Around the Markets: Demand for diamonds growing in China and India

Orloff - the worlds third largest cut diamond weighs 194 carats.

By Jesse Riseborough and Thomas Kutty Abraham Bloomberg News found at IHT August 28, 2007

MELBOURNE: Diamond producers' shares have trailed mining companies since early 2006 as an abundance of gemstones weighed on prices. Now the outlook is brighter, says Evy Hambro, who runs the world's No. 1 metals fund.

Stockpiles have tumbled 75 percent since 2000, Canada's National Bank Financial said in a July report. No new mines are scheduled to start production in the next three to five years, according to RBC Capital Markets. At the same time, annual incomes in India and China, the two fastest-growing diamond markets, are rising as much as 18 percent.

Prices rose 8.4 percent in the first half, four times as fast as the same time last year, according to National Bank Financial. That may help shares of Aber Diamond, Shore Gold and Trans Hex Group rebound after falling as much as 50 percent in 2007.
"The supply and demand fundamentals are very supportive for prices," said Hambro, the London-based managing director of BlackRock's World Mining Fund, which has $10.2 billion in mining assets. "We see dwindling stocks and a shortage of new mine development."

Aber, Gem Diamonds and Shore Gold, the world's three biggest diamond mining companies by value, have trailed the Bloomberg World Mining Index's 39 percent gain this year.

Hambro's fund owns shares of Aber, which is changing its name to Harry Winston Diamond after purchasing that company in 2006. The fund also became the biggest investor in London-based Gem Diamonds earlier this year, according to data compiled by Bloomberg. Gem Diamonds had its initial public offering in London in February.
Trans Hex, Africa's biggest publicly traded diamond producer, swung to a profit in the six months ended in March as output from its largest mine in South Africa recovered from rains. Net income was 38.95 million rand, or $5.3 million, compared with a loss of 21.2 million rand a year earlier.

Demand for diamonds may grow as much as 5 percent annually, according to Anglo American, after hovering under $15 billion a year since 2005. Anglo American owns 45 percent of De Beers, the world's biggest diamond mining company. Demand will likely pass $20 billion by 2014, RBC said.

Toronto-based Aber, the biggest producer of the precious stones by value, is up 1 percent from this year's low on Aug. 15. Gem Diamonds, third-largest, has added 11 percent after it fell as much as 8.9 percent from its IPO. Shore Gold, based in Saskatoon, Canada, has risen 5.1 percent since Aug. 17 when it hit its lowest in more than two and a half years.

The declines have not made the shares cheap. Aber, with a market value of 2.4 billion Canadian dollars, or $2.3 billion, and South Africa's Trans Hex are trading at about 20 times forecast profits. Price-earnings ratios are almost twice those of the diversified miners BHP Billiton and Anglo American.

Diamond stocks trailed other commodity shares even before the effects of the equity market rout triggered by a global credit crunch. The United States, the world's biggest consumer of the gems, accounts for roughly half of world retail diamond sales of about $57 billion.
Still, diamond prices won back all of their 2006 declines by the second quarter and will likely extend gains, says De Beers, which mines 40 percent of the world's gems. Prices of five-carat polished diamonds rose 8.4 percent in the first half, four times the 2.1 percent advance of a year earlier, according to National Bank Financial. A carat is a fifth of a gram.

Henk Groenewald, who helps manage the equivalent of $16.8 billion at Coronation Fund Managers in Cape Town, recommends Vancouver-based Rockwell Diamonds and Johannesburg-based Diamond Core Resources.

Demand for polished diamonds "will increasingly be driven by the faster-growing countries," he said.

China's diamond imports rose more than threefold in the first half, according to the industry publication Rapaport TradeWire last month.

India's imports increased 14 percent in the second quarter, according to the Gem & Jewellery Export Promotion Council's Web site. De Beers said last month it expected "very strong" jewelry demand in China and India to raise prices in the second half of this year.