Des Kilalea, a leading diamond analyst for RBC Capital Markets, which is one of the top global investment banks providing financial services in 150 countries around the world, answered the questions posed by Rough&Polished and here is what he said about the current situation in the diamond market.
In recent months the diamond market proved it was returning to pre-crisis levels both in terms of turnover and prices. Is it a stable trend or just a short-term success?
I think that while prices may have returned to pre-crisis levels in some cases, volumes are still slow into some markets such as the US. The growth in China is in part due to many new retail outlets opening up there and the impact of good demand for jewellery. But for a stable trend we need the US to start reporting better sales.
During the recession many investors viewed diamonds as a sort of safe haven which brought forth the problem of their liquidity and ability to preserve value as well as a more broader issue of whether they may be an exchange traded commodity or not. What is your view of this problem?
I do not think diamonds, other than some very special stones, are an investment asset. They are sold in luxury goods and to emerging consumers. When it comes to special stones the investment merit can be highly attractive, though liquidity will always be limited, in the same way as art works, since the number of buyers is limited when compared with investments such as stocks and bonds.
Many diamond manufacturers view the United States as a major consumer for their goods saying the recession in the industry will be over when demand for diamond jewelry in the U.S. will be resumed. When do you think this will happen?
The US consumer remains under some pressure, but there is evidence that this pressure is easing. Nevertheless I would expect a recovery in the US only to be fully re-established next year as job creations and consumer debt remains issues.
Is it possible that the growing consumption of diamond jewelry in China and India may balance the drop in demand in the United States? If it is, how soon this may happen?
China could become the largest jewellery market in the world in the next five to 10 years on a sustained basis. Near-term rises above the US are likely but a sustained position as the market No 1 will need to see a broadening of demand in China. India may be five or so years behind China. Of course the pace at which China overtakes the US will be dependent on a recovery in the US since a 5% rise in the US demand for diamond jewellery would be the same as a 10-15% rise in China. So clearly what happens in the US is important.
Do you think there is a possibility that major diamond-miners will reach an agreement on generic marketing?
No. It might be an attractive option but I think that there is too much competition now and the large miners are focusing on their own product.
Do you think the Kimberley Process should be modernized in some way - due to the obvious problems in Zimbabwe?
Yes there is need for adaption in the KP to accommodate the likes of Zimbabwe.
Do you believe in prospects for diamond-mining companies going public?
If a company has a good mining prospect or project in a stable country and sound management the markets generally are open for funding.
Do you believe in prospects of a competitive rough-diamond market instead of the monopoly left in the past? What kind of tools it will need to avoid violent price fluctuations?
A monopoly is impossible in today’s anti-trust world. There are no tools to avoid fluctuations in prices other than stable economic policies and stability in supply.
The De Beers Group posted an underlying loss of $220m in 2009 after underlying net profit of $515m in 2008 and their rough diamond sales tumbled to $3.2bn from $5.9bn. When do you think the company will be able to win back its positions?
De Beers was already back in profit in the second six months of 2009 and this should continue into 2010 provided diamond prices remain at least where they are now. The company has cut a great deal from its cost base and is now refinanced so before interest payments there should be a much larger profit.
What are in your view the opportunities of a new agreement between Botswana and De Beers?
They are partners in the world’s largest diamond mining company over a period of time (though Alrosa challenged for this position in 2009) so you would imagine that an agreement will come.
Do you think it could be possible to regulate the market by way of an agreement between diamond mining countries modeled after the one between oil producing countries?
No, I do not think colluding on production or prices is possible at all in the diamond market.
Rough&Polished
