Diamonds: why it’s a good time to invest

This week the global gem-mining giant De Beers Group revealed that the world’s diamond supplies are running out.  Despite recent economic hardships, the choice to invest in diamonds now may be a wise one.

According to the mining company, diamond mines are getting scarce and will eventually become history.  De Beers has decided to reduce its production in order to extend the life of the mines.

The depletion in diamond mines will have a direct impact on the prices of stones.  Diamond analyst at Royal Bank of Canada Capital Markets, Des Kilalea, explained that owing to the moderated output, diamond prices could rise by at least 5 percent every year for the next five years.

De Beers is responsible for 40 percent of global diamond sales, but this figure is now likely to decline.  The company had an astonishing record of producing 48 million carats per annum, but will now reduce their diamond production to 40 million in 2011.

Managing Director of De Beers, Gareth Penny, anticipates that new and growing Asian demand will accelerate the depletion of the world’s existing diamond mines.

Penny asked, “Do we want to ramp production back up to 48m carats, given the lack of availability in the future?”

“Diamonds are a treasure of nature that should be properly protected, because there will be less to sell. The reality is that supply cannot keep up, and that will become very accentuated over the next 15 years.”

So what caused this change in direction on the part of De Beers?  Well the diamond production company believes that over the long term, the supply of diamonds is simply not keeping up with the demand for them and it’s causing the mines to produce fewer on a yearly basis.  This in turn has them believing that these mines will become exhausted and with no other new mines having emerged around the world, there will be no more diamonds for the consumers.   Less mining deposits and high demand from Asia are at the route of the change.

China’s affluent urban dwellers have recently been making diamonds one of their favourite purchases, so much so that the country’s share of the diamond jewellery market should double to 16 percent by 2016.  "Two decades ago in China there was no diamond acquisition culture," said Penny in an official statement. "But, today in Beijing, Shanghai, and Guangzhou alone 40% of brides are getting diamond engagement rings. Same is the case with consumers in India." India and Hong Kong’s jewellery market is also fast recovering and demanding more.

The big problem is that no new significant diamond deposits have been discovered by the industry in the last two decades.   Except for the Marange diamond field in Zimbabwe, nothing has been found to compare with the two biggest mines in Africa, owned by De Beers, nor the largest Russian mines, owned by producer Alrosa.

However, some believe that De Beers is doing this for reasons other than the preservation of diamond mines.  Some speculate it is an attempt to keep the company rebounding from what has been a down period for them due to the economic recession.   Last year, De Beers in fact reported losses, which is something uncommon for them.  If this new plan is put into action it is estimated that rough diamond prices could rise by at least 5 percent per year for the next five years.  Obviously this would create a significant price increase that would fall heavily on the consumer.

This move from privately-held De Beers is also being considered as a precursor to the group relisting, as this will improve its production profile over the long term.  Tel-Aviv diamond consultant, Chaim Even-Zohar suggested just this: “If the De Beers shareholders are planning to go public next year, this might be timed with the beginning of the renewed growth of consumer demand.”

“We are not seeking to manipulate anything,” Penny said. “But there is a natural supply-demand imbalance that is leading to certain realities.”

Whether De Beers is being clever and cautious to protect itself from post-recession losses, or the depletion in diamond production is eventually inevitable, prices for the precious gems are most likely set to rise which means that now is a sensible time to make an investment.