The Diamond Investment Promise: Are Diamonds Finally A Commodity?

"Investment" is the word du jour of the diamond world and investment in diamonds is becoming a common discussion in financial circles. At the same time, a growing number of initiatives are in various stages of formation, Edahn Golan noted in an article released by IDEX Online.
The wide range of formats and ways of going about it reflect that this is a budding endeavor with the initiatives testing new, mostly uncharted, ground.
At the heart of all of the offerings is the expectation that the price of diamonds from one-carat whites to high-end fancies, are set to increase steadily; some will appreciate slowly, beating inflation, while others are expected to appreciate 15 percent annually.
The expectation that the price of diamonds are set to increase stands on two legs – decreasing diamond reserves and increasing demand. The global diamond mining industry produces, on average, about 120-130 million carat of gem and industrial grade diamonds. Of this production, 28 million carats are gem and near gem quality rough diamonds that is fit for the global jewelry industry.
This may seem like a plentiful supply, but diamond production is declining, down from the 168 million carats mined in 2006 and far below the +176 million carats per year mined prior to that. In addition, there is no certainty that the current quality of production is sustainable.
With the exception of ALROSA – the world’s largest producer by volume – all of the other diamond miners are decreasing production.
At the same time, the established diamond miners and many prospective miners are constantly exploring for new diamond sources. Currently there is no known high quality, high-yield rich diamond source that is not mined. Without any new mines coming online, the global diamond industry is facing an increasing shortage of natural diamonds.
It takes some 10 years from the discovery of a new resource to commercial production of a diamond mine. This means that if a new pipe is found today, it won't be before 2022 when its production will be made available to the market.
In practical terms, there is no expectation that global diamond production will increase in the next ten year – at best.
On the other side of the equation is demand. The leading consumer demand – by price point and growth – is bridal jewelry. In India, bridal jewelry is switching from gold to diamond jewelry, in China diamond wedding rings are spreading from the trend setting Shanghai and Beijing to other urban areas and in the U.S. bridal jewelry continues to be a must have.
GDP per capita, a reliable predictor of diamond jewelry demand, is set to grow, mainly in the BRIC countries – Brazil, Russia, India and China. These growing economies are witnessing more people becoming wealthy, and much more joining the middle class. With this new found financial ability comes growing discretionary income, spent on luxury goods.
Aided by continued marketing efforts, this growth is backing the increased demand in diamond jewelry.
Global consumer demand for diamond jewelry is growing and shifting. If in the past more than 50 percent of global diamond jewelry consumptions was in the U.S., today consumers from growing economies are buying diamond jewelry at increasing levels.
By 2015, China and India, together with Hong Kong, Taiwan and the Gulf countries are expected to consume about 40 percent of diamond jewelry globally, rising from the current 31 percent market share.
Demand for diamond jewelry in China and India increased by an estimated 10 percent and 9 percent respectively in 2010 and by another 9 percent and 8 percent in 2011. This year, the forecast is for continued steady growth, the same as in 2011.
Today there are a number of large diamonds miners, Alrosa, BHP Billiton and Rio Tinto, as well as several mid-sized companies such as Petra and Gem Diamonds. All of them market their rough diamonds independently, via tenders, contracted selling agreements and one off sells, resulting in a wide range of prices, leading to a shift from a supply driven market to a demand driven market.
With the growing fragmentation of the mining sector, the availability of transparent pricing and creation of a trading platform, these barriers are being removed, creating new opportunities for the financial sector to invest in diamonds.