Small Talk: Diamond market looks set to sparkle as demand recovers

This column has often touched upon the recent bull run in commodities. We've covered everything from gold to emeralds. Diamonds, however, have slipped under the radar. Last week, investors received some indication of the goings on in this market from Gem Diamonds – and the picture is sparkling.

The company reported an uptick in diamond prices as a result of increased demand in the US and emerging markets. The group's Letseng mine in Lesotho, for instance, shifted its stock at an average price of $2,383 (£1,443) per carat over the first quarter, well above the $1,753 seen in the first three months of 2010.

Moreover, tenders for April averaged $4,272 per carat, meaning that overall diamond prices for the first four months of the year were running at an average of more than $3,000 per carat. The market is clearly doing well and if some City analysts are to believed, it is set to do even better in the coming months as demand recovers to pre-recession levels.

A recent Deutsche Bank analysis, which forecasts continued strength as diamond prices run ahead of other commodities over coming years, highlighted some of the key trends in the international diamond market. Understanding demand for diamonds, they say, "requires an understanding of the end product jewellery market", although investors should also keep an eye on any inventory issues in the pipeline.

The US is the main market, accounting for 40 per cent of glo-bal diamond demand. "Of this, as a rule of thumb, 50 per cent sells between Thanksgiving in late November and New Year's Day," the broker explained. "Thus, diamond sales have traditionally been weighted towards the first half of the year to feed the pipeline of cutters, polishers and jewellers to be in stores before Thanksgiving."

Turning to retail sales as an indicator of where demand may be heading, Deutsche highlighted the fact that the financial crisis had had a "market effect on jewellery demand", with sales in late 2008 declining to below 2005 levels.

There was limited recovery in 2009 and then again in the early months of 2010. But demand really gathered pace in late 2010 when a "considerable recovery was seen back to historically high levels". "Current 2011 data suggest a return to spending in line with 2008, although in real terms still below that level, of course," the broker said, highlighting trends that bode well for diamond producers such as Gem.

Further out, China is becoming a key growth market for diamond sales, according to Deutsche. Once again, retail sales provide an indicator of prevailing trends and the future course of demand. "On average, gold, silver and jewellery have grown at 59 per cent per annum since 2002," the broker said. "Recent data has again been very strong, with strong sales growth of around 60 per cent."

"We think this is illustrative not only of retail demand for jewellery but potentially as an inflation hedge and virtually as a direct commodity trade into gold and silver," Detusche added.

Whilst acknowledging that this may "exaggerate the demand for diamonds somewhat", investors, the bank suggests, can take heart from the fact that the underlying picture remains encouraging.

Cambria on track to defy gloom

Investors in Cambria Automobiles had a good couple of days last week, with the share price rising by more than 15 per cent. Although that still leaves the stock well off the levels seen when the car retailer listed last year, it was a welcome uptick, aided by the company's half-yearly results.

The release showed that total revenues had climbed by 5 per cent in annual terms, as the acquisitions made during the last financial year lifted the figures. Pre-tax profits were ahead of the company's hopes, and "slightly ahead" of the prior year.

The business is young – it was founded less than five years ago – and has already made seven acquisitions. This drive has resulted in Cambria now boasting 26 dealerships and 39 franchises. Of course, it occupies a tough market. The economy remains weak and the car scrappage scheme, which boosted car retailers of every hue, is now behind us.

But on the upside, the uninspiring economic backdrop provides a good environment for Cambria to pursue its strategy of buying up troubled businesses and improving their performance, a point highlighted by Fairfax in a round-up issued after the results last week.

"There are currently several opportunities to acquire financially distressed assets, where Cambria will look to improve profits substantially," they said. "The group has a war chest in the form of cash of £8.5m and a new £5m revolving credit facility."

On Fairfax's estimates, Cambria should grow earnings by an average of 14.5 per cent per annum over the next two years. That is quite positive given the uninspiring consumer outlook, with recent economic surveys highlighting the ongoing squeeze on UK households.

But then, much of that growth is expected to be down to the company's own actions, according to the broker.

"This growth will be driven mainly by the recovery in profits at the three acquisitions made last year, the maturing of businesses that have been integrated over the last two years and by a cost reduction programme," Fairfax analysts explained.

Xaar reassures on Japanese supply

The recent tragic events in Japan have had a devastating effect on the local population. They have also hit businesses, both locally in Japan and thousands of miles away as companies adjust to supply disruptions. And although car manufacturers have hogged the headlines with their moves to cut production, they have not been the only ones affected by the fallout.

The printing technology firm Xaar flagged up the potential for problems in late March, when it issued annual results. Although it had not seen any impact from the earthquake and tsunami at the time, the company prudently cautioned that "with a number of key suppliers and licensees in the country, we will continue to monitor the developing situation closely".

Cue some market jitters, with the share price trading lower. But the company put out an update on Friday, with some reassuring news that should encourage investors and calm any lingering nerves.

Xaar said that it had continued to monitor the situation in Japan and that, "whilst uncertainties remain, all of our key suppliers have confirmed that they will continue to meet our requirements".