VANCOUVER (miningweekly.com) – First-quarter demand for rough diamonds has increased over the preceding three-month period, and also relative to a year earlier, as a comparatively mediocre Christmas season 2016 was offset by strong 2017 Chinese New Year sales that have driven seasonal restocking demand.
Most, but not all, Indian cutters have also started to show signs of recovery after the initial shock of the demonetisation in the country last year, independent diamond analyst Paul Zimnisky said in his latest market commentary.
According to the New York-based analyst, most miners last year liquidated excess rough inventories which they accumulated in 2015, and have since ramped up production into 2017, resuming more normal output levels similar to that of three years ago.
“Demand growth this year is likely to come from a post-election US market, where employment is stable and the stock market is at an all-time-high, driving positive sentiment that should translate into discretionary spending,” the analyst said, noting that the US is the largest diamond jewellery market in the world, representing 45% of global demand.
China, the world’s second largest jewellery market, at 16% of global demand, should be driven by continued government stimulus and an ever-expanding middle-class consumer base. India, representing 8% of the market, is forecast to show improvement year-on-year, as domestic demand for jewellery returns as the demonetisation impact is digested, especially in the second half of the year.
Near-to-medium term risks to the industry are primarily tied to macro factors in the industry’s most important markets. For instance: the US economy struggling to absorb tighter monetary policy; Chinese economic deleveraging; a longer-than-expected recovery in the Indian market post-demonetisation; signs of further disintegration of the eurozone; and protectionist pressure on global trade, the analyst cautioned.
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.
In a statement to Mining Weekly Online, Zimnisky noted that the Zimnisky Rough Diamond Index is up 1.27% year to date (through the first week of March). The internal polished diamond index is down 1.3%.
"Rough has been driven by a 4% to 5% price increase by De Beers, in January, in diamond sizes greater-than 0.75 ct. In February, there were small single-digit-percentage increases in diamonds of 2 ct to 4 ct by both De Beers and Alrosa. Also, there are indications of demand picking up in smaller, lower-quality goods, the stones that have been affected by the demonetisation – parcels are now selling, but no price increases yet," he said.
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 normalise, India’s surprise demonetisation in November threw another blow at the recovering industry. Over 90% of diamonds, by volume, are cut in India, a business that is heavily reliant on cash transactions. India has also become the third largest end-consumer of diamond jewellery in the world, so the restriction also impacted domestic jewellery consumption as most Indian consumers are accustomed to cash purchases, Zimnisky stated.
The impact has primarily been on lower-quality rough diamonds, those that sell for less than $100/ct, produced at mines like Rio Tinto’s Argyle, Dominion’s Ekati, Petra’s Finsch, Alrosa’s Aikhal, and alluvial operations around the world.
“Demand for these stones is 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 jewellery consumers,” he explained.
The larger manufacturers have been much less affected by the demonetisation, 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 businesses 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 rise in demand for lower priced rough, as these manufacturers bid to restock, competing to fill a pending shortage of smaller, lower-quality polished in the market that will be felt around the second quarter, the analyst noted.