Friday, May 16, 2008

Diamond market strong despite external pressures

To paraphrase a former director of the Diamond Trading Company (the wing of DeBeers responsible for selling rough diamonds): The demand for diamonds is driven by two factors: greed and vanity. We do not foresee a shortage of either in the future.

There has been some talk of late of rising diamond prices. Part of this is that diamonds, like almost all commodities, are priced in US dollars. As the dollar goes down the price goes up. Most economists would agree that the US dollar is falling relative to the other major currencies. This situation is different from a few years ago, when South African producers were closing mines, some in part due to end of mine life, but also in part due to a strong Rand versus the US dollar.

According to Mr. Laboucan Prolific analyst diamonds will continue to see strong demand. In particular the emerging upper-class of very populous countries (China and India) will continue to be a growing market for luxury goods, one that will outstrip that of the U.S. Even if only 1% of the 2.4 billion people living China and India make it to the high disposable income level to afford luxury goods in the next ten years, that is a new crop of 24 million consumers - a number a little short of the population of Canada.

The problem with diamonds is that they are not just any other commodity. Gemstones are evaluated individually based on a number of characteristics unique to each individual stone. It can be difficult to determine if prices for diamonds are increasing due to this increased complexity. Mr. Laboucan alludes to this by mentioning the fact that companies producing larger/high quality diamonds will always see strong business as such goods are for the “ultra-rich” and immune to economic swings. The market for smaller/lower quality diamonds is more sensitive to economic pressures and is mainly a function of the level of disposable income possessed by the upper-middle class. This brings us back to the emerging middle class in the BRIC countries, the potential size of which could very well dwarf that of North America, and possibly even Europe as well. Should the economies of these countries continue to grow, the above scenario becomes a strong possibility. Even with signs of slowdown in China, other growing countries such as India, Brazil, Russia, South Africa, and Turkey will pull up the slack.

With these fundamentals in mind, a cautious investor should be able to pick the most promising diamond companies now, when they are cheap. Assuming due diligence has been properly performed, strong gains could be reaped in the market within a few years time.

No comments: