North

'Revenge spending' and supply reduction could save diamond industry: analysts

As the world braces for what some predict will be a global recession, discretionary spending could drive the demand for diamonds down even further, and bring the North's resource-dependent economy with it. But diamond analyst Paul Zimnisky says he has hope the industry will rebound by the end of the year.

Industry 'has a history of coming out of difficult circumstances like this stronger,' says analyst

An industry analyst believes diamond prices could rebound as buyers 'revenge spend.' (Stefan Wermuth/Reuters)

The last thing the global diamond market needed as prices finally began to rebound in January after a dismal few years was a global health pandemic.

Health and travel restrictions have forced a number of the world's largest diamond mines to slow production. The Ekati mine in the Northwest Territories suspended operations on March 19, becoming the world's largest producing diamond mine to close because of the pandemic. 

As the world braces for what some predict will be a global recession, discretionary spending could drive the demand for diamonds down even further, and bring the North's resource-dependent economy with it. 

But diamond analyst Paul Zimnisky says he has hope the industry will rebound by the end of the year.

Paul Zimnisky, an independent diamond industry analyst based in New York, says he believes the diamond industry could rebound in November. (submitted by Paul Zimnisky)

'Revenge spending'

Driving Zimnisky's optimism is the idea that as the threat of COVID-19 slowly dissipates, people will spend — and spend a lot. 

"When things start to get back to normal, there's some pent up demand and people go out and buy things that make themselves feel good after what we've been through," Zimnisky says.

"If you look into November, December ... it could actually turn out to be a pretty good holiday season and, you know, people are extra generous which would bode well for diamond demand."

While that may seem counterintuitive as many, including Zimnisky, predict a global recession, that kind of spending is exactly what's been happening in China, as the country began lifting some of its lockdown restrictions late last month.

"I mean there's some evidence of that when you look at the Chinese market. They actually call it 'revenge spending' after people are restricted with shopping and going out. It does kind of create a situation where there is pent up demand," he said.

The Zimnisky Global Rough Diamond Price Index, created by diamond analyst Paul Zimnisky shows a steep decline in diamond prices in the last 52 weeks with a brief rebound in January. (Paul Zimnisky)

What could also help the diamond industry recover in the coming months is the drop in diamond supply as mines like Ekati suspend operations, while others slow production. If supply continues to drop long term, it could help prices increase, Zimnisky says.

But just how much the supply will dip is still being debated. 

Mining analyst Ben Davis with Liberum Capital Ltd. estimates it could drop by 12 per cent. Zimnisky thinks it'll be more like 10 per cent.

Currently, Zimnisky said the confirmed production drops from temporary closures is about three per cent.

Diavik mine

While Zimnisky is optimistic the industry will rebound by the end of the year, what happens between now and then could decide the future of the Diavik diamond mine.

The Diavik Diamond Mine continues to operate in the Northwest Territories. (2015 DDMI Sustainable Development Report )

Two weeks ago, Rio Tinto, which operates the mine, announced that 50 northern workers, roughly five per cent of the Diavik workforce, were being sent home with pay to reduce the risk of the spread of the coronavirus to their home communities. 

About half of Diavik's employees are flown up from southern Canada. Those workers are exempt from some of the travel restrictions put in place by the N.W.T.'s chief public health officer Dr. Kami Kandola. 

But if those travel restrictions were to tighten and Diavik was forced to suspend operations and go into care and maintenance, there is a possibility it could stay shuttered.

Zimnisky says mines nearing the end of their mine life would have to take a very close look at whether it would be worth reopening.

Diavik has an estimated five years of production left.

"There would be a longer-term suspension like a care and maintenance situation ... I think when you start to look at our mines that are approaching the end of mine life, you know, the other way of looking at it might be that there's just not enough resource left to make putting [the mine] on care and maintenance worth it," Zimnisky said.

In an emailed statement from Rio Tinto, a spokesperson did not comment on what Zimnisky said, but emphasized that the mine continues to operate "at capacity," and in line with recommendations and orders of the N.W.T.'s Office of the Chief Public Health Officer.

"Our focus is on the health and safety of our employees and communities, and on keeping our operations running safely, so we can continue to contribute to the Northwest Territories economy," the spokesperson said. 

One thing Zimnisky says is absolutely clear is that the market won't rebound overnight.

"When you look at some of the diamond mining stocks ... some of them are down 50, 60, 70 per cent just over the last month or two. I don't think there's anybody that thinks we're going to snap our fingers and go back to normal," he says. 

"I do think the diamond market will recover. This resilient industry has a history of coming out of difficult circumstances like this stronger."

Clarifications

  • The line about the possibility of Diavik mine being shuttered has been clarified to add more details from the interview.
    Apr 14, 2020 10:48 AM CT

Corrections

  • A previous version of this story incorrectly stated Zimnisky estimated a three per cent drop in diamond supply in the long term. He later clarified he believes it to be closer to 10 per cent, and said the three per cent is the current confirmed drop from temporary closures.
    Apr 14, 2020 10:52 AM CT

Comments

To encourage thoughtful and respectful conversations, first and last names will appear with each submission to CBC/Radio-Canada's online communities (except in children and youth-oriented communities). Pseudonyms will no longer be permitted.

By submitting a comment, you accept that CBC has the right to reproduce and publish that comment in whole or in part, in any manner CBC chooses. Please note that CBC does not endorse the opinions expressed in comments. Comments on this story are moderated according to our Submission Guidelines. Comments are welcome while open. We reserve the right to close comments at any time.