An increase in demand from Chinese consumers could make diamonds an attractive proposition for investors, according to Bank of America Merrill Lynch.
The broker views diamonds as an “interesting, secular, late development commodity,” which could see growth if demand from China hits the same levels as earlier key commodities, such as steel, cement and base metals.
In its update on the resource, the broker said it sees more potential upside in diamonds than in any other commodity in China.
“Chinese per capita consumption of diamonds is increasing but lags well behind developed markets,” analysts commented.
“We still like diamonds as a 'late development' commodity which gives exposure to the Chinese consumer.”
The broker expects a slightly lower dip in prices this year but the recovery will not be as robust as expected in 2013.
While it had estimated a drop of seven per cent in diamond prices, forecasts now point to a dip of just one per cent.
The following year will be tougher, as prices will rise just one per cent against previous estimates of eight per cent.
The updated figures are a result of two factors the broker reckons will impact on prices.
“In terms of our diamond view, we model two offsetting factors: 1) We adjust historic demand numbers up slightly on new data thus raising the base for future forecasts 2) We raise assumed Zimbabwean supply reflecting the lifting of selling ban for some key mines,” analysts said.
The broker also expects emerging market consumers will play an increasingly important role as demand for diamonds grows in those countries.
Two stocks to keep an eye on are Petra Diamonds (LON:PDL) and Gem Diamonds (LON:GEMD).
The broker has a ‘buy’ tag on both stocks, having upgraded Petra today on the recent share price decline.
Its shares have retraced to such an extent in the volatile market that Merrill’s target price now suggest some 34 per cent upside to the current price of 132 pence, up 2.5 pence today.
The broker reckons the company’s aim of boosting production should give “good leverage to an anticipated medium to long-term diamond supply deficit and thus positive pricing environment”.
Gem Diamonds’ share price of 207 pence is still lagging far behind its potential, say Merrill analysts, who have slapped a bullish 490 pence target on the stock.