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Consumer spending on diamonds exceeds expectations as rough demand outstrips supply – Zimnisky

08 february 2021

paul_zimnisky_xxcc.pngConsumer spending on diamonds exceeded expectations in the fourth quarter of 2020 and has continued through early 2021, according to a top industry expert.

Diamond industry analyst Paul Zimnisky told Rough&Polished’s Mathew Nyaungwa that a multi-year trend of cleaning up oversupply in the market was brought about by the COVID-19 pandemic due to supply-chain disruptions and mine suspensions.

He projected volatility in the market in the near-term, although he is of the opinion that the industry is best positioned from a supply standpoint as it has been in the past.

NB: Zimnisky publishes a monthly subscription-based report called "State of the Diamond Market". It provides a regular look into the global diamond market as it covers the most important trends in the industry as well as his updated data, analysis and forecasts.

Below are excerpts of the interview.

Diamond companies are of the opinion that the industry is now firmly back on track since the fourth quarter of 2020 after a pummeling due to the COVID-19 pandemic from the second quarter of the year. What is your projection of the state of the industry going forward?

In recent months, demand for diamonds has outstripped readily available supply. Consumer spending on diamonds exceeded expectations in calendar Q4-2020 and has continued through early-2021, and a multi-year trend of cleaning up oversupply in the market was accelerated by the pandemic due to supply-chain disruptions and mine suspensions. Going forward, volatility in the market should be expected in the near-term, but I think the industry is the best positioned from a supply standpoint as it has been in years, which should continue to be supportive of fundamentals. On the demand side, I see risks tied to the global macro environment, and on a more micro-level, a potential return to more experiential luxury consumption, like travel, once pandemic-related implications begin to normalize.

De Beers recently revised its production guidance for 2021. What is your take of that given the recovery of the market?

De Beers cut production guidance in December and again in January, with the latter more tied to operational related reasons. I think the diamond industry has, at least in part, learned from mistakes made in the more recent past, for example, oversupplying the supply chain, which can be seen in the action taken by both the up-stream and mid-stream segments of the industry over the last year. I think the supply related decisions made by both industry leaders, De Beers and ALROSA, in the recent past should be well received by the industry.

What is your comment on recent reports that De Beers and Alrosa had both raised prices for rough diamonds?

The market is beginning to see demand exceed supply, which provides an environment conducive of higher prices. The major miners lowered prices in the midst of the pandemic lockdowns, so I see the recent price action as more of a reversal of that as market conditions improve. According to my “Zimnisky Global Rough Diamond Price Index,” rough prices made a trailing 1-year high in January, and I estimate that prices are now back to pre-pandemic levels which is encouraging.

We hear much about rough diamond prices having recovered back to pre-pandemic levels. What about polished prices, have they recovered as well?

Polished has been a leading price indicator in recent quarters and outperformed rough throughout most of last year. According to my analysis, the rough/polished spread, or the divergence between rough and polished prices, widened to multi-year levels last year. I think this was consistent with jewelers, and other B2C diamond sellers, reluctance to lower polished prices, as well as, a lack of rough buying by manufacturers and other mid-stream participants due to concerns related to accumulating excess inventory as well as a simple inability to buy rough due to travel restrictions and border closures. However, in recent weeks, the spread has begun to normalize as the supply chain has begun to normalize. Going forward, I expect the relationship between rough and polished to maintain its more symbiotic relationship pending no more major supply chain disruptions. But to more specifically answer your question, I estimate that a basket of polished, including 0.5-carat to 3-carat sizes, was up almost 5% last year relative to 2019, which I think is fair to say exceeded most expectations given what we went through.

What is the level of inventories held by leading miners given a surge in demand in the fourth quarter of 2020?

In my opinion, the transition of diamond inventory from the mid-stream segment of the industry to the miners in recent years is one of the biggest and most important developments in the supply chain. For context, I estimate that the major miner’s above ground inventory position has increased from about $3 billion in 2017 to about $4.5 billion of as end-2020; whilst midstream inventories have decreased from about $40 billion to $30 billion over that time. As mentioned earlier, the miners have been conservative in terms of production guidance which I think should allow them to offload this inventory without oversupplying the market this year. Longer term, I think it can be argued that it is preferable for excess inventory to be in the hands of the major miners, which are well capitalized, rather than the more fragmented and independent diamond midstream.

What is the impact of an oversupplied rough market?

I think an oversupplied diamond supply chain was the biggest culprit for industry underperformance for the most of last decade. All-time high diamond prices in 2011 was the primary catalyst leading to the oversupply in my opinion. Now, we are actually seeing the opposite effect, where a decade of lower prices has led to reduced supply.

What is your forecast of global natural diamond production volume this year?

Following a high-water-mark in 2017, global diamond production subsequently declined in 2018, 2019 and 2020, and is forecasted to remain below 2017 levels for the foreseeable future as multiple legacy mines reach depletion and minimal new production offsets declines. In 2020, pandemic-related production suspensions and curtailments across the industry accelerated this decreasing supply trend and I estimate that global production volume decreased by over 20% to about 118 million carats, which for context, would be the lowest output since the 1990’s. In 2021 I am forecasting production of about 115 million carats.

How did diamonds perform last year compared to other luxury goods?

I think it’s fair to say that material luxury outperformed experiential luxury given all of the travel restrictions and large group gathering restrictions globally last year. As far as diamond jewelry versus other material luxury options, jewelry was the second-best performing category for LVMH in calendar Q4, and they are the largest luxury company in the world. Jewelry was the overall best performing category for Richemont, the second largest luxury company in world. There are other similar anecdotes as well. So, in general, jewelry had a pretty good 2020 and the momentum accelerated into year-end and the holiday season and seems to be continuing into 2021.

How did the synthetic diamond sector fare last year in the midst of the pandemic?

Based on my data and analysis, the spread between natural and man-made diamonds continued to widen last year at around the same pace of that seen in recent years. For context, a slightly better than medium quality 1-carat polished man-made diamond sells for about 65-70% less than a natural equivalent; a year ago the discount was about 50%. As far as other happenings in the space, perhaps the biggest news in the category last year was the commencement of production at Lightbox’s new facility in the U.S. and Lightbox’s partnership with Blue Nile, which is now distributing the product globally at that $800 per carat price point. Perhaps something else to watch, Charles & Colvard, the vertically integrated jewelry company known for synthetic moissanite, a diamond simulant, introduced a branded line of lab grown diamonds late last year –making it the first publicly traded “lab-diamond company.” The company’s current market cap is about $50 million. I think it’s also worth noting that just a few weeks ago, the Bharat Diamond Bourse, the world’s largest diamond exchange, approved trading of man-made diamonds on the premises pending a set of guidelines aimed at effectively segregating the goods from natural.

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