Diamond industry analyst and author of the Zimnisky Global Rough Diamond Price Index, Paul Zimnisky, takes us on, "A Trip Through the Diamond Industry in March 2017." If there is one trip you make this weekend, we recommend this one.
Focusing primarily on major rough diamond producers, Zimnisky goes in-depth to explain the story of the rough diamond industry's return to normalcy and stability during 2016 and its strong start to 2017: "Last year, most miners liquidated excess rough inventories which they accumulated in 2015, and have since ramped-up production into 2017, resuming more normal pre-indigestion output levels of three years ago."
Diamond demand should also be solid in the top three consuming countries - the U.S., China and now India, particularly as the latter (hopefully) moves beyond it post-demonitization crisis - so that, "Near-to-medium term risks to the industry are primarily tied to macro factors in the industry’s most important markets." Year-to-date, rough diamond prices are up 0.9%, and polished prices are down 4.1%. In full-year 2016, rough and polished were both up, 13.2% and 2.1%, respectively.
Zimnisky's overview provides a wealth of information; here are a few interesting takeaways (quotes from article):
Upstream: The miners
- In 2016, De Beers produced 27.3M carats, which was a 5% decrease, compared to the 28.7M carats produced in 2015. The production decrease in 2016 was part of a strategy to reduce global diamond supply and allow the supply/demand balance to normalize following an industry-wide diamond stock indigestion which accumulated primarily in 2015. The supply curtailment worked; a pickup in demand in 2016 flushed the excess supply held by the manufacturers and retailers, and it also allowed De Beers to sell excess rough inventory, primarily of smaller and lower-quality diamonds, in the $60-80/ct range.
- ALROSA produced 37.2M carats in 2016, eclipsing De Beers on a production volume basis by 36% (however, ALROSA’s diamonds are typically worth about 50% less than De Beers’). Despite the big number, ALROSA’s production was down 2% compared to 2015, as the company pulled back production at more flexible alluvial operations in an effort to strategically reduce global diamond supply along with De Beers following the indigestion from 2015. The company’s production capacity is approximately 41M carat, so the company is expected to produce at 91% of capacity in 2017.
- Rio’s current official plans are to keep Argyle open until 2021, however the company took a $241M impairment charge on the mine last year. The impairment could be an indication that Rio may not proceed with financing the second stage of underground block cave development at the mine, which would mean only about two more years production ... In December, Rio’s CEO Jean-Sebastien Jacques said on Bloomberg TV that diamonds are a priority area of growth for the company. But, given the company’s uncertain plans with Argyle, the gifting away of its only diamond development asset, the Bunder project in India, last month, and the selling of its 78% stake in Zimbabwe producing asset, Murowa, in 2015, Rio’s longer-term diamond plans are quite unclear.
- When Argyle closes, Rio’s only remaining diamond asset would be its 60% of Diavik. Making an acquisition to acquire more producing assets or selling its remaining asset and exiting diamonds all together seems more likely. Rio’s 40% partner in Diavik and majority owner of Northwest Territory neighboring Ekati mine, Dominion Diamond, may be an attractive acquisition target for Rio. Expansion projects at both Diavik and Eakti are planned to extend mine lives to 2023 and 2034, respectively.
Zimnisky also provides updates on Petra Diamonds, Lucara Diamond Corp., Gem Diamonds, Endiama, Zimbabwe Consolidated Diamond Company and Synthetics: "Most synthetics are being sold directly from the manufactures, or on 'memo', or consignment, at jewelers. The lack of motivation for jewelers (selling on consignment) to push product is limiting product awareness, and new customers opportunities. The current environment is indicative of the significant investment in branding, advertising, and distribution necessary for synthetics to effectively penetrate the jewelry industry."
Midstream: The manufacturers
Early-2016 diamond manufacturer restocking demand, after a stronger than expected 2015 holiday season, combined with De Beers' and ALROSA's production curtailment, alleviated most of the industry-wide inventory indigestion by the second half of 2016.
However, just as diamond supply/demand dynamics were beginning to normalize, India’s surprise demonetization in November threw another blow at the already recovering industry. The implication has primarily been felt on lower-quality rough diamonds, those that sell for less than $100/ct. Demand for these stones are typically driven by the hundreds of small, independent, cash-reliant Indian manufactures, which buy on the secondary market; a lot of stones in this category eventually end up being purchased domestically by Indian jewelry consumers.
The larger manufacturers have been much less affected by the demonetization, as they have a global presence, more structured businesses, adhere to more formal accounting measures, and are not reliant on cash for their Indian business. Most of the smaller and medium sized Indian business that will survive are expected to have integrated more-transparent, digital payment processes by the second half of the year. The result will be a pickup in demand for lower priced rough, as the these manufacturers bid to restock, competing to fill a pending shortage of smaller, lower-quality polished in the market that will be felt around Q2 2017.
Downstream: The retailers
- Tiffany & Co.'s full year 2016 results from Tiffany will likely show net sales and SSS (same-store-sales) down low-single digits. The company’s largest market, the U.S., representing 40% of business, was challenged by a stronger dollar, which had a negative impact on tourism spending, particularly impacting Chinese and European travelers to the U.S. Japan, representing 18% of Tiffany’s business, was the company’s best performing region on a SSS basis through November 2016. The company recently noted strength in its fashion jewelry products, which is typically lower priced “non-fine” jewelry.
- Signet Jewelers' fiscal Q4, which runs from November through January, and typically accounts for half of the company’s annual profit, showed a SSS decline of 5% through mid-January [we have since learned their Q4 ended up -4.5%]. Similar to Tiffany, Signet recently noted strength in lower-priced fashion jewelry lines, but also noted strength in branded diamond jewelry.
- Greater China proxy, Chow Tai Fook (HK: 1929), showed positive same store sales growth in Q4 2016 for the first time in 6 quarters.
Source: The Diamond Loupe