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30 december 2019

paul_zimnisky_xxcc.pngAs we are in the last month of 2019, it is prudent to examine what the diamond industry went through and the possible trajectory in the upcoming year.

Industry expert, Paul Zimnisky spoke with Rough & Polished’s Mathew Nyaungwa to discuss this and other issues relating to the industry.

He said an oversupplied market has been the diamond industry’s biggest challenge in the recent past, but sees near-term demand as the biggest risk, particularly out of the Greater China market, as uncertainties around the U.S./China trade negotiations and to a lesser extent the situation in Hong Kong, remain unresolved.

Zimnisky, however, said inventories accumulated by major producers in 2019, primarily De Beers and ALROSA, will put a ceiling on prices near-term even if we see demand substantially pick up.

NB: Paul runs a monthly subscription-based industry report called "State of the Diamond Market" and will also be speaking at the PDAC conference in Toronto, Canada, on March 2, 2020.

Below are excerpts of the interview.

What is your assessment of the natural diamond industry as the year draw to a close?

I think a key trend in 2019 was the continued deleveraging of excess inventory held by the mid-stream segment as the fundamentals of that business are changing. This is in part what has led to an oversupplied market downstream over the last two years or so. However, I think the larger industry is coming out of this phase in a much more sustainable position. As an analyst, I saw an oversupplied market as the diamond industry’s biggest challenge in the recent past, but going forward I see near-term demand as the biggest risk, particularly out of the Greater China market, as uncertainties around the U.S./China trade negotiations, and to a lesser extent the situation in Hong Kong, remain unresolved. Going into an election year in the U.S., I see the consumer market in America as remaining stable or even good, as it is in the politician’s best interests to keep the appearance of a healthy economy to gain favor with voters, however, post-2020, the U.S. economy and consumer market will need to be re-examined. For reference, the U.S. remains the diamond jewellery industry’s largest market representing almost half of global end-consumer demand, Greater China is second, approaching 20% of global demand.

We saw De Beers' last sight registering some gains following a difficult year for the industry and the company. Are we seeing a recovery as we get into the holiday season in the West?

Yes, I am beginning to see some very-early indications of a recovery in rough prices over the last couple of months. I think this is a result of a more balanced supply situation meeting renewed mid and downstream industry stocking going into the holiday period. That said, I think the inventories accumulated by the major producers in 2019, primarily De Beers and ALROSA, will put a ceiling on prices near-term even if we see demand substantially pick up. For example, in 2020 I estimate that ALROSA could release back into the market 50-85% of the inventory that it accumulated in 2019 if conditions allow.

Are there any prospects of new diamond mines coming on stream or there is lack of appetite for diamond exploration?

Regarding exploration and development, I think by far the biggest news as of late is Rio Tinto electing an option early on Star Diamond's Star-Orion project in Saskatchewan, Canada. This means that Rio will be taking Star-Orion to a feasibility-study stage at which point a decision to build a mine will be made. This is important because I think it shows Rio's level of enthusiasm for the project and for natural diamonds in general. For context, Rio Tinto is the second largest diversified mining company in the world. As far as other exploration projects, given how challenging the current environment is for ‘junior’ diamond companies, I think that any company that continues to progress in this environment says a lot about them and their projects. Some examples that come to mind are: North Arrow Minerals, Lithoquest Diamonds, Tsodilo Resources and Adia Resources.

Are synthetic diamonds still regarded as a threat to the natural diamonds?

Yes, man-made diamonds are a threat to the natural diamond industry, and anyone that says otherwise is probably not being honest. Every man-made diamond that is sold to a consumer today, especially at a price that is comparable to that of a natural diamond, probably represents a sale lost by the natural diamond industry. That said, I do think that the price of man-made diamonds will continue a trend of falling in price simply because the product is a renewable, manufactured product that is not limited in nature as is the case for natural diamonds. Ultimately, this will further and further differentiate the product from a natural diamond in consumer’s minds. Given that diamond jewellery is an emotional, luxury purchase, not a practical purchase, the ‘rare’ and ‘valuable’ characteristics that make up a natural diamond are actually very important. Successful and sufficient marketing by the natural diamond industry will make this even more apparent in consumer’s minds if executed properly.

What are the chances of more natural diamond miners getting involved in the production of synthetic diamonds like De Beers?

Most diamond miners have business plans with very longer-term views, so entering the man-made diamond space, unless it is exclusively as a strategy to protect the natural diamond business, probably does not make sense. I think that we are in a multi-year window where there are some consumers that will be willing to spend thousands of dollars for a man-made diamond, but this will not last and the current attractive margins for man-made diamond producers and retailers will not last either. So, in that way I do think man-made diamonds are a fad, and as man-made diamond prices approach the marginal cost of production the dynamics of the product will change. Of course, there will be cases of certain man-made diamonds that are successfully and uniquely branded that will continue to achieve premium price points, but I don’t see this being the case for the bulk of generic man-made diamonds. You can buy a beautiful 1-carat+ generic man-made ruby or emerald for less than $100 and no one cares or wants to talk about this and its because the fad has worn off; I see this as a proper analog to where man-made diamonds will be at some point in the future.

Speaking of De Beers, do you think their strategy on synthetic diamonds is working?

I do think this strategy is working but it is a multi-year strategy, so it will take some time. Consumers are smart and when making a multi-thousand-dollar purchase decision, as is the case with a diamond, they will at least do some research. When conducting this research, they will likely come upon De Beers’ Lightbox pricing structure at which point they will likely be much more hesitant to buy a man-made diamond that is priced at two, three or four times the price of a Lightbox man-made diamond. I think you are going to start to see the narrative, by the media and otherwise, around man-made diamonds shifting from how they are ‘disrupting’ the natural diamond jewellery industry to how they will be integral component in figure high-tech applications and related industries.

Lastly, what is your comment on the KP member countries' recent failure to reach a consensus on the new path the diamond watchdog should follow going forward?

I think this serves as a reminder of how nuanced the Kimberly Process is given the number of countries involved in so many different parts of the world all with different politics and cultures. It’s amazing that the framework came together as well as it did back in 2003. These inherent challenges make finding a consensus on sweeping changes very difficult. That said, I think as the diamond industry continues to implement supply chain transparency initiatives the demand for goods without a verifiable clean origin will eventually be left behind, so in a way this will in part accomplish the KP’s initiatives via an alternative method.

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished