Paul Zimnisky Talks Diamond Supply, Demand, Profits and Marketing

04/03/2016 14:57

In an exclusive interview with Rough & Polished, analyst Paul Zimnisky discusses a wide range of issues, from diamond production volume and prices to oversupply and mid-stream purchasing trends, profit margins, consumer demand and synthetic diamonds. A few key takeaways:

On how De Beers' and Alrosa's inventory overstock will affect the miners' financial performance: "It will of course affect cash flow. Everything always comes back to demand, which is what will ultimately drive the industry and the participant companies longer term. Supply reduction and cost cutting can shore up financials in the shorter-run, but demand is the driver of longer-term earnings growth. On a positive note, the diamond industry still seems to be positioned relatively better than other segments of the mining industry. Diamond demand is driven by luxury consumption, whereas most of the other minerals and metals are driven by capital investment. Thus, a transition like the one China is currently going through should benefit a resource like diamonds longer-term, relative to some of these other commodities."

On investor's demand for profits impacting the industry: "The industry has changed in that De Beers is now being run more like a public mining company now that it’s a subsidiary of Anglo, and ALROSA as well, to a similar extent, since the company IPO'ed a minority stake a few years back. These companies are now more focused on creating shareholder value in the shorter run, whereas in the past they had the operating liberty and flexibility of focusing on the longer-run at the expense of shorter-run. Investors want profits now; they tend to be more concerned with generating as much money as possible today, rather than 5 years from today. The up-stream industry participants, more so than ever before, are primarily focused on their own business much more so than coordinating with the industry as a whole to ensure the overall health of the industry. Over time, this will probably result in a more efficient industry, meaning consolidation in the mid-stream and down-stream segments, for instance, at the expense of smaller independents."

On synthetic diamonds and marketing: "I think it’s a niche market, at least until prices come down. Right now, based on my research, prices are only marginally lower than the natural equivalent ... it will take significantly lower prices before lab-grown's take meaningful market share away from the natural market, at least in the short-to-mid-term timeframe. [It depends on] how fast the technology advances the economics of production. In addition, successful marketing, branding, and distribution is necessary; as is the case with all new product in the jewelry industry." The same is true of natural diamonds. "Diamond demand would be nowhere near where it is today if it were not for De Beers’ marketing campaigns last century, and I don't think the current level of demand can be sustained for future generations without new successful campaigns. Bottom line, the success of luxury discretionary items, like diamonds, are heavily dependent on marketing and branding."