Note to self — check insurance on the rings. And remind Isabel to do the same. Diamond prices are moving up with the rest of the minerals. Not quite as spectacularly as gold, but they are in there! Yet another haven from inflation and recession fears as the Fed axes a further half per cent off interest rates! Must check the miners, too.
Last year saw some diamond records. Admittedly, at the end of the market neither Isabel nor I can afford. At auction the hammer knocked down an all time high of $1.32m a carat. This was on a fancy blue diamond that went for $7.84m. That many noughts on the price have attracted the interest of the mega-art dealers, such as Sotheby’s. And with good reason. Ex-wunderkind Damien Hirst decided diamond was THE new art material. His piece "For the Love of God" - a real skull studded with 8,601 diamonds — went for £50m.
Higher prices are spreading across the industry. De Beers has already upped prices this year by 3.5%. When the world’s premier diamond group does that, the rest of the industry knows what it can do.
Everyone’s queuing up to put out forecasts. PolishedPrices, world expert on the small stuff, is going for a "reasonably strong year" with a 7% rise. Last year the rise on its index for the 1 and 2 carat gems was 4.2%. World Federation of Diamond Bourses president, Ernie Blom, wouldn’t go as far as a figure. But "we should see very strong prices" were his words. Consultants Allan Hochreiter are suggesting a 5% rise.
Diamonds are in short supply - for the first time in 25 years production is falling. Australia’s could be down by 25%, Russia is struggling and Africa’s problems range from power cuts to tribal warfare.
Stocks are nearly gone
Last year’s Perth World Diamond Conference heralded the news that mining output would be down 10% by 2010. Against that, demand was forecast to rise. This year’s shortfall was put at $3bn. That figure could rise to $6bn by 2010.
With these large supply shortfall projections, prices for rough uncut diamonds are expected to rise significantly by 2008. Nerves are being further stretched as De Beers changes its selling strategy. It’s drastically scaled back its operations. Lack of stock is the reason — it is "nearly all" gone. Last year its supplies to the market were down around 8% at $6bn.
De Beers is no longer looking after the market. It is going to look after itself, and its own profits. Plus the last South African power cuts forced it to close mines for days. So, all the market is left desperate to stock up. Reports from the bourses described conditions as "red hot" last week.
This is adding huge uncertainties to an already jumpy market. Diamonds have become unpredictable — volatile like all the other investment markets. For years prices were controlled, indeed guaranteed, by De Beers. Those days have gone. So the price graphs look positively panicky. Which is hardly surprising - diamonds are a "want" not a "need". They are thus exposed to the availability of money.
Reliance on Indian consumers
As the US economy took a turn for the worse, jewellery retailers there saw sales tail off. Fund money moved into gold. Zale Corporation reported flat sales in 2007 and warns of the same in 2008. Finlay reported loses. Signet Group warned of a weak Christmas. Harry Winston reported a fall in profits even as it listed on the New York Stock Exchange. But the CEO of Alpha Omega had the right idea when his troubled company filed for Chapter 11 protection. He left for India!
Sounds terrible! The US is the biggest market — 55%. How did prices rise? Online US sales rose, for a start. Some retailers were talking of 20% plus.
India was buying heavily for most of the year. There is now heavy reliance on this market. The country’s enormous number of consumers like sparklers. Imports of polished stones rose by a whopping 119% through November. The jewellery trade cooled off at the year end — those soaring gold prices scared off buyers for a bit.
Asia, however, rarely stays out of the jewellery market for long. They’ll be back!
China is forecasting that its polished diamond trade was worth $900m in 2007. This is a rise of 50%. Already domestic jewellery sales are up by 39%.
The picture for the miners is mixed. Diamonds have been a big-company game — De Beers, BHP Billiton, Rio Tinto, and Alrosa. The arrival on the scene of Russia’s Alrosa and De Beer’s new strategy is changing this. Opportunities are there and many small companies are trying their chances. But it takes years to find and produce diamonds.
Producers — the best investment bet
Producers are best for investors. Explorers may have trouble in this new cash-strapped world. Those looking for second and third-round funding could certainly have problems, according to stockbroker Hoodless Brennan’s mining consultant David Hargreaves. There are too many diamond miners out there! Or, at least too many small "wannabes" among the world’s 2,000 quoted mines.
Thus "jam tomorrow" diamonds may be, but that does not mean investors can buy just any explorer. Most of the recent stellar share price performances have been for the big diversified mining groups. Tempting though forecast leverage on little ones may look, best to pause just for a moment. That said, those minnows in joint ventures with the world’s major miners, such as BHP Billiton or De Beers, probably have a chance.
Minors rather than minnows are preferred. Petra Diamonds could be interesting. Its sales are soaring, although no profits have been reported yet. Petra said in a trading statement this week that that revenue for the six months ending December 2007 rose 286% to $31.7m. It is just buying some famous mines off De Beers. Trans Hex is just moving into profit, as is Firestone.
The fact that none of these companies share prices have followed the price of diamonds into the sky tell us one thing: it’s still early days.
So, keep digging.
Erin and Isabel.
