The diamond market ‘is the strongest it’s been in ten years,’ diamond expert says

After a brutal 2020 that saw diamond production and sales curbed globally, with production declining more than 20% to around 107 million carats, the diamond market has bounced back strongly in 2021. Paul Zimnisky, an independent diamond industry analyst, explains what’s happened in the market, why new supply may be needed by the beginning of the next decade, and the importance of traceability initiatives in the sector.

Alisha Hiyate: The last year and a half has been a real rollercoaster for the diamond sector. Can you catch us up quickly on the effect that the pandemic has had on the diamond sector and where we are right now with the market?

Paul Zimnisky: Just to briefly summarize, the middle to the end of last decade I would say was relatively underwhelming for the diamond industry. I think a lot of that had to do with the market being oversupplied. However, in late 2019 going into early 2020, the market really began to show signs of recovering. Then the pandemic hit.

But the pandemic has actually accelerated the recovery that started in late 2019. According to my rough diamond price index, prices are up some 20% this year. Based on everything I’m seeing going on in the industry, I would say the diamond market is the strongest it’s been in ten years and it’s being driven by real consumer demand, which is what you want to see.

AH: The strongest in ten years – that’s pretty amazing. Just to go back to the pandemic a little bit, it was a huge disruptor for the industry and for every industry. Can you tell us a little bit about the innovations that have happened that were forced by the pandemic and how the diamond sector is in a better place now because of those innovations?

PZ: For diamonds, the pandemic accelerated the return to more balance (in the market) and actually took that a step further. The market experienced supply deficits throughout some periods this year.

In Russia, they actually had to borrow stocks from the government reserve, so that’s on the supply side. On the demand side, consumers bought diamonds because they weren’t spending money on travel and doing more experiential luxury spending.

The pandemic also showed that consumers are willing to buy very high-end luxury items like diamonds over the internet. The largest luxury companies saw online sales increase to almost one-quarter to one-third of company wide sales in recent quarters. I think that number (will) normalize, but it shows that consumers will buy diamonds online if they’re marketed the right way.

AH: Can you talk to me a little bit about the traceability initiatives that have popped up in the diamond sector recently (such as De Beers’ Code of Origin or Tiffany & Co.’s geographical sourcing information) and why those are important?

PZ: Being able to tell a consumer where the diamond originated alleviates any concern that it’s a conflict diamond or that it’s not a natural diamond. It also gives the consumer a story to tell their friends about the diamond. If you’re American and your spouse is Canadian and you have a Canadian diamond, that’s kind of a unique (story) for that couple, so there are a lot of benefits that come from being able to tell a consumer the source.

This is something that the industry has been working on for years and it’s become more and more of a priority just in the last year or two. An early mover on this was Tiffany. It’s a vertically integrated company, so it’s maybe a little bit easier for them to do that for their customers. But Tiffany’s already been doing this for almost two years now — if you go into Tiffany, they can tell you where any diamond that’s 0.18 carat and larger came from. That’s a very important initiative for the industry and it’s starting to finally progress quite rapidly.

AH: As we enter into a recovery stage with the pandemic, we’ve seen some return to pre-pandemic demand levels or close to it. But what are the biggest risks to the diamond market at this point?

PZ: This is the first time in years that the market’s been fundamentally balanced, and again, this was in the works for years, it’s not just a result of the pandemic. That said, I think the key is to not make the same mistakes of the past. Don’t oversupply the market and don’t lose focus on the importance of marketing. De Beers just launched a new campaign with the tagline “I do.” The industry is getting back to its roots, which made it so successful in past decades, and a big part of that is proper marketing. In my opinion, proper marketing campaigns like this will move the needle. It’s a slower, gradual process, but the larger impact of good marketing should be felt for years or decades, and I think the industry is getting back to that level of commitment with marketing.

AH: You keep a close eye on the lab-created diamond segment of the market, which some people see as a threat to the natural diamond market. Are lab-created diamonds proving to be a threat, or do consumers understand them as separate products with different features and price points?

PZ: Larger fashion jewelry companies seem to be making a big move into the lab-diamond business, but not as much the fine jewelers. I think once the product matures, most will be sold as lower-priced fashion jewelry that does not compete as much with higher-priced natural diamonds. There will be some overlap, but I don’t think it’s nearly as great as some are making it out to be. Just looking at where we are today, natural diamond jewelry sales will be close to a record high this year and that’s as lab-diamond supply continues to grow quite rapidly. The takeaway is that it’s not necessarily zero-sum. I think lab diamonds will take more market share away from other lower-priced jewelry, especially once the novelty wears off. A key to this whole thing is marketing. If the natural diamond industry doesn’t market its product properly, the risk of losing market share increases. But if the industry does drop the ball, there is perhaps greater risk that people just stop buying diamonds. Right now though, the natural diamond industry seems to be doing a lot right.

AH: You mentioned earlier that Alrosa had to borrow diamonds because the demand for diamonds had come back quite strongly and the supply wasn’t quite there. Currently, the market is balanced, but do we need new supply going forward?

PZ: Yes, looking longer term (new supply will be needed), and I think higher prices will drive new discoveries and new production. Right now, you’re seeing some mothballed mines being turned back on. But most of this production is not very significant and if you look at volumes of production, the industry will need greenfield projects that bring on, 2, 4, 6 million carats of new supply annually.

There’s really only one project of size being developed right now, and it’s in northeast Angola and I’m actually going to visit in a few weeks, so next time we talk I’ll have to give you an update.

But yes, in general the industry needs to be looking for new supply that will hit towards the end of this decade, early next decade.

Speaking to Canada specifically, there are three larger projects that could be supplying the market by the end of the decade: the Star-Orion project in Saskatchewan; Naujaat in Nunavut and Chidliak also in Nunavut. Star is a Star Diamond (TSX: DIAM) and Rio Tinto (NYSE: RIO; LSE: RIO) joint venture project; Naujaat’s a North Arrow Minerals (TSXV: NAR) and Burgundy Diamond Mines (ASX: BDM) project (Burgundy Diamonds is a newcomer to the industry that’s really taking an aggressive approach to growing its asset portfolio); and Chidliak, a De Beers project.

AH: The diamonds sector is a difficult place for small producers and we’ve seen that with some Canadian projects, with the Renard mine in Quebec with Ekati and Dominion Diamond in the Northwest Territories. Do you think there’s room for smaller players in the diamond industry, or is this really just a game for De Beers and Alrosa, and to some extent Rio Tinto?

PZ: In general the role of smaller players works best when they make the discoveries and then they sell or partner with a major to finance and operate the mine.

Lucara Diamond (TSX: LUC) is a good example of a small producer that’s been successful. They’re a sole asset producer with the Karowe mine in Botswana and it’s been a very profitable mine. The company was able to pay back all the money that it raised to build the mine within just a few years of commencing production.

So I think as is the case with most of the mining industry, if you have an economic asset, you can be successful regardless of the size of the company. But economies of scale is certainly a thing, and the challenging thing with the diamond industry has been putting a portfolio of economic assets together because they’re so few and far between.

This interview has been edited for clarity.