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

Mathew Nyaungwa

Consumer 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.

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.

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Source Rough&Polished