Nomura now reckons that the prospect of flat diamond pricing has set a floor for the valuation of listed diamond companies.
“After this correction, we believe that there is limited downside in the equities. Diamond exposure for the long term, either through Anglo American, or our favoured pure plays Petra Diamonds or Harry Winston is, in our view, worth investigating.”
An absence of significant discoveries means that a supply shortage appears to be on the cards.
“The diamond industry has changed dramatically from the nineties when there was suddenly a rush of new Canadian diamond discoveries and the market had to deal with a substantial De Beers stockpile,” Citigroup analyst Jon H Bergtheil explains. “That stockpile has been whittled down and there has been a real shortage of new diamond discoveries, such that De Beers and key industry consultancy groups believe that the market is heading for a significant shortage in the second half of this decade.”
Earlier this month, Canadian Group Harry Winston sold its luxury retail arm to Swiss group Swatch in order for it to focus purely on diamond mining. The company had previously been a difficult beast for equity markets to value, as it was a mixture of a miner and a high-end retailer (Marilyn Monroe famously sang “talk to me, Harry Winston” in Diamonds Are A Girl’s Best Friend). It has chosen to focus on diamond mining because it is more profitable. In fact, last year the business was more than twice as profitable.
“The margins you can generate at the mining level are better than they’ve been achieving at the retail level,” Edward Sterck, an analyst at BMO Capital markets said.
Investors in the diamond have had a torrid time from price collapse, to a euphoric recovery and back to price collapse. However, now could be a good time to invest in the sector as a recovery in global GDP is almost certain to prove a boost.
UK GDP in the fourth quarter slipped by 0.3pc. However, if the oil industry is stripped out, the economy only contracted 0.1pc. This highlights the economic problems caused by the slump in North Sea oil production.
Output of oil and gas has been hit not only by reservoir depletion, but a series of production shuts-ins and maintenance work caused by creaking infrastructure.
“Oil output averaged 1.1m barrels per day (bpd) in 2011, Caroline Bain of the Economist Intelligence Unit (EIU) explains.
The EIU expects UK oil output would have fallen by about 15pc in 2012.
The prospects for 2013 are not encouraging with problems already evident with the Brent pipeline and the expected closure of the Schiehallion field,” Ms Bain notes. “Oil output is on a declining trend in the UK as new fields are failing to offset the rapid decline of mature fields, but expected and unexpected maintenance at North Sea fields led to a particularly weak oil production outcome in 2012.
“On the gas front, UK output was down nearly 14pc in the first 10 months of the year according to the IEA, and again there is little prospect of a turnaround in 2013,” she notes.
The price of Brent has also been rising for the last two months, which also has the effect of crimping GDP because of its inflationary effect.
Copper, the most economically sensitive metal because of its many uses, had a downbeat end to the week, hit by US data.
US home sales dropped 7.3pc in December, which was significantly worse than expected.
However, China is a more important price driver and Asian demand is expected to rise. “We expect that, despite high copper stocks, net copper imports into China will likely remain elevated in the first half of 2013, with some re-stocking taking place at the consumer level,” Deutsche Bank said last week.
“This may result in copper prices approaching $9,000 per tonne in the second quarter.” The price now stands at $8,030 a tonne.
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