CAPE TOWN, South Africa - Diamonds were hard-hit by the global economic dislocations of 2008-2009, along with other asset-class commodities including gold, but the industry is now in a recovery phase that looks poised to accelerate.
Diamonds are a relatively small asset class (along with other types of precious stones, jewelry and fine art), but they rank higher than other asset classes in terms of portability. Further, diamonds are more liquid than some asset classes, notably real estate and fine art, although not nearly to the same degree as large traditional asset classes such as equities, bonds and exchange-traded commodities.
A decade ago, in 2001 and early 2002, the price performance of diamonds (basis one carat) frequently exceeded that of oil and gold. Beginning in 2003, however, the price performance of both began to rapidly outpace that of diamonds. While diamonds have comfortably outperformed the S&P 500 Index over the past decade, gold and oil have done far better from an investment standpoint, according to a presentation prepared by industry consultant Chaim Even-Zohar, president of Tacy Ltd., for delivery at this week's annual Investing in African Mining Indaba conference here.
Mine production of diamonds peaked in 2006, however, at around 160 million carats and has since been in decline, leading diamond purveyor De Beers to suggest that demand will exceed supply at some point, according to the presentation. Current global diamond production is approximately 120 million carats annually and demand is forecast to outpace supply beginning around mid-2012.
Diamond output plummeted in 2009 to an estimated 120-125 million carats valued at $8.2-$9.0 billion compared with 2008 output of 165-175 million carats valued at $13.8-$16.5 billion. A muted recovery was evident in 2010, when output edged up to 130-135 million carats valued at $11.2-12.0 billion.
The industry has been in a stabilization phase since mid-2010. Global retail demand for diamonds rose 6.8% in 2010 from 2009's very low comparison level but was still 12% below 2007 levels. Demand this year is expected to increase 7.9% year on year but will still be 5.1% below 2007 levels, according to estimates presented. Meanwhile, 2011 demand for rough and cutting center polished diamonds will rise by an estimated 20.0% and 9.9% respectively, Even-Zohar indicated in his presentation.
The greatest increases last year were seen in Asia and the Middle East, where diamond demand rose 13%, followed by a 3% increase in North America and a 2% up-tick in Europe, while Japanese demand was flat. Even-Zohar's presentation showed that demand is forecast to improve further this year, rising another 13% in Asia and the Middle East, 5% in North America, 2% in Europe and 1% in Japan.
The statistics as presented suggest a strong shift in demand toward the East and away from traditionally strong Western World demand. The presentation forecasted that by 2016 US consumer market diamond demand will shrink to 37% of the overall market from 40% in 2010, while Indian demand will go to 11% from 7% and Chinese demand will rise to 10% from 6%.
In recent quarters rough-diamond prices have exceeded polished-diamond prices since the second half of 2009. This also occurred in 2007 and early 2008 prior to the onset of the economic crisis. Even-Zohar presented information charting relative price behavior for all qualities and sizes of diamonds, based on quarterly averages, using end-2007 price levels as a benchmark.
The information showed that prices for rough diamonds peaked in the second quarter of 2007 at around 8% above polished diamond prices. Rough prices then plummeted much faster than polished prices during the economic crisis. By the fourth quarter of 2008 rough prices bottomed at a level about 30% below polished prices, according to the presentation. Rough prices then began to rise rapidly, even as prices for polished diamonds continued to fall for another three months or so, finally bottoming in the middle of the first quarter of 2009. Rough diamond prices by late in the third quarter of 2009 once again surpassed polished diamond prices and by the end of 2010 exceeded them by nearly 13%. The price differential has tended to be least pronounced for high-quality diamonds and most pronounced for low-quality diamonds.
The fundamentals of the international diamond market look good, although the industry has become more vulnerable to "outside shocks" revolving around reputational and consumer confidence issues, according to Even-Zohar's presentation. Reputational and consumer confidence issues are based in part around humanitarian concerns regarding mining practices in certain key producing regions.
Brett Hartke is a contributor to ResourceInvestor.com who has more than 20 years of experience researching and writing about commodities and the metals markets.