

00

15,0

00

20,0

00

25,0

00

30,0

00

35,0

00 2000

A20

02A

2004

A20

06A

2008

A20

10A

2012

E20

14E

2016

E20

18E

2020

E

Diamond Content in Diamond Jewellery (US$M)

Oth

erR

est o

f Asi

aC

hina

Indi

aJa

pan

Euro

peU

SA

Diav

ikOr

apa (

doub

les)

Argy

le Jwan

eng

Vene

tiaEk

atiCa

toca

020406080100

120

140

160

180

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

Mcts

Diam

ond P

rodu

ction

(Mcts

, lhs)

Fore

cast

0

5,00

0

10,0

00

15,0

00

20,0

00

25,0

00

30,0

00

35,0

00

2006A

2007A

2008A

2009A

2010A

2011E

2012E

2013E

2014E

2015E

2016E

2017E

2018E

2019E

2020E

Rough and Polished Diamond Supply and Demand (US$M)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Diamond Inventory (Mcts)

Rou

gh D

iam

ond

Year

End

Inve

ntor

yPo

lishe

d D

iam

ond

Year

End

Inve

ntor

y R

ough

Dia

mon

d Su

pply

Polis

hed

Dia

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7.5

27

.52

7.3

27

.4(M

cts)

29

.02

9.4

28

.62

6.0

30

.82

7.1

26

.32

6.8

26

.12

7.1

27

.52

7.5

27

.52

7.3

27

.4Pe

rcen

tage

Cha

nge

(%)

0%0%

-3%

-9%

18%

-12%

-3%

2%-3

%4%

2%0%

0%-1

%0%

(%)

0%0%

-3%

-9%

18%

-12%

-3%

2%-3

%4%

2%0%

0%-1

%0%

Pol

ish

ed D

iam

ond

Dem

and

(US

$M

)1

7,7

11

18

,95

41

8,4

71

16

,34

51

8,1

27

19

,70

62

0,7

37

21

,83

72

3,0

12

24

,32

32

5,7

30

27

,24

12

8,8

67

30

,61

83

2,5

05

(US

$M

)1

7,7

11

18

,95

41

8,4

71

16

,34

51

8,1

27

19

,70

62

0,7

37

21

,83

72

3,0

12

24

,32

32

5,7

30

27

,24

12

8,8

67

30

,61

83

2,5

05

Perc

enta

ge C

hang

e(%

)n/

a7%

-3%

-12%

11%

9%5%

5%5%

6%6%

6%6%

6%6%

(%)

n/a

7%-3

%-1

2%11

%9%

5%5%

5%6%

6%6%

6%6%

6%

Ave

rag

e P

olis

hed

Dia

mon

d P

rice

(US

$/c

t)6

11

64

56

45

62

85

89

72

87

87

81

48

83

89

89

36

99

11

,05

11

,12

01

,18

7Pe

rcen

tage

Cha

nge

(%)

n/a

6%0%

-3%

-6%

23%

8%3%

8%2%

4%6%

6%7%

6%(%

)n/

a6%

0%-3

%-6

%23

%8%

3%8%

2%4%

6%6%

7%6%

..

Sour

ces:

BM

O Ca

pita

l Mar

kets

, WW

W In

tern

atio

nal,

IMF,

Blo

ombe

rg


-20%-15%-10%

-5%0%5%

10%15%20%25%30%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per

cent

age

Cha

nge

(%)


USA, US$6.9B, 39%


Japan, US$1.7B, 10%


India, US$1.6B, 9%

Other, US$2.5B, 14%

China, US$1.0B, 5%

USA, 15.4Mcts, 50%

Japan, 4.4Mcts, 14%

India, 1.7Mcts, 6%

China, 0.9Mcts, 3%


Other, 3.4Mcts, 11%


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2000A 2002A 2004A 2006A 2008A 2010A 2012E 2014E 2016E 2018E 2020E

Dia

mon

d C

onte

nt in

Dia

mon

d Je

wel

lery

(US

$M)



Argyle

Jwaneng


0

20

40

60

80

100

120

140

160

180

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

Mcts


Forecast

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2006

A

2007

A

2008

A

2009

A

2010

A

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Rou

gh a

nd P

olis

hed

Dia

mon

d S

uppl

y an

d D

eman

d (U

S$M

)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Diam




0

1000

2000

3000

4000

5000

6000



2010Rebased to 1948 = 100












Inventory Movements Support Diamond Prices (US$M, Mcts)

Sources: BMO Capital Markets, WWW International, IMF, Bloomberg

Sources: BMO Capital Markets, Bloomberg

BMO Capital Markets assesses the diamond market from the perspective of forecasting rough diamond prices in order to evaluate the prospects of listed diamond mining companies. As such, rough diamond prices are of greater concern than polished diamond prices. BMO Capital Markets publishes a Rough Diamond Index which is intended to be indicative of our expectation for the direction in which rough diamond prices will move going forward.

Diamond industry insiders report that prices have increased by around 25% through the first quarter of 2011 and continued to strengthen through the second quarter. After such a strong increase, BMO Capital Markets expects an element of price consolidation through the balance of the year with a pull back

BMO Capital Markets Rough Diamond Index vs. Gold (1948 = 100)

in prices a possibility. However, given the forecast of continued draw-down of diamond inventories, prices could return to current levels by the end of 2011, especially if the holiday season shows strong sales early on.

Looking into 2012 and beyond, the combined supply/demand analysis suggests that rough diamond prices should increase at an annual average of 5% until 2020 although as a conservative measure, this growth is flattened from 2016 onwards. On this basis, BMO Capital Markets expects rough diamond prices to overtake the gold price index in 2013. Diamond prices have relatively underperformed gold since 2008. This would therefore represent a return to a more normal relative position when compared to prices since 1948. n

-20%-15%-10%-5%0%5%

10%15%20%25%30%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per

cent

age

Cha

nge

(%)


USA, US$6.9B, 39%


Japan, US$1.7B, 10%


India, US$1.6B, 9%

Other, US$2.5B, 14%

China, US$1.0B, 5%

USA, 15.4Mcts, 50%

Japan, 4.4Mcts, 14%

India, 1.7Mcts, 6%

China, 0.9Mcts, 3%


Other, 3.4Mcts, 11%


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2000A 2002A 2004A 2006A 2008A 2010A 2012E 2014E 2016E 2018E 2020E

Dia

mon

d C

onte

nt in

Dia

mon

d Je

wel

lery

(US

$M)



Argyle

Jwaneng


0

20

40

60

80

100

120

140

160

180

19

45

19

48

19

51

19

54

19

57

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

20

11

20

14

20

17

20

20

Mcts


Forecast

0

5,000

10,000

15,000

20,000

25,000

30,000

35,00020

06A

2007

A

2008

A

2009

A

2010

A

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Rou

gh a

nd P

olis

hed

Dia

mon

d S

uppl

y an

d D

eman

d (U

S$M

)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Diam




0

1000

2000

3000

4000

5000

6000



2010Rebased to 1948 = 100












0

1000

2000

3000

4000

5000

6000



2010Rebased to 1948 = 100

Inventory Movements Support Diamond Prices (US$M, Mcts)

Sources: BMO Capital Markets, WWW International, IMF, Bloomberg

Sources: BMO Capital Markets, Bloomberg

BMO Capital Markets assesses the diamond market from the perspective of forecasting rough diamond prices in order to evaluate the prospects of listed diamond mining companies. As such, rough diamond prices are of greater concern than polished diamond prices. BMO Capital Markets publishes a Rough Diamond Index which is intended to be indicative of our expectation for the direction in which rough diamond prices will move going forward.

Diamond industry insiders report that prices have increased by around 25% through the first quarter of 2011 and continued to strengthen through the second quarter. After such a strong increase, BMO Capital Markets expects an element of price consolidation through the balance of the year with a pull back

BMO Capital Markets Rough Diamond Index vs. Gold (1948 = 100)

in prices a possibility. However, given the forecast of continued draw-down of diamond inventories, prices could return to current levels by the end of 2011, especially if the holiday season shows strong sales early on.

Looking into 2012 and beyond, the combined supply/demand analysis suggests that rough diamond prices should increase at an annual average of 5% until 2020 although as a conservative measure, this growth is flattened from 2016 onwards. On this basis, BMO Capital Markets expects rough diamond prices to overtake the gold price index in 2013. Diamond prices have relatively underperformed gold since 2008. This would therefore represent a return to a more normal relative position when compared to prices since 1948. n

0

5,000

10,000

15,000

20,000

25,000

30,000

35,00020

06A

2007

A

2008

A

2009

A

2010

A

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Rou

gh a

nd P

olis

hed

Dia

mon

d S

uppl

y an

d D

eman

d (U

S$M

)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Diam





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