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27 july 2020

paul_zimnisky_xxcc.pngThe Covid-19 pandemic, which is spreading across the globe, having originated from China’s Wuhan has left diamond traders and buyers at sixes and sevens.

Traditional diamond tenders were cancelled around March as governments imposed travel restrictions in a bid to curb the spreading of the novel coronavirus.

Global rough sales were down some 80-90% in value in the second quarter compared to the previous year, according to Paul Zimnisky, an independent diamond industry analyst and consultant.

He told Rough & Polished’s Mathew Nyaungwa in an exclusive interview that the biggest impact on the rough market is an acceleration of a multiyear production decline forecast.

Zimnisky said his 2020 global production forecast is now almost 20% lower than it was prior to the pandemic, which would be the lowest output since the late-1990’s.

His global natural rough diamond production forecast for the year was 139 million carats.

Kimberley Process data shows that the global rough output stood at 130,3 million carats in 2019, although Zimnisky had projected an output of 141 million carats for the year.

NB: Zimnisky publishes a monthly subscription-based industry report called "State of the Diamond Market" (http://www.paulzimnisky.com/products). The next edition will be out the first week of August.

Below are excerpts from the interview:

What is the current state of the rough diamond market?

The rough diamond trade continues to resume with a handful of producers hosting sales in recent weeks for the first time since the lockdown. That said, given the global nature of the trade, international travel restrictions continue to significantly impede business-to-business diamond commerce. For context, I am estimating that global rough sales were down some 80-90% in value in Q2 compared to a year ago.

What measures have been put in place by diamond companies to sell their rough as covid-19 continues to wreak havoc?

I think travel restrictions are the biggest challenge for the rough trade at the moment, with boarder closures and strict quarantine requirements still in place in most of the primary jurisdictions where rough sales are held. To work around this, some of the major producers have sent goods to the buyer’s local trading hubs for viewing, which I believe is an unprecedented measure. Some of the majors have also provided buyers with the option to view and buy good digitally via portals which include high definition images of the stones along with in depth descriptions of the stone’s characteristics. Another approach, which some of independent producers have taken, is to sell goods to private parties via direct sale, versus the traditional route of selling via tender. While these workarounds have helped, rough sales are still down significantly in recent months. For trading to resume at more normal levels I think we will need to see borders reopen, which will likely happen once an approved vaccine finally becomes wide available or herd immunity is reached.

Why are diamond juniors registering better rough tenders compared to majors such as De Beers and ALROSA?

The independent producers that have sold during the lockdown most likely did so out of necessity to generate cash flow. These sellers have been at the mercy of a very illiquid market and have seen prices at significant discounts to early-2020 levels. The majors, which may not be under pressure to force sales in this market have been pretty firm with prices and have consequently seen very limited value of goods sold. Those fortunate enough to be in a position where they can hold off selling their inventory until conditions improve will help support prices to the benefit of the market as a whole in the medium and longer-term I think.

What is the long term impact of covid-19 on both the rough and polished diamond markets?

I think the biggest impact on the rough market is an acceleration of a multiyear production decline forecast. For instance, my 2020 global production forecast is now almost 20% lower than it was prior to the pandemic, which would be the lowest output since the late-1990’s. I think, the implications of production curtailments and suspensions this year will be felt for years to come as I think we will see some permanent mine closures and modifications to producer’s longer-term strategies. Regarding polished, I think the lockdown accelerated the transition to more diamonds being sold to consumers via ecommerce and other digital means. Some of the largest luxury conglomerates in the world with exposure to diamonds and jewelry are now selling upwards of 20% of their merchandise online, which was unthinkable just a few years ago. It’s pleasantly surprising how many retailers have shown to be quite nimble in transitioning to digital sales during the lockdown.

What has been the appetite for diamonds in the United States and China during this time of a global pandemic?

With China the first market to reopen it provided the first indication of what consumer pent-up demand looked like after two to three months of being locked-in, and it didn’t disappoint. Multiple major jewelers saw really encouraging sales figures starting in April and May. For example, Tiffany said May sales in Mainland China were up almost 100% year-over-year. My expectation is that sales in the rest of the world post-reopen won’t be as strong as seen in China, but anecdotes in recent weeks point to consumers still buying diamond jewelry, sometimes at rates that have exceeded expectations. Looking forward, this will be an especially important holiday season for the industry.

How is the synthetic diamond industry faring this era of covid-19?

I think man-made diamond demand has taken a hit with the global swath of retail store closures globally, as have natural diamonds and most all other luxury items for that matter. My understanding was that the consumer response to man-made diamonds was mixed in the most recent holiday season. Relatively speaking, this is still a very new product category so it will take some time to fully determine how it is received by consumers. That said, there is certainly initial consumer interest for the product but I am not sure how much of that is a result of it being a fad. Longer-term, it is my prediction that man-made diamonds will ultimately settle in as a unique product class from natural diamonds, with the most prominent characteristic being a much lower price point than natural diamonds. I think the most compelling application of man-made diamond will be for use in high-tech application, which I think has very exciting market potential.

What are the chances of lab-grown diamonds eroding the market share of natural diamonds during this pandemic and beyond?

It is certainly a possibility that man-made diamonds take a large share of the market, but for that to happen I think the man-made diamond industry would really have to be successful with marketing its product and the natural diamond industry would have to drop the ball in that area. I think without a doubt marketing is really the key here, for both man-made and natural. The coming year should be an important one for this space as De Beers’ man-made diamond jewelry line Lightbox is expanding its footprint with the opening of a new manufacturing facility that will increase the company’s supply by ten-fold. The Lightbox price point is very competitive and I think widely available man-made diamonds at a much lower price point will really change the way consumers see this product.

We recently saw the Diamond Producers Association rebranding to Natural Diamond Council. Was this a recognition of the threat posed by lab-grown diamonds?

In part for sure. I think part of the natural diamond marketing strategy is to distinguish its product from man-made diamonds, other gems and other luxury items as a whole. I think the key to all of this is getting to a point where natural diamonds come with a source of origin verification at the point of consumer sale. By doing this the consumer knows that the diamond is in fact a real natural diamond and they know it is not a conflict diamond. In addition, knowing the provenance of a diamond increases the emotional appeal in that it makes the diamond more interesting, it enhances its story. Especially when buying say a higher-end diamond, like an engagement ring diamond, that can cost thousands of dollars, I think consumers want that detail, they want that information. In addition, this gets a consumer thinking about the relative rarity of the diamond: the long and difficult exploration process, the complex production process, the idea that it came from a very remote part of the world if it is a Canadian Arctic diamond or Russian Siberian diamond or Namibian South Atlantic diamond, but also if the diamond financially supported social programs like public healthcare and education in Botswana.

Zimbabwe recently said that it is planning to sell a stockpile of more than 1 million carats. Is this the right time to conduct diamond tenders?

They have been talking about selling this inventory for a few years now. I think they have been waiting for an opportune time to sell these goods and have recently indicated that they have been presented with buyer interest. My guess is that this will be sold in multiple lots over the next year or so and will not likely have a significant impact on global supplies.

The country said it is expecting to realise up to $100 million from a stockpile of 1 million carats. Is this wishful thinking given that it last year produced 2.1 million carats valued at $141.4 million or $ 67.09 per carat?

That figure is possibly attainable if the quality of goods justifies it, however, it is very difficult to analyze this without seeing the goods.

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