We look at how you can invest in the diamond market.
In the film Diamonds Are Forever, Ernst Stavro Blofeld threatens the world with a giant orbital laser which used an extremely large number of smuggled diamonds. Naturally, like all major villains, he explains his plan to James Bond and is then surprised when it is thwarted, before attempting to escape in a mini-submarine.
Whilst the diamond business has known a few villains in its time, these were not megalomaniacs with white cats who tended to dispose of their henchmen in creative ways. Instead they formed cartels, engaged in predatory pricing and manipulated consumer tastes to the extent that their slogans and ideas have passed into the global consumer consciousness.
The Cartel
In the 1870s, after production started at several new South African mines, producers realised that a glut would destroy the illusion of scarcity which until then had supported the diamond price. To protect their interests these mines amalgamated in 1888, forming De Beers Consolidated Mines, creating a monopoly over South African diamonds.
Over the next century De Beers evolved into the dominant force in the world diamond market, in large part by colluding with other countries' producers to restrict supply. The De Beers cartel manipulated prices by buying from other miners and threatening any firm which refused to join the cartel that they would dump diamonds onto the market to drive down their profits.
By the 1990s the De Beers cartel had collapsed as new supplies came onto the market from Australia, Canada and Russia, whose firms were too large to be intimidated by the cartel. So De Beers changed its tactics to focus upon increasing the demand for diamonds; something in which it had more than 50 years of experience.
Diamonds Are Marketed
De Beers has managed to turn diamonds into a highly exclusive product which is closely associated with romance through some clever marketing. For instance, the idea that diamond engagement ring should cost two months' pay comes from a 1940s advertising campaign.
De Beers is responsible for almost every slogan that is associated with diamonds ("a diamond is forever") with the exception of the song Diamonds are a Girl's Best Friend, immortalised by Marilyn Monroe in the 1953 film Gentlemen Prefer Blondes and which has subsequently been covered by numerous artistes from Madonna to Kylie Minogue. You can't buy publicity like that.
In recent years competition has emerged from the laboratories in the form of "synthetic diamonds" which are manufactured using high pressure, chemical deposition and ultrasound techniques. The diamond industry has gone to great lengths to distinguish synthetic diamonds from the naturally occurring "geological diamonds", with the intention of creating a two-tier market for jewellery diamonds.
While most people associate diamonds with jewellery, more than 80% of the world's diamond output goes to lower-margin industrial applications, primarily for use in cutting and grinding tools. You don't see catchy slogans about this part of the market!
The diamond business suffered a big blow over a decade ago as the concept of "Blood Diamonds" entered popular culture, thanks to diamond mining in some countries being used to fund several civil wars, particularly in Sierra Leone and Liberia.
In response the major diamond producing countries, through the World Diamond Council, adopted the United Nations Kimberley Process Certification Scheme in 2000 which verifies the country of origin of diamonds, and this certification is helping with diamond sales (arguably it is a good piece of marketing).
The 2006 film, Blood Diamond, which starred Leonardo DiCaprio, goes into considerable detail regarding this topic.
Investing In Diamonds
Whilst the multinational mining companies Anglo American (LSE: AAL), BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO) have some diamond mining interests, the size of their other businesses means that diamonds only form a small part of their turnover.
So if you're looking for bigger exposure to diamonds you have to turn to smaller companies like Firestone Diamonds (LSE: FDI), Gem Diamonds (LSE: GEMD) and Petra Diamonds (LSE: PDL), or their equivalents on various overseas exchanges.
Alternatively you could have a look at jewellers such as Tiffany, another company which received tremendous publicity from the cinema, via Audrey Hepburn's Breakfast at Tiffany's.
The Future For Diamonds
Rising affluence in the developing world and the need of many people to overtly display wealth, even though in many cases they're really showing off their debts, should continue to provide strong support for the jewellery market. Of course, there's always cubic zirconium for those who want to flash the bling without paying premium prices!
The demand for industrial diamonds may be harder to predict. Diamond's status as the hardest material on Earth means that it will always be in demand for cutting applications, but as a word of warning recent developments in nanotechnology have produced the aggregated diamond nanorod, an artificial diamond that's harder than any natural diamonds.
It's possible that technological developments will drastically cut the cost of making synthetic diamonds, in which case you can be certain that De Beers' marketing will focus on the "superiority" of geological diamonds.
Of course, not everyone goes along with the "two months' pay" argument when they become engaged. In 1993 Bill Gates visited Berkshire Hathaway's jeweller, Borsheims, to buy an engagement ring, spending many millions less than this rule implied. This left Berkshire Hathaway's CEO Warren Buffett to joke that "we didn't have quite as big a day that Sunday as I had hoped."
More from Tony Luckett:
> Tony owns shares in Berkshire Hathaway and BHP Billiton
