Diamonds are a Girl’s Best Friend… Apparently in China Too!

In the midst of a multi-year bull market in natural resource companies, with mining stocks performing very well, apparently one group has been somewhat left behind.

“Diamond producers' shares have trailed mining companies since early 2006 as an abundance of gemstones weighed on prices” according to a recent article in Bloomberg. However the outlook for these firms going forward is glittering again, thanks to robust demand from… you guessed it: China!

Diamond supplies have dropped 75% since 2000, according to National Bank Financial Inc., of Canada; a direct result of too little new diamond production coming online. In fact, “no new diamond mines are scheduled to start production in the next three to five years.”

While Supplies Slump, Demand Soars

Set against this backdrop of falling stockpiles, demand for precious gems is surging from upwardly mobile emerging economies in China and India. These two rapidly growing nations are the fastest growing markets for diamonds right now, thanks to annual incomes that are rising “as mush as 18 percent” in China and India.

As is the case in so many other commodity markets right now, this growing supply/demand imbalance is leading to higher prices. Diamond prices surged 8.4% in the first-half of this year alone – that’s four-times faster than the same time a year ago.

Evy Hambro, who manages the world's No. 1 metals fund, the BlackRock World Mining Fund, is quoted as saying: “The supply and demand fundamentals are very supportive for prices.'' Hambro also notes that this should be a longer-term issue; “We see dwindling stocks and a shortage of new mine development.”

Diamond Prices Still Have Some Catching-Up to Do

As a result of this imbalance, prices are bound to keep moving higher. Anglo American Plc, which owns almost half of De Beers, the world’s largest diamond producer, expects demand for the precious stones to grow as much as 5% per year.

“Diamond stocks trailed other commodity shares even before the effects of the equity market rout triggered by a global credit crunch,” according to the article; but surging demand from emerging markets is causing diamond prices to catch up fast.  In fact, “China's diamond imports rose more than threefold in the first half,” and in India, diamond imports “increased 14 percent in the second quarter” alone.

Here’s another factor that should help keep diamond prices high: the industry enjoys a cartel-like status, since just a few major mining companies dominate global diamond production. Rio Tinto Group, Anglo American, BHP Billiton, and Russia's closely held ZAO Alrosa, together control 75% of diamond output worldwide.

Right now, that’s good company to be, whether you’re a “material girl” – or an investor looking for the next undervalued commodity play!