Two black swan events have combined to boost diamond prices significantly this year.
The first was the coronavirus crisis, which held demand back for two years, and which now that it’s abating has released a wave of new buyers into the market. What’s more, for the first part of the year these buyers were also flush with stimulus cash, and not yet concerned about inflation.
That may change as oil continues to trade at very high levels and economic activity slows across the board in reaction to higher prices everywhere.
But even if demand does fall away, diamond prices are still going to be high.
That’s because of the second black swan event that’s hit the market: the Russian invasion of Ukraine.
Around one-third of the world’s diamonds are produced by Russian mining behemoth Alrosa. In particular, Alrosa specialises in the small stones that go around a larger one in the centre of a ring.
The world’s foremost diamond producer, De Beers, doesn’t produce much in the way of these smaller stones, and according to data cited recently by Bloomberg, prices of these have gone up by around 20% this year.
In the old days, in times of market imbalance, De Beers would just have released more stones from its fabled stockpile and a correction would have occurred forthwith.
But after the collapse of the Soviet Union and in the face of Alrosa’s rise to prominence, De Beers recognised that it could no longer control the diamond market in the way it used to, and that tying up capital in a stockpile was no longer a good use of shareholders’ funds.
Or at least, that’s what they said at the time.
Now, though, even with De Beers mines producing at full tilt, there’s no chance that the company will be able to make up the shortfall caused by the ostracising of Alrosa from world markets.
Will Alrosa find a workaround?
It may do. Russian relations with India remain on a reasonably firm footing, and it may be that Alrosa can channel significant supply through Bombay.
But this is an industry that knows how to track its product. True, the tracking capabilities now in place were designed to mitigate against conflict diamonds produced in Africa. But those tools can still be brought to bear to keep Russian stones out of Western markets. Buyers are interested in provenance anyway. Now governments will be too.
So what does this mean for the miners?
Last month, unsurprisingly, De Beers reported continuing strong demand for rough diamonds. The fourth De Beers sales cycle of 2022 realised US$604mln, according to De Beers owner Anglo American Ltd.
That’s more than US$220mln ahead of the US$385mln reported for the equivalent fourth sales cycle in 2021 and bring sales so far in 2022 to approximately US$2.5bn.
Broker SP Angel reckons that that means De Beers sales at this point in the cycle are at their highest level since 2016.
And it’s not just the majors that will do well.
Smaller companies are set to benefit too, although this isn’t always showing up in their share prices.
Shares in Gem Diamonds, for example, have more than doubled since the worst of the Covid ravages, but in the intervening period between then and now have also traded much higher.
Operational issues have temporarily tempered investor enthusiasm for BlueRock Diamonds, although overall production from its South African mine is set to rise this year.
Meanwhile, ongoing exploration programmes from the likes of Karelian Diamonds and Botswana Diamonds are attracting some attention, but not really setting the market alight, even though Karelian’s recent identification of multiple Kimberlites in Finland could be a real game-changer.
And earlier in May Gem Diamonds and Botswana Diamond failed to complete a transaction on the Ghaghoo project in Botswana.
Even Lucara, the standard-bearer of the Canadian independents, remains subdued, in spite of a 28% boost to revenues in the first quarter of this year.
So, for now, it’s a mixed picture.
But if the buyers aren’t coming in for diamond companies right now, what that could mean is that there will be a stampede to catch up when the valuation mismatch between the current shortage of supply and diamond company share prices becomes more widely appreciated.
Is a re-rating on the cards?
We will see.