Diamonds getting scarcer and more expensive

RBC Capital Markets, the corporate and investment banking arm of Royal Bank of Canada, has issued a research report that concludes that demand is likely to outstrip supply over the next three to five years, resulting in continued support for diamond prices. The report identifies that strong and growing demand for diamond jewellery will lead to a potential shortage of gem-quality diamonds in the medium-term.  However, the knock-on effect of increased spend on exploration will not provide a solution to the shortage, as success of turning this investment into viable kimberlite mines is limited, and the process of discovery is lengthy and expensive. In addition, no major new mines are like to add to production within the next five years.

Des Kilalea, Director of Global Mining Research at RBC Capital Markets concludes that this shortage will not lead to synthetic diamonds dominating the industry.  He says: “Man-made gem-quality diamonds are unlikely to be a threat to the gem market in the foreseeable future. Longer-term, however, man-made stones could become competition for natural gems at the cheaper end of the market, particularly as shortages develop. Countries where diamonds are mined are increasingly insisting that their rough diamonds are turned into polished stones at home. This could lead to major cutting centres, such as India, developing excess cutting capacity which may be turned to synthetic jewellery over time.”

The research also investigates the current investment story for diamonds, which remains good, despite opportunities to invest in the sector being limited. Some 80% of global diamond production is accounted for by diversified miners Anglo American, Rio Tinto and BHP Billiton, along with Russian company Alrosa. Whilst there are about 100 companies listed on exchanges worldwide involved in the exploration and mining of diamonds, only 10 companies account for two-thirds of total market capitalization. The universe is also shrinking as consolidation continues among the juniors.

This topic was discussed further as part of RBC Capital Markets’ inaugural Diamond Conference: Hard Assets.Sparkling Investments which took place on  May 17 in London.  The conference brought together the senior management of the world’s leading diamond corporations, ranging from exploration to mining to polishing and retailing. Speakers included: De Beers Group, Aber Diamond, Rio Tinto and Petra Diamonds.