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Message: The perfect storm that's going to make diamonds more expensive
Diamonds may be forever but their supply certainly isn't. What happens when millions of new potential customers enter the diamond market while some of the world's biggest mines close shop?
If you're Paul Zimnisky, profit.
In 2012 Zimnisky launched GEMS, the world's first ETF to exclusively invest in the diamond and gemstone industry. The CEO of PureFunds is convinced that we're about to see a diamond supply crunch and demand boost as the rapidly-growing Asian middle classes enter the market and few new mining projects step in to replace expiring ones.
Citing a report by Bain & Co., Zimnisky says global demand is forecasted to grow by 5.1% on an annual basis over the next ten years while supply lags with only 2% growth.
The key lies in the East where for decades the global diamond industry was missing millions of customers in the form of Chinese brides getting married without diamond rings. Now, as the country adopts some Western traditions, more and more newly-weds are tying the knot with expensive rocks – a welcome phenomenon for the diamond industry whose "bread and butter" depends on these gem-quality stones, Zimnisky says.
According to a 2012 report by Bain & Co, China and India are expected to lead a 60% surge in diamond consumption by the end of this decade. The two countries are the world's second and third largest diamond consumers respectively – the US still holds the number one spot.
Zimnisky also notes that it's not just jewellery that's fuelling the industry.
"Investment demand is coming from high-net-worth individuals primarily in Asia."
But investment only represents about 1% of total diamond demand – compared to 40% for gold – "so there is definitely room for that number to grow," says Zimnisky.
Some businesses are taking note. Two US companies, Index IQ and GemShares, have filed initial paperwork to set up physically backed diamond ETFs.
As for supply, there are few options when it comes to replacing existing production.
"Globally there are only six projects in development estimated to eventually produce in excess of 1 million carats a year," says Zimnisky. "So, there is not a lot of new production coming online in the foreseeable future, and quite a few existing mines are approaching depletion levels."
Gahcho Kue, the largest of the bunch, is expected to begin production in 2015 putting out 5 million carats per year. Other upcoming mines include Russia's Botuobinskaya mine and Quebec's Renard project.
Supply is relatively easy to predict because it takes about 10 years to take a project from discovery to production, explains Zimnisky. And while there are few new projects, the exploration scene looks even more barren.
"At the moment there is little indication that the future supply picture is going to change anytime soon, especially given that the pure grassroots diamond exploration business is virtually non-existent today," says Zimnisky. "North Arrow Minerals (TSX-V:NAR) is one of the only public companies solely focused on diamond exploration."
About Paul Zimnisky: Paul currently creates and develops new exchange-traded products as CEO of PureFunds. This past November, PureFunds launched 3 innovative ETFs, including the worlds first ETF to exclusively invest in the diamond and gemstone industry, traded on the NYSE Arca under the symbol GEMS. Prior to PureFunds, Paul worked as a buy-side equity analyst focused on the metals and mining space, and as an ETF arbitrage trader. Paul has a bachelor’s degree in finance from the University of Maryland’s Robert H. Smith School of Business.
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