Chinese and Indian appetite for diamonds will fuel demand growth of more than 6 percent a year over the next decade and almost double the size of the market, far outpacing supply increases limited by a lack of new mines, Bain & Company said in a report.
That is set to hold up prices even through periods of volatility and could be supported by additional demand for diamonds as investment, the management consulting firm said.
The concept of diamonds as a potential investment commodity has long been debated, but - unlike for gold and silver - difficulties with valuation, the lack of a spot market and a lack of liquidity means efforts to create diamond funds have struggled.
Bain, however, said industry efforts to increase transparency could help attract investors to individual, high-end polished gems, with the lack of supply also making top quality diamonds increasingly rare.
(It could be) not necessarily investment funds, that invest on behalf of investors into diamonds - that model seems to have been less than successful - but individuals buying into investment diamonds in places like China, India and the Middle East, said Gerhard Prinsloo, a Moscow-based Bain partner and the lead author of the report.
The industry really needs to grapple this by the horns and develop mechanisms to better price diamonds and get better transparency around the pricing of polished diamonds.
Prinsloo said the industry would need to develop benchmarks to allow investors to get market prices for investment gems.
The model of having 12 to 16,000 different price points will probably need to undergo to change if you want to stimulate demand for investment, he said.
In its wide-ranging report, Bain said rough diamond supply is expected to grow at a compound annual growth rate (CAGR) of 2.8 percent globally in the decade to 2020 in carat terms, and 3 percent in volume terms.
That takes into account new projects coming onstream in the short term but also the impact of relatively flat growth towards the end of the decade as no major new deposit discoveries have been made since Murowa in Zimbabwe in 1997.
Predicting exact supply is difficult, not least because of potential destocking from Russia's Gokhran, the state precious metals and gems repository, which could be sitting on more than $1 billion of diamond stock, Bain said. But supply will remain tough, as even if new discoveries are made today, it could take a decade for the first diamonds to be sold.
An indication of how even jewellers expect constrained supply has been the decision by retailers like Tiffany to strike deals directly with mines in order to secure diamond supply.
Consumer appetite for diamonds, though, will boom, Bain said, driven by increased prosperity in China and India. Demand is set to grow at an annual rate of 6.4 percent to nearly 250 million carats and 6.6 percent in value terms by 2020.
ONLY A RICH GIRL'S BEST FRIEND?
The supply-demand picture is cheering to producers, but some are already fretting that the difficulties in securing new supply - only about 1 perecent of kimberlite pipes discovered to date have been economically viable - could make the price of diamonds too high, forcing consumers to look at alternatives.
Bain's Prinsloo said that could be a factor at the lower end, but not at the lucrative top. About 5 percent of diamonds produced are more than 2 carats, but that accounts for more than 50 percent of sales value.
The impact for those types of consumers would be minimal. Having 2, 3 or 5 carat diamonds, this is for the rich or the super rich, who will be less price sensitive, Prinsloo said, though at the lower end consumers could shift into other gems or even out of jewellery and into technology must-haves.
Industrial diamonds and synthetic diamonds are also unlikely to replace the traditional rock.
Like fake luxury goods, Louis Vuitton bags etc, there will be people who are willing to give fake products but the majority of people would not like to, he told Reuters.
The diamond industry has seen significant change over the past month, with the exit of the Oppenheimer family from De Beers after almost eight decades, and last week's signal from BHP Billiton that it is considering moving out of an industry that it does not see as scaleable.
The Oppenheimers agreed to sell just months after De Beers said it would shift its London-based rough diamond sales operations to Botswana, part of a shift in the jewellery industry towards India, China and Africa, thanks to cheap labour but also programmes intended to boost employment and increase profits producer countries reap locally from mining.