2015 was difficult for the diamond market, but the diamond outlook for 2016 looks better. Experts Paul Zimnisky and Yaniv Marcus weigh in here.
This time last year, diamond market participants were calling for 2015 to be a fairly quiet year. Though some were warning that tightness in the space was on the horizon, the consensus seemed to be that it would take years to come to a head.
In actuality, 2015 was far from quiet. The year brought a large rough diamond price slump, and major diamond miners have had to move fairly quickly to react to it. All in all, the Zimnisky Global Rough Diamond Price index shows that in the last year, rough diamond prices have sunk 13.53 percent.
To find out more about what happened in the diamond space this year, and to get up to speed on the diamond outlook for 2016, the Investing News Network reached out to industry experts for their thoughts. Read on for comments from Paul Zimnisky of Paul Zimnisky Diamond Analytics and Yaniv Marcus of the Diamond Investment & Intelligence Center.
2015 diamond themes: Low prices, big diamonds
As mentioned, a key diamond market theme in 2015 was lower rough diamond prices. While prices held steady for about the first half of the year, by July they were trending downward.
There’s been much commentary on this price slump from industry participants, but perhaps most notable is the article on the situation published in late November by Martin Rapaport, chairman of the Rapaport Group. In it, Rapaport outlines what sparked the current downtrend in the diamond price and lambastes those he sees as responsible for it — namely major diamond miners and banks.
Essentially, states Rapaport in the article, after the 2008 global financial crisis, banks began lending large amounts of money to diamond cutters so that they could buy rough diamonds. While that strategy allowed cutters to stay afloat, it ultimately lent support to “rough prices that were significantly higher than polished prices” — in other words, cutters were borrowing money to buy rough diamonds, but once they had polished the gems they were unable to sell them profitably.
According to Zimnisky, the end result of that strategy was “a global supply glut of low- to mid-quality polished, downward pressure on [prices for] manufactured products and a midstream segment that is having difficulty servicing its debt.”
In his article, Rapaport calls for De Beers CEO Philippe Mellier to resign, and encourages concerned diamond market participants to reach out to Anglo American Chairman Mark Cutifani with their “concerns about profitability in the diamond trade.” However, some in the industry — Marcus is one — have turned Rapaport’s call to action on its head, challenging him to be the change he wishes to see in the industry. (Read Marcus’ in-depth article on the topic here).
On a brighter note, Zimnisky said that alongside low rough diamond prices, another key 2015 trend was the discovery of some major diamonds. He pointed in particular to Lucara Diamond’s (TSX:LUC) recovery of a 1,111-carat diamond, commenting, “I’m glad it was Lucara and William Lamb, I think he’s one of the industry’s best representatives.”
Petra Diamonds (LSE:PDL) and Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) also recovered “exceptional diamonds” in 2015, he said.
Marcus also identified some positivity, stating that the year’s rough diamond price drop didn’t extend to fancy colored diamonds. “Overall in fancy colored diamonds prices went up by 5 to 6 percent on average,” he said. “Some colors, such as pure blue and pink, have increased even more. Rarity and high demand by affluent people have caused prices to increase, similar to art.”
Diamond outlook 2016: Higher prices, less supply
It’s clear that the diamond market had both ups and downs in 2015, but if Zimnisky and Marcus are to be believed, 2016 should bring more of the former and less of the latter.
Zimnisky commented that while some — like Rapaport — might argue otherwise, he believes diamond miners have been reacting well to today’s lower rough diamond prices. “The miners have been proactively reacting to the weak environment by taking supply off the market and reducing prices,” he said.
Similarly, Marcus noted that big miners like De Beers and ALROSA allowed their clients to refuse more and more diamonds at sights this year. “I think this shows … that miners are feeling the pain of the industry and are willing to help their partners. By doing so, it will help the overall value chain,” he asserted.
That said, neither Zimnisky nor Marcus sees a market turnaround coming until at least the summer.
“The effect of [the factors mentioned above] will be seen in late spring/summer 2016, when the midstream and downstream industries stock for the 2017 holiday season,” said Zimnisky, while Marcus commented, “I think that the current challenges will continue until summer 2016, or right after the second quarter.” Elaborating, Marcus said, “by then, it is highly likely that the inventory at polishers will be diminished as they sell off inventory for cash. Then purchases by sightholders will probably pick up, and the ball will get rolling onto other areas of the value chain.”
But when those factors do come into play, both see rough diamond prices rising as a result. Zimnisky said that this time next year he sees rough diamond prices being higher than they are now, “and at the least [they will] continue to outperform other resources.” He cited China’s transition to “more of a consumer-driven economy” as another positive factor for diamonds, noting, “the effect on a luxury consumer-discretionary commodity, like diamonds, should be relatively favorable compared to capital investment commodities like coal, iron ore and copper.”
And for investors wondering about companies to watch in 2016, the analysts both had some suggestions. Zimnisky said he’s looking forward to production at Mountain Province Diamonds’ (TSX:MPV,NYSEMKT:MDM) Gahcho Kue mine, as well as a bulk sample and subsequent valuation for Kennady Diamonds (TSXV:KDI); he’s also eagerly anticipating further definition at North Arrow Minerals (TSXV:NAR) PK 150 kimberlite, and PEA-related results from Peregrine Diamonds (TSX:PGD).
For his part, Marcus sees Petra Diamonds as undervalued, and is encouraged about the company’s new plant and increased production. “The mine is on the right track [to increase production to] 5 million carats a year from the current 3 million. We have seen major diamonds unearthed there in the past two years, and I believe Petra has a lot of potential moving forward,” he said.
Investor takeaway: Be cautiously optimistic
Overall, it seems that diamond-focused investors have reason to be cautiously optimistic heading into 2016. While better market circumstances appear to be in store, market participants will have to exercise patience as they wait for them to emerge.
Even so, those involved in the space should also be aware that it’s possible that conditions will not improve next year. As Zimnisky pointed out, while the midstream diamond market (cutters) “has certainly felt squeezed by the rough/polished price spread, it’s unclear the extent that this has impacted the longer-term livelihood of that industry.” Essentially, he explained, while some cutters and polishers have gone out of business in the last year or so, “it can be argued that there really hasn’t been a mass exodus or consolidation in the space.”
In his opinion, “the question is: are conditions not as bad as indicated, or is it just a matter of time before that segment of the industry collapses?” Investors interested in diamonds will no doubt be watching closely for the answer.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Diamond Outlook 2015: Supply Needed, but Financing an Issue