Diamonds aren't forever? De Beers to cut supply

(FT) -- De Beers believes that the supply of diamonds is running out over the long term, prompting the world's biggest miner of the gems to reduce production in an attempt to extend the life of its mines.

Assuming the move moderated production, rough diamond prices could rise by at least 5 per cent per year for the next five years, said Des Kilalea, analyst at RBC Capital Markets.

De Beers' move, which will see production plateau at about 40m carats a year from 2011 compared with 2008 production of 48m carats, anticipates new Asian demand accelerating the depletion of the world's existing diamond mines, said Gareth Penny, managing director.

For 20 years the industry has found no new diamond deposit to match De Beers' two biggest mines in Africa or the best Russian mines of Alrosa, the other big diamond producer.

"Do we want to ramp production back up to 48m carats, given the lack of availability in the future?" Mr Penny asked. "Diamonds are a treasure of nature that should be properly protected, because there will be less to sell. The reality is that supply cannot keep up, and that will become very accentuated over the next 15 years."

De Beers, while no longer a cartel, accounts for 40 per cent of global rough diamond sales. After a brutal year for the industry, which pushed De Beers to a net loss for 2009, the company stands to gain over the next five years from what Mr Penny calls "a natural supply-demand imbalance".

Diamond analysts also read the move as a precursor to the privately held group relisting, because it improves its production profile over the long term. "If the De Beers shareholders are planning to go public next year, this might be timed with the beginning of the renewed growth of consumer demand," said Chaim Even-Zohar, a Tel Aviv diamond consultant, who says?De Beers is certain to relist.

China's affluent urbanites are buying diamonds in droves and the country's share of the diamond jewellery market should double to 16 per cent by 2016, De Beers said. The company has emerged from the downturn with a halved cost base and a new strategy centring on protecting the value of diamonds.

"We are not seeking to manipulate anything," Mr Penny said. "But there is a natural supply-demand imbalance that is leading to certain realities."

World rough diamond production last year was 124m carats, according to Mr Even-Zohar.

© The Financial Times Limited 2010