A bright future: investing in diamonds

After plummeting prices following the global financial crisis, historically high levels in 2010 and 2011, a suffering market for rough and polished diamonds between 2011 and 2012 and finally an overall steadying out in 2013, the diamond market has had its share of ups and downs. But experts believe the future for diamonds is positive, with demand increasing and predictions of a supply slump.


Diamonds

The diamond market has been on something of a rocky road since the global financial crisis hit, with prices plummeting in 2008 and 2009 only to pick themselves up incredibly quickly to reach historically high levels in 2010 and 2011. Then, from 2011 to 2012, retail sales of diamond jewellery grew 1.8%, but the upstream and middle-market segments suffered as overall prices for both rough and polished diamonds declined by 14% and 13% respectively, according to 'The Global Diamond Report 2013', put together by global management consulting firm Bain & Company (Bain) and the Antwerp World Diamond Centre (AWDC).

Enter 2013 and things were starting to steady out. Overall growth moved back into line with long-term trends; rough diamond prices were higher than they were before the crisis, having increased at a compound annual rate of 13% since 2008, the report stated. The outlook became much more positive - and it continues to improve.

"Antwerp ended 2013 on a high note with a total value of traded diamonds of no less than $55bn, compared to $51.9bn in 2012 and very close to the record of $56.6bn in 2011. 2013 marks the second best year ever for the Antwerp diamond industry," says AWDC spokesperson Margaux Donckier. "2014 also had a good start."



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And things are only going to get better, with demand for diamonds fast on the up and a predicted supply slump from around 2018 onwards. The latter is in contrast to the last three years, during which, according to Bain and AWDC, overall diamond reserves have held steady at approximately 2.3 billion carats.

China and India fuel growing demand

Soaring diamond demand, which Bain and AWDC predict will reach approximately $26bn in 2023, growing at a compound annual rate of 5.1%, is largely going to be fuelled by the growing middle class in China and India - and their newfound penchant for diamond engagement rings.

"There is a growing interest in buying diamonds for weddings in China," confirms diamond analyst Edahn Golan. "This used to happen only in the big cities like Beijing and Shanghai, but now it's very common. And as China continues to become more and more urban, you'll see more of this."

In India too, diamonds are growing in popularity, albeit not quite as quickly, and the world's biggest diamond producer De Beers believes that the new Indian Prime Minister Narendra Modi, a champion of the diamond industry, will only encourage this further.
"India is the good news versus last year," De Beers chief executive officer Philippe Mellier said in July. "It is clearly starting to grow again. The election of Mr Modi is clearly changing the paradigm there. We all believe he is going to support the industry."
As Donckier summarises: "As long as both the Chinese and Indian economy remain strong, the future looks bright."

Supply shortage inevitable

Combine this with the ever-present demand from the US - the country imported nearly £23bn worth of polished diamonds in 2013, up more than 16% from 2012, according to market research firm Rapaport - and the dearth of new diamond discoveries that have been made in recent years, along with the fact that many existing mines will soon be depleted, and investors really have something to look forward to.

"Soaring diamond demand, which Bain and AWDC predict will reach approximately $26bn in 2023, is largely going to be fuelled by the growing middle class in China and India."

The price hikes aren't set to materialise quite yet, but supply is on the up, with Bain and AWDC predicting that rough diamond production will see moderate growth in the next four years, peaking at 169 million carats in 2018, below the pre-crisis level of 177 million carats in 2005.

This is due to the many new mines set to come online during that period, including Gahcho Kue in Canada, developed by Mountain Province Diamonds and De Beers and expected to produce around 4.5 million carats annually for 11 years, and Rio Tinto's Bunder mine in central India, projected to yield up to 3 million carats per year when it comes fully online in 2016 or 2017, potential delays notwithstanding.

Of course, in the mining sector, timings are never certain. "We know that for the next few years there will be new mines coming online, but any numbers people offer are always going to be an estimate; there are always going to be delays," Golan notes. "That said, though, there is going to be a decline at some point and obviously the simple math means that when there's rising demand and a decline in supply, prices will go up."

For Bain and AWDC, the supply peak will be in 2018, with a decline thereafter, as existing mines become depleted and no major new deposits come online.

Synthetic diamonds: just a niche

Of course, several other factors come into play when making predictions about the future of the industry, not least the growing prominence of synthetic diamonds. Will these lab-made stones, which have been making waves across the industry in recent years, with many reports surfacing about synthetic diamonds being marketed as natural, really start to pose a threat to their natural counterparts?

Remarks Edahn: "It's a good question because no one knows for sure, but my personal assessment is that they are going to have their own niche, and they will be established as a very separate product. There's going to be a difference in price tag, particularly because wherever there is a technological aspect to something, cost comes down. This will give diamonds an excuse to be a more expensive item.



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"If synthetic diamonds do harm natural diamonds at all, it will be at the low end of the market. At the higher end they will play much less of a role - they'll be a niche, they'll be popular with customers whose world view fits with synthetic diamonds."

To invest or not to invest?

So is it worth waiting to invest? Golan and Donckier think not, commenting that diamonds are already a stable store of value. "We see that more and more people, especially in the Far East, are interested in buying diamonds as an investment, and rightfully so," notes Donckier.

"Obviously diamonds are in a class apart as 'commodity'. You have to take into account that virtually each diamond is unique, defined by the four C's - carat, cut, clarity, colour. But, statistics even show that, over the past 25 years, diamond prices have increased, slowly but steadily. They are easily authenticated and long lasting. Last but not least, they are becoming scarcer as we speak."

Moreover, there may soon be new ways to place your bet on diamonds. "In China, diamonds are well on their way to claim their place alongside other precious metals, and the rest of the world will probably follow," Donckier predicts.

In fact, it already is; in March 2013, a group of hedge fund traders launched the Los Angeles-based Investment Diamond Exchange, where investors can buy physical diamonds (with no intention of making them into jewellery). And in September, a Chicago-based company called GemShares announced a partnership with the Nasdaq OMX Group to develop the GemShares Global Investment Grade Standard Diamond Basket Index, which will provide a standardised pricing mechanism for valuing a diamond basket that could be used for the development of financial products.

"Over the past years, we can see that the idea to use diamonds as an investment commodity, for example through diamond backed exchange trade funds is gaining popularity. I believe it is a matter of time before those initiatives will be fully operational," Donckier concludes.

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