Johannesburg - The outlook for diamond prices in 2009 is "very poor" with analysts forecasting the price could drop by up to 30% and that it will not recover until 2010.

"I wouldn't be surprised if prices drop by more than 30%," says Des Kilalea, an analyst at RBC Capital Markets, an international corporate and investment bank. "There will be no material recovery in 2009," he says.

A Johannesburg analyst expects prices to fall between 15%-20%. "Prices aren't easy to predict, but I expect it to remain flattish throughout 2009," he says.

In 2007, total diamond production worldwide was 160m carats with an estimated value of $14bn. SA contributes 12% of overall production by value.

The US recession is a significant threat to the diamond market because that country accounts for half of the market. Diamond cutters are building up debt because there are no credit options available to them. This makes them reluctant to buy additional stock.

On the rough diamond supply side, miners have built up a surplus and are now cutting back on production.

The Toronto and Johannesburg-listed diamond junior, BRC DiamondCore,is the latest mining company to announce it would scale back production. "I expect DiamondCore to close down its SA operations completely this year and focus on its prospects on the DRC," says Kilalea.

De Beers 'to suffer most'

Rockwell Diamonds said it would extend its year-end shutdown by four more weeks in January owing to weak market conditions. Kilalea says Rockwell is likely to restart all its operations by the end of January, except its unprofitable Wouterspan mine.

"De Beers is going to be hurt the most, since it mines the most diamonds," says Kilalea.

It was, however, difficult to make blanket statements about alluvial juniors, which dig for diamonds in rivers, says Kilalea. Consolidation was possible.

"The juniors who are producing diamonds at the moment, such as Rockwell, Namakwa Diamonds and Petra Diamonds, are likely to survive the year.

"The ones that are still developing and exploring are just consuming cash without making any money." It is these juniors that are likely to merge with other mining operations in the year ahead, says Kilalea.

Although alluvial juniors mine some of the highest-quality diamonds, prices will be weak due to low demand, says Kilalea. "Quality diamonds are only used in jewellery, which is still a market driven by consumers."

Bill Champion, MD of Rio Tinto Diamonds, which is earning a 60% stake in BRC DiamondCore's Congo operation, was positive about diamond prices in the future, according to an RBC Capital Markets presentation.

"Long-term diamond industry fundamentals suggest that the aggregate level of diamond demand will exceed supply, resulting in sustained price growth over the next decade."

- Miningmx.com

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