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Diamonds Will Still Be Forever

Unless the pessimists are right about the collapse of the world economy – and they never have been yet – the one sure thing to come bouncing back will be diamonds.

It only seems yesterday that the future for diamonds was bright, prosperous and everlasting. The Chinese and Americans were falling over themselves to buy and the Indian market was soaring as Indians rushed in their millions to marry and present the largest stone they could afford to their new bride.  One of the strongest supports for the eternal value of diamonds, it was said, was that they had stopped making them.

The leader in the diamond market was seen as  Petra Diamonds (PDL) which has today issued a trading update for its half year to the end of December.

Petra is still on schedule for its long held 2019 production target. Production for the half year was up by 2% but the weakness of the market was illustrated by a 28% decline in revenue to US$154m. and that included $10m from the sale of just one 23 carat pink diamond.

The rough diamond market where prices fell by 9%, was impacted by an oversupply of polished diamonds, liquidity issues, the strength of the US$ and a slowdown in demand from China. Only the weakness of the South African Rand helped to lift the gloom.

Petra’s cash at the bank fell by 75% from its June figure, inventories nearly doubled from 340,000 carats to 660,000 carats, as did net debt which rose from $171.7m to $324.4m. The company however describes its financial position as being robust as at 31st December.

Prices in the first half of 2016 are seen as becoming stable with an improvement in the second half.

The share price opened at 73p this morning having risen from a low of 54p in mid November, a rise which has made Petra into a nice little earner over a short term period of only two months. The present price is a long way from its 2014 peak of 220p. Even in January last year it was still at the dizzy height of 190p.

Diamonds are one of those rare commodities where demand is governed in the end by the retail trade, the strength of which can be judged by the results of the regular auctions which the diamond houses hold. In this respect diamonds are different to other commodities such as oil, copper, nickel iron ore etc.

There will be more crises this year there will be more media panic as economists and financial journalists vie to scare the pants off their readers and each other and write ever more desperate headlines in their battles for circulation.

But Indians will still marry in their millions, the Chinese economy is still growing strongly, for Americans the strength of the US$ is irrelevant and the US is, in any event, on its way to new wealth as it rapidly acquires domination of world oil markets.

Petra’s share price does not yet seemed to have formed a base, so there could still be more wobbles to come but already it has attractions which make it worth keeping an eye on.

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