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Annual Report and Accounts 2011

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The Diamond Market

 

At a Glance
The Diamond Market

Petra anticipated a positive outlook for the diamond industry in FY 2011 and the market did indeed perform strongly, with rough prices in all categories increasing throughout the year. The robust market was underscored by firm retail demand, particularly from China, India and, to a lesser degree, the US.

Rough diamonds produced globally in 2010

133m carats
+6%

Average value per carat mined globally in 2010

US$90
+30%

Source: Kimberley Process Certification Scheme

The table below sets out the tender prices per carat achieved during the Period:

Mine
Average price for
H2 FY 2011
(US$)
Average price for
H1 FY 2011
(US$)
Average price for
FY 2011
(US$)
Average price for
FY 2010
(US$)
Cullinan
178 120 148 141
(101 excluding the
Cullinan Heritage)
Koffiefontein
756 470 564 402
Kimberley Underground
355 285 333 n/a
Fissures
289 192 244 185
Williamson
314 264 302 157

Note: the prices above, as in the mine by mine tables to follow, are the average of the mix of ROM and tailings production, as Petra tenders
         production from each mine on a mixed ROM/tailings parcel basis.

Petra anticipated a positive outlook for the diamond industry in FY 2011 and the market did indeed perform strongly, with rough prices in all categories increasing throughout the year. The robust market was underscored by firm retail demand, particularly from China, India and, to a lesser degree, the US.

In calendar year 2010, some 133 million carats of rough diamonds were produced globally, worth just under US$12 billion (Source: Kimberley Process Certification Scheme). This is up around 6% from 2009's total of 125 million carats, worth US$8.6 billion, with much of the rise in value being attributable to a strong increase in rough diamond prices from year to year and an increase in production caused by producers ramping up operations following strategic shut-downs during the global economic downturn of late 2008/early 2009. The average value per carat mined in 2010 globally was US$90 per carat (2009: US$69 per carat).

The 2010 production level of 133 million carats remains below the previous highs of 176 million carats in 2005 and 2006 (Source: Kimberley Process Certification Scheme) and it is forecast to remain flat or start to decline in the coming years as new sources of production cannot make up for the decrease in supply from the world's ageing major diamond mines. It is possible that the world has already seen peak diamond production.

Whilst supply to the market is forecast to remain constrained, demand for diamonds continues to rise in both established and new markets as global wealth and consumer spending increase. De Beers calculates that the global diamond jewellery market grew by over 8% in 2010, whilst the US, which remains the largest single consumer market for diamonds with around 38% of global demand, grew by over 7% in 2010. Demand in emerging markets grew at substantially higher rates. The fastest growing new consumer markets for diamonds are China and India, both of which recorded double digit growth in 2010, up over 25% and 31% in local currency respectively. These markets are predicted to continue their rapid expansion, accounting for more than 50% of incremental growth over the next five years, and the Far East (China, Hong Kong, Taiwan, India and the Gulf) is expected to eventually account for around 40% of global demand by 2015 (source: De Beers).

As far as Petra's tender results are concerned, prices rose steadily from October 2010 to the end of FY 2011.

Since July 2011, the industry has seen rough diamond prices adjust downwards from the June 2011 highs. Petra (along with many other industry participants) is confident that prices will stabilise in the near future, although the Company does not expect to see the price highs of June 2011 for some time.

The long term fundamentals of the market remain strong. Positive results from industry bellwethers Tiffany's and Signet demonstrate that consumer demand remains robust. In China and India, many new diamond jewellery stores need inventory and this is driving a large portion of the wholesale demand. Investment demand for diamonds is also rising, given their appeal as a hard asset investment class, and several new physical diamond investment funds launched during the Period. Global economic uncertainty may, however, continue to cause some volatility in rough pricing in the short term.

Petra sells the majority of its South African production in Johannesburg and its Tanzanian production in Antwerp. Many of the world's foremost manufacturers are regular Petra clients and interest is expected to increase further now that the Finsch production is incorporated into the Group. Petra manages all of its sales internally and has recently expanded its marketing team to manage the level of activity further to the completion of the Finsch acquisition, which is expected to add ca. 125,000 carats per month to Petra's output after an initial bedding down period.

2010 showing global production by volume and by value

Source: Kimberley Process Certification Scheme

chart