Diamonds Haven’t Lost Their Polish

Diamonds may be a girl's best friend, but they didn't do investors any favours in the 1980s and 1990s. Back then, supply swamped demand, and diamond giant De Beers was left with a huge stockpile as it was forced to absorb excess production from African producers to prevent prices plunging further.

But these days it's a different story: the De Beers pile is almost gone and miners "just can't dig diamonds as quickly as the market wants", as Cris Heaton puts it in Shares. Producers neglected to invest in new capacity in the 1990s as prices were low, and many of the larger mines are close to depletion. Now demand has jumped, the miners are scrambling to close the production shortfall, but boosting output fast won't be easy it can take a decade to get a mine up and running.

On the demand side, Asia and especially China is providing most of the impetus. This trend looks unlikely to falter anytime soon: the burgeoning Asian middle classes who love diamonds are growing increasingly wealthy and thus beginning to buy more sparklers. Asia still accounts for less than 5% of global diamond jewellery sales, suggesting ample scope for growth.

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Given all this, it's no surprise that global demand jumped by 8% last year, while De Beers raised prices for rough diamonds three times. The run looks far from over: Kevin Tomlinson of Williams de Broe says that rough diamond prices are expected to rise by 30% from current levels over the next five years. Among the "high-quality" diamond miners on the market is Firestone Diamonds (FDI, 138.5p), says Shares, which also deems Dwyka Diamonds (DWY, 30p) worth a look.