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02 september 2019

paul_zimnisky_xx_excl.jpgAn independent diamond industry analyst and consultant said the natural diamond industry will be in a better position within a year time if end-consumer demand holds. Paul Zimnisky, CFA told Rough & Polished’s Mathew Nyaungwa in an exclusive interview that although supply indigestion is currently the biggest challenge, the natural diamond market is now through most of the mid-stream deaveraging and inventory levels will be more sustainable going forward.

He said the industry will be much better positioned once wholesalers, traders and retailers digest current inventory.

Zimnisky also projected that recovery of the diamond market will be within a year’s time if end-consumer demand holds.

NB: Zimnisky will be speaking at the Guangzhou International Jewelry & Diamond Conference in Guangzhou, China, on November 21, 2019 and at the PDAC in Toronto, Canada, on March 2, 2020.

Below are excerpts from the interview.

Stornoway recently announced that it is being reviewed by the Toronto Stock Exchange and faces possible delisting. The company also said in its second quarter report that it was in a dangerous cash position due to the poor diamond market. Are we likely going to see more junior diamond companies going through the same rough patch?

New diamond mining companies typically need to be profitable in the first few years after commencing production in order to service the debt taken out to fund construction of the mine. Relatively weak diamond prices and eroding sentiment has certainly pressured miners, especially some of the new producers.

That said, seemingly stable global demand for diamonds and an apparent medium-to longer term favorable supply picture should be supportive of diamond prices and the companies producing them, especially those that are currently profitable with de-risked mining operations and a manageable debt load.

What are the challenges facing the rough diamond market?

I think supply indigestion is currently the biggest challenge. This is a result of a deleveraging of inventory held in the mid-stream and downstream segments of the industry. I estimate that as much as $10 billion of excess diamonds have come out of the mid-stream segment over the last year-and-a-half.

This is a result of many manufacturers’ inability to retain the level of finance they have previously which is forcing them to scale down operations.

However, I think we are through most of the mid-stream deaveraging and inventory levels going forward will be more sustainable.

Once wholesalers, traders and retailers digest current inventory, the industry will be much better positioned.

When are we likely going to see the price recovery?

I am already seeing some indications of a like-for-like price recovery. This industry has traditional done a good job of supporting itself in challenging times. For example, De Beers has cut production guidance, reduced prices, allowed Sightholder deferrals and upped the company’s marketing budget to drive downstream demand and ALROSA has significantly cut sales guidance. If demand holds stable, I think the industry as a whole could be on good footing a year from now.

Are pink diamonds experiencing the same challenges affecting other types of diamonds?

This represents a very small segment of the industry. Outside of Argyle, most mines are lucky to produce one or two notable pinks a year. The fundamentals of high-quality pinks appear to be favorable and I imagine this will continue to be one of the relatively stronger categories of diamonds.

Are lab-grown diamonds also contributing to the challenges facing the natural diamond market?

Yes, I think a lot of it is the impact of negative sentiment. However, there is certainly a market share impact as well. Man-made diamonds only represent a low-to-mid single digit percentage of the market, but the larger natural industry is only growing at low-to-mid single digits, so in a way man-made diamonds are taking a very precious piece of the natural industry’s currently modest growth.

You once projected that lab-grown diamonds will likely to grow to 3.4 per cent by 2023, and to 4.5 per cent by 2035. Do you still maintain these projections and what are the driving factors?

So it’s important to note that one of the primary forces driving these projections is significant demand growth for man-made diamonds as fashion jewelry. If prices continue to come down, as I expect them to, this product will compete very directly with fashion jewelry which is quite a large growing market globally.

I estimate that the total fashion jewelry market is now worth over $40 billion and could grow to over $115 billion by 2035.

Why are banks moving away from the diamond industry?

It’s a complex industry, it’s not well understood and collateralizing the debt is difficult given the nature of pricing diamonds. On top of this, there has been a loss of trust following the scandals and stigma associated with the industry.

What is the global supply picture for natural diamonds like?

The forecasted supply picture looks pretty bullish from a diamond price standpoint. Supply is estimated to incrementally decrease on an annual basis until at least 2021 as multiple legacy mines reach depletion, including the Argyle mine in Australia which at one point accounted for almost half of global output in volume.

Currently there is only one new large-scale mine in development globally, the Luaxe project in Angola, which will not likely reach full-commercial production prior to 2025.

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