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China’s opening of new jewellery stores to continue driving incremental demand - Paul Zimnisky

13 december 2021

excl_13122021_n.pngChina, the world’s second-largest consumer of diamond jewellery after the United States, has continued to open new jewellery stores at a relatively aggressive pace, according to independent diamond analyst Paul Zimnisky (pictured left).

He told Rough&Polished’s Mathew Nyaungwa (pictured right) on the sidelines of Angola’s International Diamond Conference in Saurimo recently that the opening of the new stores in the Asian country is driving incremental demand for diamond jewellery.

Zimnisky also said that the new stores were crucial for the diamond industry as this means a brand-new source of recurring demand.

He also emphasized the need for the Angolan government to ensure transparency in the mining and trading of diamonds in the country to comfort consumers, particularly in the US, who are concerned about ethical sourcing.

Zimnisky said diamond companies such as Endiama that are ploughing back into the communities that they operate in will also help convince diamond consumers that they are a responsible corporate entity.

Below are excerpts of the interview.

You said in your presentation at the inaugural Angola International Diamond Conference that the current recovery of diamond prices will continue. What is driving the continued recovery?

Just to be clear I think the trajectory might normalise, but I think the general, overall trend of higher prices is more sustainable this time because the industry has a much more balanced supply position than it has had in the years past. I think that is sustainable in the medium term. On the demand side, demand is quite strong in the US right now, and I think it will remain relatively strong during the ever-important holiday season and quite possibly into next year. Then, in China, they continue to open new jewellery stores at a relatively aggressive pace which is driving incremental demand. In Europe, that market finally seems to be reopening, and the Middle East is starting to see some tourism return. So, I think the biggest risk to the demand picture is more macro in nature, an unfavourable economic event – if we do get a situation where inflation gets out of control or if we have a significant stock market correction or a monetary or fiscal policy mistake in the U.S. or one of the world’s other major economies….so I think the risk to diamond demand in the near- to medium-term is more macro in nature, but at the moment, the coast seems relatively clear, so we should enjoy it.

You referred to inflation and there had been media reports in the US on inflation becoming a problem. Do you think the high inflation rate will slow down soon as this has a bearing on demand for diamond jewellery?

This is a complicated question (laughs) and just to be clear the US officials are not saying that inflation is a problem, but a lot of the economists are saying inflation is a problem. Right now, inflation is quite high relative to what it has been in the past and I think it is understandable why this is happening. There is mass economic stimulus, which is driving demand and there are supply chain disruptions because of pandemic-related measures, lockdowns and quarantines and that sort of thing. So, we have artificially restricted supply, and we have artificially boosted demand and this is a recipe for inflation. Again, the question becomes: can some of these policies be unwound in a way that allows a healthy return to more normal levels? But if we continue to see inflation I would expect that to continue to impact diamond prices. I think the best way to look at this is the cost of producing diamonds goes up when we have inflation, labour costs go up, as do fuel costs, equipment prices go up, the cost of shipping equipment goes up…so this will be passed on to diamond prices.

You also talked about the exponential growth in jewellery shops in China. What is driving this growth?

I think it is just the robust growth of the consumer economy in China. The economic situation in China is reaching a more mature stage: where earlier on its mostly infrastructure spending, capital spending, but towards the end of the economic growth cycle you see consumer spending pick up as it becomes more of a consumer-driven economy –so I think we are approaching that state with China. We have been seeing that for a few years now, but I think it is very important to look at the major jewellery companies in China and how aggressive they are in opening stores, even during the midst of the pandemic last year. It is important for the industry because when new stores are opened they have to buy stock to fill inventory and then once the store is open, you have a brand-new source of recurring demand.

Why is it important for the natural diamond industry to market diamonds?

You need to look at diamonds as a consumer discretionary luxury product, and it is all about selling an emotion and selling something that people want but do not necessarily need. The industry has to remember that, and this is an industry where if you do spend a proper amount on marketing (and if you have a successful campaign) you will see a return on the investment. I think this is where the industry lost its way over the last decade, decade-and-a-half… I would like to see investment in the Natural Diamond Council be two or three times what it is today. If the industry gets this right I think the future is quite bright for natural diamonds.

Are synthetic diamonds still posing threat to natural diamonds?

It continues to be a very legitimate threat, possibly the most important thing happening in the industry right now, but I think the natural diamond industry needs to focus on what it has control over, which is again making people want its product first and foremost. The industry has done a lot of right things on that front in the recent past, but there is more work to do. The industry needs to make people feel good about buying an Angolan diamond, a Namibian diamond, a Canadian diamond, and there needs to be a real fundamental basis to this.

Do you see any appetite for transparency from the industry?

Yes, we are getting to the point where consumers are demanding that. There was a question of whether consumers would pay a premium for (source provenance) and when it was tested in Canada 10-15 years ago it seemed as if consumers liked the idea of knowing where the diamonds came from, but they weren’t willing to pay a big premium for it. But now, we are getting to the point where consumers are going to demand it. Some recent studies have shown that consumers will pay a premium for this, but we haven't seen this play out in the actual market yet. So, we will see, but this remains a priority for the industry as it certainly should be for multiple reasons.

The issue of the redefinition of conflict diamonds had been topical and a subject of much debate. What is your take on this?

It is a frustrating area for the industry, there is not enough progress happening quickly enough. I think it is important to maintain what they already have in place (i.e. the Kimberly Process), but the industry needs to continue to be progressive in this area. A lot of people in the industry are becoming frustrated that this is not progressing. I think a lot of this has to do with the bureaucracy that inevitably comes with a very large group of global industry participants. However, individual companies should be focusing on what they can do. They can and should conduct business with their particular policies and procedures. But, as a whole, the industry is too large, too fragmented, too diverse to move on these things as quickly as we would like…that is what we are seeing play out.

What is the perception of US consumers on Angolan diamonds and what Luanda needs to do to clean its image in the eyes of the diamond jewellers consumers in the US?

I think it is transparency, transparency, transparency. And I think one of the things that I have witnessed at this conference is that the diamond industry via Endiama has done quite a lot of positive things for the country, as far as infrastructure, housing and healthcare. So, I think the focus needs to be continuing to invest profits from the industry into infrastructure, healthcare, education and community programmes. If this is done successfully and transparently, hopefully, consumers from around the world will want to buy Angolan diamonds and feel good about doing it.

Angola recently discovered the Luaxe mine, which will be the latest new diamond mine in the world when it begins production next year as expected. Do you think we will have more new mines soon?

That is a good question. It has been a long time since we have seen a significant discovery. At the moment, Luaxe is the only new major source of supply for the industry in the medium- to longer term. Through this decade I forecast that we are going to see current supply levels relatively maintained, which I think is a sustainable, healthy level for the industry. But as we get towards the end of the decade, we are going to need new sources of supply.

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