Commodities: Diamond prices stabilise and market moves into a stronger position

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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Commodities: Mixed messages from gold as lengthy bull run suffers a touch of jitters

The yellow metal faced more bad PR the following day, as it emerged that billionaire investor George Soros has cut his stake in the SPDR Gold Trust, a huge exchange-traded fund (ETF) backed by gold, by 55pc.

So could gold be losing some of its lustre after a 12-year bull run?

Not at the world’s central banks, at least, according to the WGC report. Their net purchases reached a 48-year high at 534.6 tonnes, climbing by 17pc on the previous year.

Last year saw Brazil, Paraguay, Iraq and Venezuela join those nations building up their gold reserves, continuing the trend for those countries ramping up their official gold holdings to be found in developing markets.

That, of course, reflects their economic progress, since rising currency reserves prompt countries to look for ways to diversify their wealth away from the dollar and the euro.

Russia remained a big spender, adding around 75 tonnes through gold produced at home, meaning its reserves are now the seventh largest globally, trailing Switzerland in sixth place.

Separate data from the Intentional Monetary Fund, compiled by Bloomberg, reinforced that purchasing power. Over the past decade, Russia’s central bank has added 570 tonnes of the metal, a quarter more than China, the second-biggest gold buyer.

To put that in context, that extra gold in Russian vaults is roughly equivalent in weight to three Statues of Liberty.

Still, central bank buying only accounted for 12pc of total market demand last year, even if that was a rise from the 10pc in 2011. Demand from other investors was more mixed.

ETFs and similar products enjoyed a 51pc rise in demand at 279 tonnes, a bounce-back from a poor 2011. But demand for gold bars and coins moved in the opposite direction, dropping 17pc to 1,255.6 tonnes.

Since demand in this area had grown from under $3.6bn in 2003 to $76.6bn in 2011 in dollar terms, the WGC argued that perhaps it was “not surprising” that it had tapered off last year.

Nonetheless, it meant that overall demand in the investment sector dropped 10pc to 1,534.6 tonnes.

The amount of gold bought in jewellery form also fell, down by 3pc to 1,908.1 tonnes, The biggest drop-off was seen in India, as a weak rupee limited consumers’ purchasing power. In the West, gold-plated silver is growing in popularity as consumers in slumping economies are faced with higher prices.

The drag from the weak global economy could also been seen in demand for gold to use in technology – from electronics and other industrial uses, to dentistry – which dropped 5pc overall, to 428.2 tonnes, marking a second year of decline. That was “largely indicative of lacklustre sentiment in key markets,” said the WGC.

No one is calling an end to gold’s bull run. But what it all serves to remind us is that while economic clouds can help drive investors towards the metal, they -may be having the reverse impact on other, equally important buyers.

A turning point looms in the oil market. Imports of light crude oil into the refineries on the Gulf coast of the US have more than halved over the past three years, driven by rising oil production from America’s shale fields.

That will continue, say analysts at Barclays. They expect the level of imports rapidly to drop to “irrelevant” levels.

As a result, the market on the US Gulf coast will become driven by domestic rather than international competition Because of this, they think that the price of WTl, America’s benchmark crude (shown above), faces a “long-run” discount to Brent, London’s benchmark, of $15 a barrel.

Cynthia Carroll offered some industry insights as she presided over FTSE 100 giant Anglo American’s results on Friday, her last as chief executive of the miner.

Did she agree with the consensus that a sea-change is taking place, as companies switch their focus from growth and M&A to running existing assets efficiently?

She did - “we’ve got to strike the right balance between returning to shareholders in the short term and investing in the long-term business” – but had something to say to critics of her management of Anglo’s vast iron ore growth project in Brazil, Minas-Rio.

Carroll had followed a mandate to pursue iron ore, she said, adding: “We didn’t have attempted acquisitions and then failed acquisitions, unlike some of our competitors.”

No names were mentioned, but look to BHP Billiton’s $40bn (£26bn) bid for Potash Corp, blocked by Canada. Not to mention write-downs detailed by Rio Tinto on recent Mozambique purchases, which cost CEO Tom Albanese his job.

As for what’s next for Carroll, she said she was “not going away” from the commodities business.

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