Diamond Bull Market Goes On

Garry White - Mon 03 Mar, 2008

The imbalance of supply and demand looks set to continue which is bullish for the price...

The imbalance of supply and demand looks set to continue says Smart Commodities editor, Garry White, which is bullish for the price...

Diamond Bull Market Goes On
By Garry White

Two weeks ago, Ori Temkin, the chief executive of diamond polishing group Steinmetz noted that demand in the diamond market had exceeded supply for the last four to five years. He predicted too that this imbalance would last many more years before supply increased sufficiently.

This is something I have believed for a long time. However, more evidence emerged last week to support this view… and it’s all to do with energy…

“We are quite positive about diamond sales this year,” he said “and it will be two to three years before supply increases again.”

Steinmetz covers the entire diamond pipeline excluding mining – from rough diamond trading and marketing, manufacturing and cutting, polished sales and marketing, to jewellery creation and retail.

Mining is extremely important to the economy of Southern African… but most of the countries in the region are in the midst of a power crisis. In South Africa, it is down to a booming economy coupled with an incompetent government. In Zimbabwe it is down to the actions of a delusional dictator.

Outages in South Africa have caused gold and platinum prices to soar to new highs. Rio Tinto has already said that it will review plans for a major aluminium investment in South Africa because of the shortages. All this means that supply of these commodities will plummet, which will support prices.

But it’s not just South Africa that is having power problems. The situation is actually worse in Zimbabwe – and the country could offer a preview of what could become of the South African mining industry. Let’s hope not…

Last Wednesday, Rio Tinto said that its 78%-owned Murowa diamond mine had seen a 40% fall in production in 2007. Output was hurt by frequent power cuts, equipment failures and a delayed expansion program.

The mine produced 145,000 carats in 2007, compared with 240,000 carats in 2006.

A decline in diamond grade had been expected, but the company had not expected the extensive impact of electricity outages.

"Besides the anticipated decrease in grade with depth and the delay in the implementation of the expansion project, production was adversely affected by ZESA power outages and contractor mining fleet breakdowns due to lack of spares," the statement said.

Other UK-listed mining stocks exposed to the power and political problems in Zimbabwe include Anglo Platinum, Implats, Aquarius Platinum and Mwana Africa.

The news from Rio Tinto makes me even more bullish on the diamond price. Many investors have been concerned about investing in the sector because of fears of a US recession. US citizens buy 50% of the diamonds sold annually.

However, with the emergence of India and China, the reliance of the industry on US sales appears to be waning. De Beers recently said that it expected strong demand from China, India and the Middle East to help sustain prices for "larger and better quality" diamonds. This trend will continue, as will electricity shortages in mining-driven economies. For this reason, I now like diamonds even more… despite the crumbling US economy.

A perfect storm is brewing on the commodity front over the next 5 to 10 years. If the world keeps up its insatiable demand for commodities, then watch out… there won't be much left of anything.

Regards,

Garry White

For The Daily Reckoning

Editor’s note: Garry White is the editor of Smart Commodities UK (formerly Outstanding Investments) a natural resource and biotechnology investment newsletter. This essay was re-published from his free eletter, Garry Writes...