Why rough diamond prices are at a 52-week high

Following the global financial crisis of 2007-2009, diamonds were one of the fastest commodities to recover, up almost 150% from the low in early-2009 through mid-2011.1 The crisis resulted in curtailed diamond production just as incremental demand for diamonds was escalating, primarily a result of the Chinese market adopting the tradition of giving diamond engagement rings in the midst of the financial liberation of the nation's middle and upper-middle class.

However, since making an all-time high in Q2 2011 diamond prices have been in a prolonged downtrend as the run-up in prices led to growth in incremental supply through 2017, which was not met with commensurate demand. This was in part due to China suffering an economic slowdown in 2015, and over-leveraging in the diamond industry's manufacturing segment which damaged industry sentiment and confidence while evoking unsettling price volatility.

Today, while the industry still deals with challenges ranging from shorter-term lender confidence in the Indian manufacturing segment to longer-term fundamental shifts in consumer preferences for material luxury goods, forecasted industry fundamentals point to an environment favoring higher diamond prices over a period of at least the next four years.

Diamond demand is correlated with global GDP growth and a current coordinated environment of global economic growth recently seen in Q4 2017 and Q1 2018 has translated to strong consumer sentiment and retail sales, especially in the industry's most important markets. In Q1, jewelry store sales in the U.S. were up 11.9% year-over-year and in Mainland China "gold, silver and jewelry" retail sales were up 7.9%.2 The U.S. represents the world's largest end-market for diamond jewelry at almost 50%, Greater China, which includes Mainland China, Hong Kong, Macau and Taiwan, is second, approaching 20%.

Pending no major global economic disturbances disrupting consumer diamond demand, incremental year-over-year diamond production declines are forecast to drive real diamond prices up approximately 10% cumulatively from 2018 through 2021 (17% in nominal terms). Further supporting supply dynamics favorable to prices, producer excess inventories have been reduced to multi-year lows and excess production capacity of the major producers is expected to be insufficient to significantly offset the pending supply gap.

If the above scenario plays out, diamond prices could revert back to 2014 levels, which would be about 8% above today's prices. This would mark a significant price level for diamond producers, as in 2015 all five stand-alone publicly-traded diamond miners at the time were profitable and paid dividends on the back of 2014 diamond prices.3

Indications of the current supply-demand dynamic can already be seen as rough prices are up 3.9% year-to-date through mid-May, marking a 52-week high. However, necessary to note, risks of a continuation of this trend primarily lie with demand uncertainty, in particular, a global economic slowdown which could result from: a sooner than anticipated ending of the current growth cycle exacerbated by monetary and fiscal policies of developed nations; further U.S./China trade hostility; escalation of the U.S./Russia/Iran proxy war; consequences of the over-levered Chinese consumer economy; and negative implications higher oil prices, which are currently at a four-year high.

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1All rough diamond price figures in reference to the Zimnisky Global Rough Diamond Price Index, more information can be found at www.roughdiamondindex.com.

2According to the U.S. Census Bureau and the National Bureau of Statistics of China.

3Based on a global universe of publicly traded stand-alone diamond miners at the time with a market capitalization of at least US$250M including ALROSA (MICEX: ALRS), Dominion Diamond (acquired), Petra Diamonds (LSE: PDL), Lucara Diamond (TSX: LUC) and Gem Diamonds (LSE: GEMD).

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Paul Zimnisky is an independent diamond industry analyst, author of the Zimnisky Global Rough Diamond Price Index and publisher of the subscription-based State of the Diamond Market monthly industry report. He will be speaking at the Northern Miner Diamonds in Canada Symposium in Toronto on June 11, 2018 , and at the Brazilian Diamond Geology Symposium in Salvador, Brazil on November 5, 2018. Paul can be reached at [email protected] and followed on Twitter @paulzimnisky.

At the time of writing the author held a long position in Lucara Diamond Corp, Stornoway Diamond Corp, Mountain Province Diamonds Inc, Diamcor Mining Inc, Peregrine Diamonds Ltd, Tsodilo Resources Ltd, North Arrow Minerals Inc and Signet Jewelers Ltd.