TORONTO (miningweekly.com) - If diamonds are a girl's best friend, Chinese girls are certainly a diamond producer’s best friend. While demand for the sparkling stones is still limping along in most other countries, China is eating them up.

The Asian powerhouse will double its share of global diamond jewellery demand by 2015 to 16%, RBC Capital Markets analyst Des Kilalea says.

As China’s cities absorb an increasing amount of rural migrants, and the population's wealth rises, diamond demand will increase, particularly for engagement rings.

But prices and demand will still heavily depend on a recovery in the US market, which accounts for about 40% of total demand.

Unemployment in the world’s biggest economy is hovering around 10%, and US Treasury Secretary Timothy Geithner cautioned this week joblessness would remain at these levels for the rest of the year.

He predicted employment should recover to around 7,9% by the end of 2012. This will put pressure on consumer demand, and, in turn, diamond demand.

Though China, and even India, will play an important role in picking up the Western world’s demand slack, Kilalea warns: “Don’t be seduced by China just yet.”

This is underscored by the fact that senior producer De Beers had to cut its output by about 50% last year as global demand cracked in the wake of the recession, despite rising demand from the East.

The company is planning on production of around 30-million carats this year, which is roughly 75% of capacity. Still, long-term projections for the diamond market look good.

LSE-listed Gem Diamonds, which managed to report a profit in 2009 despite the horrendous market conditions agrees. CEO Clifford Elphick said in the company’s 2009 annual report: “Evidence suggests that demand for diamond jewellery in India and China continues to grow strongly, although not making up for the slowdown in US consumption of diamond jewellery.”

According to a presentation Kilalea made in Toronto last week, diamonds will be in a significant short supply by 2020. The market is more or less in balance currently, and will be until next year.

By 2020, the bank estimates diamond production will be worth $20-billion, while demand will be worth roughly $27,5-billion.  That is a 35% deficit between supply and demand, and good news for prices.

Negative factors that could impact prices in the short term include Russian stocks. What became the world's biggest diamond producer last year (though not expected to remain so for long), Alrosa, ceased selling diamonds in 2008 because of the global financial collapse.

The Russian miner, however, continued production throughout. Only in July last year did it begin selling directly into the market again, meaning stocks reached a level of around 18-million carats. That is about half its annual production.

These diamonds will sooner or later find their way into the market, and this will not have a positive impact on gem prices.

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