diamonds: looking forward to the chindia decades
TRANSCRIPT
Diamonds:
Looking forward to the
Chindia Decades
James AllanBotswana Resources ConferenceJune 2010
2
Contents
Diamond industry in perspective
Who are the producers
Last two years > what happened?
China and India to drive demand
Supply forecast to 2020
Conclusion
3
Diamond production in perspective ($bn)
126
99
74
50
27
14
112
80
73
29
10
9
0 20 40 60 80 100 120 140
Copper
Aluminium
Gold
Nickel
Platinum (3PGE)
Diamonds
20092008
4
44%
24%
9%
5%
2%
0%
16%
De BeersAlrosaRio TintoBHP BillitonGem DiamondsPetra DiamondsOthers
Concentration of production by value (2008)
4 producers Control 82% of supply
5
Share of global diamond production (140 million carats) 2008
10%
20%
1%
13%
4%20%
8%
22%
2% South Africa
Botswana
Namibia
Russia
Angola
Australia
Canada
DRC
Lesotho
Tanzania
Sierra Leone
Zimbabwe
Other
6
Cutting centre debt levels
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
$m
7
The last two years…..market to June 2009
Early 2008> Positive market >Diamond shortage leading to rising diamond prices…
September 2008>Collapse of Lehman Brothers
September 2008>Credit tightened in financial market
October 2008>Credit lines withdrawn for diamantaires
October- December 2008>Collapse in diamond prices
Polished Prices
8
The last two years…..producer response
“Old De Beers” would have bought up diamonds and stockpiled
“New De Beers” cut production by 90% in Q1 2009>reduced supply to the market (Economics 101)
Increased production from Q2
Sales 1H 2009 down 68%
2009 sales lowest since 1986
0
1000
2000
3000
4000
5000
6000
7000
8000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
De Beers Sales 1980-2009
9
Concentration of production 2009
Others21%
Petra Diamonds
1%
BHP Billiton7%
Gem Diamonds
2%
Rio Tinto7%
Alrosa31%
De Beers31%
10
Cutting centre debt levels – stocks and debt down
0
2000
4000
6000
8000
10000
12000
14000
1600019
80
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
$bn
11
Retail Sales of Diamond Jewellery 2008 ($65bn) (-10%)
51%
15%
6%
6%
6%
16%USA
Japan
Europe
Asia-Pacific
Asia-Arabia
Others
12
Diamond Content 2008
43%
12%8%
8%
15%
14%USA
Japan
Europe
Asia-Pacific
Asia-Arabia
Others
13
Diamond Content 2009 (-3%)
38%
13%10%
15%
20%
4%
USA
Japan
Europe
Asia-Pacific
Asia-Arabia
Others
14
The last two years…..prices recover - June 2010
Production down 35%
Demand saved by strong showing in China
Overall demand down 3%
De-stocking in pipeline
Prices recover
15
Prices recover strongly in post recessionary periodsDTC Rough Price Index vs. US Recessions
16
Diamond market conclusion
Cutting centre debt
De Beers’ production/sales in 2010 (60-70% capacity)
Supply restricted
Prices
17
Diamond market – Longer term view
Review of demographics
• US
• China
• India
Start with global growth forecasts
Intensity of consumption
Combine with population growth forecasts
Long term view of diamond consumption
18
Impact of the baby boom generation on diamond demand
Economists can’t understand economics because they don’t understand sex….
Next few slides come from my 1999 presentation “Baby Boom for diamonds”
19
US Births
2834
77
45
72
0
10
20
30
40
50
60
70
80
Parent ofBaby-
boomers
previewBoom
BabyBoomers
Gen-X Echo Boom
Born before 1931 1931-1945 1946-1964 1979-19971965-78
Million
20
US Consumers - increases/ decreases by age (1995 - 2010)
-10
0
10
20
30
40
50
60
70
Under 25 25 - 34 35 - 44 45 - 54 55 - 64 65 - 74 Over 75
Age
%
Projected % change in consumers by age
21
Affluence peaks at midlife
0
10000
20000
30000
40000
50000
60000
Under 25 25 - 34 35 - 44 45 - 54 55 - 64 65 - 74 Over 75Age
$
Boomers in ten years
Boomers today
22
Per Capita
Jewellery Expenditures by age
020406080
100120140160180200
Under 25 25 - 34 35 - 44 45 - 54 55 - 64 65 & over
Age
$ Boomers - today to 2010
23
0
50
100
150
200
250
<$ 15K $ 15-30K $ 30-40K $ 40-50K $ 50-70K >$ 70K
Income
$ Boomers - today to 2010
Jewellery expenditures by income level
Per Capita
24
Adult womens’ market
US Diamond Jewellery Expenditure by age (000’s)
0500
100015002000250030003500400045005000
Under 25 25 - 34 35 - 44 45 - 54 55 - 64 65 & over
Age
$Boomers -today to 2010
25
Baby Boomers entering high income bracket
Inheriting more
High disposable income
Jewellery spend to rise sharply
The Jewellery Boom
26
And now China….
0
20
40
60
80
100
120
140
0?x?
4
5?x?
9
10?x
?14
15?x
?19
20?x
?24
25?x
?29
30?x
?34
35?x
?39
40?x
?44
45?x
?49
50?x
?54
55?x
?59
60?x
?64
65?x
?69
70?x
?74
75?x
?79
80+
(m)
27
Chinese baby boom
0
50
100
150
200
250
300
350
(m)
1945-1960 1960-1975 1975-1990 1990-2005
28
Chinese population - % change 2005-2020
-20%
0%
20%
40%
60%
80%
100%
120%
Under 25 25-34 35-44 45-54 55-64
240m
160m
190m
29
Developing a market for diamonds
De Beers starts with inculcating the DER
The philosophy and culture of diamonds
Takes time to develop and grow market acceptance
Penetration of the market also requires distribution
Jewellery stores must be accessible…
30
0%
10%20%
30%
40%50%
60%
70%
80%90%
100%
1966
1980
2000
1965A Diamond is forever
1968Three months salary intro
Creating a market for diamonds in Japan…
Japan market growth (% new brides who receive diamond only engagement rings)
31
0%
33%
0.590.62
0%0%
45%
38%
0%
13%
23%
39%
0% 0% 0%
18%
0% 0% 0%
15%
0%
10%
20%
30%
40%
50%
60%
70%
Shanghai Beijing Guangzhou Chengdu Dalian
1993 1997 2000 2006
…and more recently in China
China DER (Diamond Engagement Ring) acquisition rate
32
CHINA
DIAMOND WEDDING
RING
(2 Film clips)
33
India‘s demographics – More Boom boom
0
20
40
60
80
100
120
140
160
0?x?
4
5?x?
9
10?x
?14
15?x
?19
20?x
?24
25?x
?29
30?x
?34
35?x
?39
40?x
?44
45?x
?49
50?x
?54
55?x
?59
60?x
?64
65?x
?69
70+
34
India’s demographics
0
100
200
300
400
500
600
700
800
Under 25 25-34 35-44 45-54 55-64 65-74
(m) 2005
20202030
35
India’s demographics- % change from 2005-2020
0%
50%
100%
150%
200%
250%
Under 25 25-34 35-44 45-54 55-64
140m
180m
250m
36
Economic growth forecasts
8.09 4654 085Asia-Arabia
8.522 3279 082Asia-Pacific
220 63916 580Europe
-0.14 0074 390Japan
319 73914 341USA
CAGR %2020 ($bn)2009 ($bn)
Source:World Bank
37
Regional GDP and intensity of diamond jewellery consumption (2020 forecast)
3.62434660594651.433Asia-Arabia
2.0264413057223271.71Asia-Pacific
0.314741527206390.497Europe
2.994123231540070.124Japan
2.01164057716197390.342USA
Intensity of consumption
DJ/capita
($)
Diamond Jewellery
consumption ($bn) ("DJ")
GDP/capita
GDP($bn)
Population (bn)2020
38
Diamond Jewellery Retail Market (estimate and forecasts)
2005
Japan14%
Europe10%
Asia-Pacific10%
Asia-Arabia13%
Others4%
USA49%
2010
Japan12%
Europe9%
Asia-Pacific15%
Others4%
Asia-Arabia18%
USA42%
2020
Japan8%Europe
5%
Asia-Pacific32%
Others3%
Asia-Arabia25%
USA27%
39
Diamond supply – Longer term view
Mine by mine production forecast (carats)
Overlay with constant $ price
Resulting deficit feeds into price increases
Overlay with pipeline stocks
Results in price index feedback to
Increased supply
Iterative process
40
No new material sources supply – World Production
Botswana (Jwaneng)
Australia(Argyle)
South Africa(Venetia)
Canada(Ekati)
Canada(Diavik)
Car
ats
(m)
Source: De Beers
41
0
20
40
60
80
100
120
140
160
18019
98
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
No new material sources supply – World ProductionC
arat
s (m
)
Source: AH
Production cuts in 2009
Marange
Production increase
Mines go deeper
42
Pipeline Stocks as a % of Global Demand
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%19
98
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
43
Diamond Pricing Index
0.00
0.50
1.00
1.50
2.00
2.5020
01
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
44
Supply and Demand Indexed (2000)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
DemandIndexedSupply
45
Summary
It’s the demographics stoopid…..
China and India will drive diamond demand for the next 20 years
But never underestimate the Americans….
Marange is a wild card….a very wild card
Supply to decline over the next decade as mines go deeper and underground
Rising demand and constrained supply….
46
Conclusion on diamond prices
De Beers managing production increases to “match” demand
De Beers production 66% capacity in 2010 and 80% from 2011 result in …
Rising prices
“Prices will rise” – Stuart Brown (De Beers’ FD)
Short term seasonal dip
AH estimates prices will return to 2008 level by end 2010
Prices should double by 2020
Average of 7% per annum price increase
Questions?
Allan Hochreiter (Pty) LtdCorporate finance and advisory
+27 11 325 5457 (office)+27 82 565 4507 (mobile)