Like other luxury goods, diamonds have become a symbol of prosperity to the newly wealthy middle classes, says Tony Reading, an analyst at www.fool.co.uk, a British investment portal.
If you want to invest in something where the economics are more predictable, you could do a lot worse than diamonds. Now I'm not advocating that you catch the ferry to Antwerp and come back with a pocket full of shiny rocks. That's beyond the scope of this article and way beyond my competence and knowledge. But diamond miners can be a proxy for the gems themselves.
There is a fundamental mismatch between supply and demand for gem quality diamonds, which account for about 80% of the value of diamond market.
On the supply side, there have been no major new discoveries for 20 years, and several of the 25 or so substantial diamond mines in the world are now past peak production. Russia's Alrosa is believed to have a substantial stockpile - maybe 10% of annual global demand - and Zimbabwe has under-exploited mines which could increase production if the political and economic circumstances changed. But apart from these sources the supply of new diamonds is expected to remain stable over the next ten years.
Demand, on the other hand, is rising. It collapsed in 2009 as a dip in retail sales was magnified by destocking throughout the supply chain. As a consequence production was cut back, by some 25%.
The reverse is now happening. The US market, which accounts for about 40% of the global total, grew by 7% last year. But the real growth in demand, as with many limited resources, comes from India and China, which grew by 37% and 26% last year.
It's a familiar story, but a convincing one. Like other luxury goods, diamonds have become a symbol of prosperity to the newly wealthy middle classes. De Beers estimates that 4 out of 10 new brides in the major Chinese cities of Beijing, Shanghai and Guangzhou get diamond engagement rings, an unheard-of phenomenon 20 years ago. If that spreads across a country where 11 million couple marry each year, the potential is enormous.
Prices have reacted accordingly. Rough diamond prices rose by about 25% in 2010 and have continued to rise this year, though they may be vulnerable to some short term weakness as production is cranked up.
And it isn't (yet) possible to invest in the two big players. DeBeers, which produces about 36% of diamonds measured by value, is privately owned though there are suggestions it might float. Shares in the Russian state owned Alrosa, which produces 24%, are quoted on the Russian Trading System and it is slated to be privatised by 2017. It's strictly for the adventurous investor.
For the rest of us there are several listed independent diamond miners. The largest is Petra Diamonds (LSE: PDL). Also interesting is the second-largest independent Gem Diamonds (LSE: GEMD). Other companies, with mines at various stages of development, include Firestone (LSE: FDI), Namakwa (LSE: NAD), Paragon (LSE: PRG), Diamondcorp (LSE: DCP), Stellar (LSE: STEL) and Botswana Diamonds (LSE: BOD). It's a sector that is well worth a look.
