Quarterly Review of Rough Diamond Prices in the 10 Years Since the Global Financial Crisis

This year marks 10 years since the onset of the global financial crisis. In 2007 the first signs of a collapsing sub-prime mortgage bubble in the U.S. were seen, although rough diamond prices were not impacted until the fall of 2008, just shortly after achieving record high prices in summer 2008. As the global economy crashed, rough prices bottomed out in the beginning of 2009, congruent with the U.S. stock market. Two years later new all-time highs were made in the summer of 2011, highs that have yet to be retested.

Over the last decade the diamond industry has been wrought by historically high volatility. A surge in demand for diamonds from the economic and social liberation in China along with other emerging economies that consequentially benefited, was followed with overt speculation by industry players that left the industry oversupplied when the growth tempered. Banks lending to the industry consequently reined in liquidity, some leaving the business altogether, further exacerbating the situation.

The upstream segment of the industry responded by curtailing supply, reducing prices, implementing a marketing campaign and increasing transparency attempting to restore profitability and confidence to its customers and their lenders. The proactive response by the miners showed signs of success as industry-wide inventories returned to more normal levels and supply/demand balanced. However, just as the recovery was underway India demonetized its highest denomination bank notes, directly impacting the largest base of manufacturers in the industry.

Today the diamond industry continues to navigate internal challenges, such as the advancement of lab-created alternatives, with an arguably more challenging structural backdrop of generational shifts in consumer preferences. However, the inherent allure of diamonds has existed for centuries, and the resilient diamond industry has an impressive track record of survival.

Below is a quarter-by-quarter outline of catalysts effecting diamond prices over the last decade with the corresponding quarterly change in the Zimnisky Global Rough Diamond Price Index, representing a proxy for rough diamond prices:

Q3 2017 (through mid-July)

Rough diamond index change: +0.5%

• • Demand for rough remains stable although slightly abated in some categories compared to earlier in the year

  • Recovery in lower-quality rough impacted the most by demonetization has somewhat stalled as demand has slightly come off and supply is robust

  • Bifurcation between stronger rough and weaker polished resulting in more cautious sentiment

  • Some concern of excess inventory in pipeline returning

Q2 2017

Rough diamond index change: +1.2%

• • Lower relative allocations to De Beers’ Sightholders following liquidation of excess inventories in Q1 and also higher beneficiation allocations to government partners, particularly Namibia

  • ALROSA said to increase production and sales guidance for 2017

  • India to transition to more centralized goods and service tax regime equating to higher net tax rate for diamond manufactures and luxury consumers

  • Diamond Producers Association increases marketing budget

Q1 2017

Rough diamond index change: +2.1%

• • Significant return in demand for lower-quality rough which was severely impacted by India’s demonetization in Q4 2016

  • Most Indian manufacturers recovering from demonetization faster than anticipated

  • U.S. retail failed to meet holiday 2016 expectations resulting in some excess stock in industry pipeline

  • Mainland China retail demand improvement seen as well as signs of stabilization in Hong Kong and Macau

  • Gahcho Kué mine in Canada begins commercial production

Q4 2016

Rough diamond index change: -6.0%

• • Much of Indian diamond manufacturing sector brought to halt by demonetization in November

  • Lower-priced rough impacted the most by demonetization, producers having difficulty selling the category

  • Disappointing Christmas for U.S. retail, but somewhat offset by stronger buying ahead of Chinese New Year

  • Continued overall demand declines in Hong Kong and Macau, especially domestic demand

  • First Diamond Producers Association generic diamond marketing campaign launched targeting millennials and non-bridal diamond jewelry

  • Renard mine in Canada commences commercial production

Q3 2016

Rough diamond index change: -3.8%

• • Overall decrease in demand for rough, especially lower-priced goods, due to build in polished stocks and Diwali seasonal weakness

  • Upbeat Hong Kong trade show indicates enthusiasm of Mainland China-based jewelers, however, Hong Kong and Macau markets continue to be subdued

  • U.S. market stable as anticipation builds for holiday season

  • Russian government removes export duty on rough diamonds

  • New Diamond Technology produces largest ever lab-created blue gem-quality diamond at 10.07 carats

Q2 2016

Rough diamond index change: 6.3%

• • Stabilization in demand for rough after strong finish in Q1

  • Reduced inventory across pipeline, however, mid-stream financing availability remains constrained as Standard Chartered announces exiting diamond lending business in June

  • U.S. end-market supporting global demand, but strong dollar continues to negatively impact markets outside U.S., especially in Europe, Middle East, and Hong Kong

  • Growth seen in Mainland China middle-class consumer demand

  • Second largest rough diamond ever recovered, the Lesedi la Rona, fails to sell at auction in London

Q1 2016

Rough diamond index change: -3.4%

• • Significant improvement in demand for rough, especially towards end of quarter, as producer responses to indigestion play out

  • Manufacturers left understocked following a better than anticipated holiday season

  • U.S. primary driver of demand growth while Mainland China stabilizing, however Hong Kong and Macau noticeably weak

  • Stronger dollar continues to negatively impact non-U.S. markets

  • Indian jewelers strike over proposed excise tax

  • Potential for new diamond project in Angola, Luachi, to be largest new diamond mine in decades

Q4 2015

Rough diamond index change: -4.4%

• • Weaker industry-wide conditions continue as excess inventory spanning all segments of industry remains

  • Liquidity available to manufacturing segment remains tight

  • Miners aggressively respond to state of industry by further curtailing supply to market, reducing pricing, offering purchase deferment to contract buyers, and initiating plans to increase generic diamond consumer marketing

  • Strength of U.S. dollar continues to negatively impact international demand

  • Retail slowdown continues to be seen across Greater China

  • De Beers puts non-profitable Snap Lake mine in Canada on care and maintenance

  • Second largest gem-quality rough diamond in history uncovered in Botswana by Lucara Diamond Corp, at 1,111 carats

Q3 2015

Rough diamond index change: -12.4%

• • Chinese stock market sells off sharply further pressuring a weakening Chinese jewelry market as major retailers continue to sell down inventory and opening of new stores slows

  • Weak global polished demand impacting demand for rough, especially small and medium sized categories

  • Manufacturing capacity continues to be restrained by limited financing availability

  • Demand for rough weaker due to seasonality as manufacturers shut ahead of Diwali

Q2 2015

Rough diamond index change: +2.0%

• • Retail demand in U.S. stable and growth in emerging markets remains positive however at lower rates

  • Softer demand for polished from Chinese retailers in particular has resulted in more cautious industry-wide sentiment

  • Chinese retailers seen able to fulfill current demand with existing inventories

  • Stronger U.S. dollar continues to make polished goods relatively more expensive in non-U.S. markets translating to somewhat lower demand globally

  • Major miners seen curtailing supply and reducing prices in some categories in response to current market conditions

Q1 2015

Rough diamond index change: -0.1%

• • Stabilization in demand for rough at quarter-end after slight downward pressure at beginning of year

  • Downstream holding low stocks with the expectation that goods are available from midstream as needed, midstream consequently cutting stocks

  • Some new sources of financing seen becoming available to manufactures

  • U.S. consumer market resilient, but growth slowdown in Mainland China

  • Hong Kong, Macau, and Indian market weak, the latter impacted by a weaker rupee

  • Stronger U.S. dollar has put pressure on international diamond prices

Q4 2014

Rough diamond index change: -10.1%

• • Current level of polished stock has led to further tightening of bank financing available to manufacturers

  • Overall decrease in demand for rough as polished stocks build despite relatively good U.S. Christmas season and optimistic lead-up to Chinese New Year

  • Rate of new jewelry store openings in China seen slowing

  • Diamond jewelry demand in Macau continues to significantly decline on government anti-corruption crackdown

Q3 2014

Rough diamond index change: +0.8%

• • New demand for bridal diamonds in Mainland China remains strong, but weaker macroeconomic conditions in China and Japan, in particular, have somewhat offset growth in global diamond demand

  • Business-gift related jewelry purchasing in Macau plummets amidst aggressive corruption crackdown by Chinese government

  • Moderate weakness in rough demand due to post-summer seasonality

  • In September the largest lender to the diamond manufacturing industry, Antwerp Diamond Bank, announced it will be winding down operations after never fully recovering from the financial downturn in 2008-2009

Q2 2014

Rough diamond index change: +2.3%

• • Stable diamond jewelry demand growth in U.S. and Greater China continues to support rough prices

  • Grib mine in Russia commences production independent of primary Russian producer ALROSA

Q1 2014

Rough diamond index change: +9.2%

• • Continued growth in the industry's two most important markets, the U.S. and Greater China, along with a pickup of consumer demand seen in India, supporting higher rough prices

  • Production at Zimbabwe’s alluvially mined Marange fields drops significantly as most easily accessible ore has been depleted

Q4 2013

Rough diamond index change: +3.3%

• • Industry-wide pipeline stocking demand strong driven by new store openings in Greater China

  • Strong holiday demand seen in the U.S. as well as Greater China leading up to Chinese New Year 2014

  • Positive consumer demand trends for diamond jewelry seen returning in India

Q3 2013

Rough diamond index change: -3.5%

• • Tighter credit availability for Indian diamond manufactures and regular seasonal weakness ahead of Diwali has translated to lower demand for rough

  • Cautious jewelry manufacturers globally seen accumulating less inventory

  • Weaker rupee has put pressure on domestic consumer demand for diamond jewelry in India

  • Continued reduction in Chinese purchases of higher-quality diamonds seen as consumers gravitating towards mid-quality diamonds typically bought by U.S. consumers

  • Botswana begins selling portion of its De Beers production independent of DTC under Okavango Diamond Company

Q2 2013

Rough diamond index change: +5.4%

• • U.S. retail market stable, with noticeable demand for medium-quality-and-sized polished

  • Economic stimulus in Japan boosting retail demand

  • Greater China and India markets fundamentally weaker on macroeconomic concerns, with noticeable decrease in demand for higher-quality goods by Chinese

  • Gemesis Inc. produces largest ever gem-quality colorless synthetic diamond at 1.29 carats

Q1 2013

Rough diamond index change: +1.5%

• • Strong restocking demand following Christmas and Chinese New Year, especially in lower-priced categories

  • Global retail jewelry market stable led by a resilient U.S., followed by slower but recovering Chinese and Indian markets

  • Continued shortages of global rough supply due to production disruptions at De Beers and lower Russian output

  • In March publicly-traded Indian diamond and jewelry manufacture Winsome defaults on loans approaching US$1 billion equivalent

Q4 2012

Rough diamond index change: +0.6%

Notes:

• • Continued weaker global economic backdrop attributed to economic uncertainty in Europe, softening of consumer demand in China, and budget policy issues in the U.S.

  • Some demand weakness offset by relatively strong Diwali, Christmas, and lead-up to Chinese New Year

  • Hurricane Sandy impacted key northeastern U.S. markets due to store closures towards the beginning of the quarter

  • Overstocking still seen in upstream segment of industry, but beginning to clear towards end of year

  • Shortage of rough supply due to production disruptions at primary De Beers mines and lower relative supply from Russia due to a temporary decrease in mine plan production

Q3 2012

Rough diamond index change: -3.2%

• • Some demand improvement seen against continued weak global economic environment, primarily U.S. and European markets benefiting from Chinese tourism

  • Upstream segment of industry is overstocked as expectations of strong 2012 have not played out

  • Financing to midstream segment of industry marginally improving

Q2 2012

Rough diamond index change: -4.8%

• • Midstream segment of industry experiencing a buildup of excess stock, in addition, liquidity has tightened for manufacturers putting pressure on rough prices

  • Industry lenders cautious due to weaker global macro conditions, especially in Europe, and a weakening rupee in India

  • U.S. market is stable and Japanese market has recovered following earthquake, while retail conditions in China and India have weakened

  • Rate of new jewelry store openings in China showing signs of slowing

  • Increasing trend of wealthy tourists from emerging economies buying luxury abroad

Q1 2012

Rough diamond index change: +1.1%

• • U.S. market improving and Japan continues to recover from earthquake in March 2011, but concerns over slowing economic growth in China and ongoing European sovereign debt problems weighing on sentiment

  • Global macro concerns have led to reduced financing available to midstream segment and have made retailers cautious about replenishing inventory

Q4 2011

Rough diamond index change: -12.0%

• • European sovereign debt crisis and weaker global economic sentiment continues weigh on global diamond demand, however young, wealthy, emerging market consumers in Asia and Latin America still supporting longer-term diamond jewelry demand trend

  • A significant increase in production from the Marange fields in Zimbabwe has contributed to a build-up of global rough inventories

Q3 2011

Rough diamond index change: -2.6%

• • An accelerating European sovereign debt crisis and a U.S. credit rating downgrade has impacted global stock markets and eroded consumer confidence which has been felt by the diamond industry

  • Excessive build-up of rough inventories by mid-stream segment has begun to result in downward pressure on prices

Q2 2011

Rough diamond index change: +15.5% **10-year Index high

• • Rough prices up over 30% year-to-date through the end of Q2 as demand for polished continues to outstrip supply as new retail stores in China stock

  • Despite economic uncertainty in U.S. and Europe, manufacturers actively stocking ahead of holiday season

  • Towards the end of quarter the market has begun to show some signs of resistance to additional rough price increases

Q1 2011

Rough diamond index change: +17.7%

• • Demand for rough currently outpacing supply as manufactures aggressively buy stock to cater to new polished demand from Chinese retailers supplying new store openings

  • U.S. consumer market recovery leading to increased demand for polished, further supported by a weaker dollar that has attracted tourism, especially from Asia

  • Secular trend in growing global demand for diamond jewelry led by China, is more than offsetting a subdued Japanese market recovering from earthquake and geopolitical concerns in Middle East and North Africa

Q4 2010

Rough diamond index change: +7.5%

• • Industry-wide shortages of rough and polished as new demand from emerging markets combined with a recovering U.S. economy have elevated prices

  • Global consumer demand for luxury continues to strengthen particularly from a rapidly expanding economy in China and from the Middle Eastern and Russian markets driven by higher energy prices

  • In the U.S. a relatively weak dollar, a strong rebound in the equity markets, and a solid holiday season has contributed to global demand growth for diamond jewelry

Q3 2010

Rough diamond index change: -1.85%

• • Global diamond jewelry market seen improving quarter-over-quarter, but global economy still fragile as tepid growth and unemployment, particularly in the U.S. and Europe, limit demand

  • High-net worth individuals in China and other emerging markets continue to drive new demand for diamond jewelry

  • Some shortages of rough and polished categories seen as industry prepares for optimistic holiday season

Q2 2010

Rough diamond index change: +7.1%

• • Consumer demand for diamond jewelry continues to strengthen globally, particularly from growing number of high-net worth individuals in China as well as Middle East, where higher energy prices are driving wealth

  • U.S. and European markets continue to be impacted by weaker domestic economies, although recovery is underway

  • Industry-wide shortages of rough resulting in some major manufacturers and retailers buying directly from producers, rather than via traditional industry trade channels

  • Potential for incremental Russian supply to be released into market currently held by state's Gokhran which purchased diamond stocks from domestic producers during demand lull in 2008-2009

  • A significant increase in production from Zimbabwe’s Marange fields could fill industry void of lower-quality categories as Argyle production declines

Q1 2010

Rough diamond index change: +7.6%

• • Rough prices have returned to 2008 highs driven by continued diamond jewelry consumer demand growth in China and India, economic recovery in the U.S., and luxury demand in the Middle East and Russia driven by high oil and gas prices

  • Relative shortages of some popular polished categories seen

Q4 2009

Rough diamond index change: +15.8%

• • Rough prices just shy of 2008 highs as demand recovers relatively rapidly following global financial crisis

  • Polished prices, which were impacted less than rough by the global financial crisis, have returned to pre-crisis levels and some categories have even surpassed previous highs

  • Credit availability to mid-stream segment of industry seen improving as lenders respond to returning demand for polished

  • Sustained demand for luxury goods in China and India and renewing interest in U.S. driving demand for diamond jewelry

  • China positioned to overtake Japan as the industry's second largest market

  • U.S. holiday season stronger year-over-year

Q3 2009

Rough diamond index change: +7.6%

• • Shortages seen in some popular polished categories as sustained demand from China and India outpaces reduced rough supply and curtailed manufacturing capacity

  • Russian Gokran inventory seen being released into market without suppressing prices

  • Higher polished prices helping manufactures negotiate better credit terms with lenders

  • Signs of economic recovery in Asia and indications that U.S. and Europe have already hit bottom has improved global sentiment

  • Increasing oil and other commodity prices has boosted Russian and Middle Eastern consumer markets

Q2 2009

Rough diamond index change: +25.5%

• • As of mid-summer, rough prices have rebounded over 25% from multiyear lows hit in Q1 as select demand has returned and supply is tight

  • Some manufacturers seen actively buying rough to rebuilt stocks ahead of holiday season

  • Chinese retail demand has remained impressively resilient through the global financial crisis and U.S. buyers have begun to return to market

  • Rough supply is currently restricted but excess inventory is held by largest producers which will most likely be released in a congruent manner with returning demand

Q1 2009

Rough diamond index change: -14.3% **10-year Index low

• • Rough prices seen recovering slightly from multi-year low in February

  • Global luxury market remains challenged as consumer confidence has been eroded by state of the global economy

  • Major diamond producers, led by De Beers, have strategically reduced supply to market in an effort to restore supply/demand balance

  • Asian demand for polished and first signs of activity from U.S. buyers has motivated some manufacturers to begin restocking, although credit to the mid-stream segment remains highly restricted

Q4 2008

Rough diamond index change: -20.7%

• • The impact of the global economic downturn on the diamond industry has accelerated through Q4, as diamond price volatility has increased and prices are pressured further

  • U.S. and Japanese markets have been hit the hardest while Asia Ex-Japan and the Middle East markets have fared better

  • Credit availability to the mid-stream segment of the industry has declined considerably, destocking of the industry pipeline occurring

  • Polished price declines continue to be less relative to rough but overall sales volumes of polished have been substantially impacted

  • Core engagement-ring-quality diamonds and other bridal goods have suffered the least

Q3 2008

Rough diamond index change: -9.8%

• • Through the middle of 2008 rough prices achieved record prices, however by the end of Q3 the impact of the global economic downturn has weighed on the diamond industry

  • Prices in all rough categories have weakened

  • Polished prices have been less affected than rough as manufactures defend the value of their stocks

  • Industry lenders said to maintain credit availability to manufactures but not fund customers accumulating stocks, thus destocking of pipeline expected

  • Production from two new De Beers mines in Canada add to global production

Q2 2008

Rough diamond index change: +6.5%

• • Expanded global marketplace for diamonds continues to push rough prices to all-time highs

  • More difficult trading conditions for polished seen in U.S. and Japan, however more than offset by continued new demand from BRIC economies, Brazil, Russia, India and China

  • Market cautious that stronger U.S. dollar could result in pricing pressure from non-U.S. markets

  • South African power issues continue to disrupt global diamond production

Q1 2008

Rough diamond index change: +8.9%

• • Strength of emerging markets led by China and India continue to support global market, driving rough prices to all-time highs

  • Developed economies, especially the U.S., showing structural weakness as unsustainable consumer debt driven economic growth in previous years showing signs of catching up

  • Decline in global diamond production primarily due to power shortages at South African mines supportive of rough prices

Q4 2007

Rough diamond index change: +2.4%

• • Rough diamond prices continue to strengthen to all-time highs

  • Diamond demand growth seen shifting from U.S. to economies driven by rapid economic expansion and those benefiting from high commodity prices such as China, India, Russia, and Middle East

  • Concerns of a U.S. recession prompted by signs of a deteriorating housing market and reflected by instability in developed economy equity markets

  • Higher quality polished categories, those preferred by the Eastern World, are seen outperforming lower-quality categories preferred by the U.S.

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This was highlighted in Mining Weekly.

At the time of writing Paul Zimnisky held a long position in Lucara Diamond Corp, Stornoway Diamond Corp, Mountain Province Diamonds Inc, Kennady Diamonds Inc, and a covered-call position in Signet Jewelers Ltd.

Paul Zimnisky is an independent diamond industry analyst and consultant. He can be reached at paul@paulzimnisky.com, and followed on Twitter @paulzimnisky.