By Stephen Clayson
LONDON (ResourceInvestor.com)
May 16. 2005

The prevailing prognosis for the rough diamond market is a bullish one, driven primarily by growing demand for diamond jewellery, and this is stimulating exploration and production in new and interesting areas of the globe. Canada is one of these areas, as recently discussed in these pages, and Brazil is another. Though Brazil currently lags Canada in rough diamond production by a considerable margin, the country is likely to be a prolific source in the future.

In the short to medium term, worldwide diamond production growth is projected to be unable to match demand growth, which some estimates put at 50% by 2012. This could plausibly occur on the back of inexorably rising affluence in China coupled with steady demand in traditional markets, and indicates that prices will likely continue to rise, hence offering an opening in the market for new producers.

In an attempt to ensure this strong demand growth, the diamond industry’s leviathan De Beers is continuing to strongly market diamonds generically as a luxury good, having achieved a great deal via this strategy over the past half century. The company feels that the aggressive marketing of diamonds is as important now as ever, given the ever burgeoning spectrum of alternatives for consumers’ luxury spending.

In the traditional markets of the US, Western Europe and Japan, De Beers’ marketing efforts are aimed at holding static diamonds’ share of luxury spending, rather than increasing it, as the company feels that these markets, particularly the US and Japan, are largely mature.

In order to contend with this maturity, De Beers intends to target China and the rest of Asia excluding Japan and try to establish through marketing the same cult of the diamond, particularly as regards marriage, that exists in the traditional markets, and hence to stimulate demand growth in these emerging ones.

To this end the company has been running highly emotive advertisements, particularly in China, designed to inculcate the populace with an inextricable association between diamonds and love, just as the company’s campaigns have been instrumental in achieving elsewhere.

But a concern for any canny investor in diamond mining should be the threat from artificial diamonds, as if one day success were to be attained in the economically viable replication of the characteristics of natural diamonds then it would likely devastate the diamond mining industry.

To address this, De Beers is keen to portray natural diamonds in its marketing campaigns as somehow more desirable than any artificial alternative, in order to maintain demand for them in the face of any serious competition that may emerge in the future. Whether this can be achieved or not, particularly if a chemically identical and possibly even aesthetically superior artificial product is created and in turn adeptly marketed, remains to be seen. But for now, natural diamonds have no credible rivals.

In terms of natural diamonds, Brazil is one of the most promising nascent producers, being a country that has a number of points in its favour from a mine development perspective and one which boasts significant historic production. Brazil offers to today’s prospectors a mining friendly political environment, a generally low cost base, largely clement weather, and many areas of reasonable infrastructure.

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In summation, the strong market for rough diamonds has and will continue to invigorate prospectors in various corners of the globe. But Brazil’s prolific historic production and generally positive attitude to mining means that companies active there could be worthy of particular attention from investors.