For the first time in 25 years, diamond output is declining and that may make the world’s most coveted stones a better investment than copper, nickel and zinc, this year’s top-selling commodities.
Production from diamond mines worldwide is likely to fall 2% by 2015, says James Picton, a diamond analyst at WH Ireland who has been following the industry for 35 years.
Production has increased about 9% in the past five years, according to the New York-based World Diamond Council, as mining firms hurried to find deposits to meet soaring demand.
A rally in prices will fuel earnings for producers African Diamonds and Petra Diamond, according to Merrill Lynch and JPMorgan Chase. The drop in production comes as purchases of the stones rise, helped by the booming economies of China and India.
China alone doubled jewellery purchases since 2001 and may buy 20% more this year, according to Diamond Forecast, a London-based research firm.
Diamonds have “the best fundamentals”, said Evy Hambro, who manages the $6,6bn World Mining Fund in London for Merrill Lynch. “The gap between supply and demand is much bigger relative to other commodities.”
Rough, or uncut, diamonds do not trade on commodity exchanges. Instead, Johannesburg-based De Beers, which sells 60% of the world’s uncut gems, holds 10 sales a year, known as sights, to a select group of customers called sight-holders from countries known for diamond cutting, including Belgium and Israel.
That leaves shares of diamond producers as the easiest way to invest in the gems.
Hambro, with 1,5% of his assets in diamond firms, said he would buy shares of Germiston-based Gem Diamond Mining, which goes public this year, and Toronto-based Aber Diamond.
Ian Henderson, who manages $2,5bn in natural-resource assets for JPMorgan in London, said he had increased his diamond-share holdings to 4% from 1% in the past year.
“I am very positive about diamonds, given the overall supply-demand situation,” said Henderson. “Of the 170 diamond companies out there, only 25 are actually producing.”
One of those is Dublin-based African Diamonds, whose shares almost tripled this year. Another is Sierra Leone Diamond, a UK-based company operating in west Africa, whose stock has also tripled. Shares of Petra Diamonds, a Jersey, UK-based explorer in Angola, SA and Botswana, have risen 52%.
By contrast, the Bloomberg world mining index of 48 companies, including Norilsk Nickel, the world’s number one nickel producer, is up 21%.
“There are no big mines out there in the foreseeable future,” said John Teeling, chairman of African Diamonds, which made its first and only diamond-mine discovery two years ago in Botswana. “We’d be very lucky to find a second.”
Declining production is a boon for retailers. Consumers bought $70bn of diamonds worldwide last year, Picton said.
Retailers including De Beers and Tiffany aim to increase that figure this year with new stores from Wall Street to Beijing. De Beers plans to open 20 new jewellery stores this year and next with Paris-based LVMH Moet Hennessy Louis Vuitton.
“There’s something about diamonds that’s completely seductive,” said Stephen Webster, who designed the wedding rings for singers Madonna, Pink and Christina Aguilera.
The value of rough diamonds is likely to increase 30% in the next six years, says Picton at Manchester, England-based WH Ireland. His research shows that diamonds have provided better returns than gold since 1948.
Diamonds, the hardest substance in the world, were formed in primeval carbon rock structures known as kimberlites at least 150km underground.
Volcanic activity brought the gems closer to the surface, and the first were found in the river beds of India’s Golconda region.
About 7000 kimberlites have been discovered but only 15% bear diamonds.Since the first were discovered more than 2000 years ago in India, the world has produced 380 tons of diamonds.
The average value of the 114-million carats of diamonds sold worldwide each year is little more than $7bn, according to the World Diamond Council.
Danielle Rossingh and Saijel Kishan, Bloomberg