Why Now is a Good Time to Buy Diamonds

Anglo American is positioned well to benefit from as rising household incomes across China bolster demand for automobiles and jewellery, sending up gold, platinum and diamond prices

Morningstar Equity Analysts 15 January, 2016 | 10:56AM
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As China rebalances away from infrastructure and construction-led growth, long-lagging Anglo American (AAL) will find itself better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds at about 40% of revenue, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.

Persistent problems have weighed on profits in recent years, threaten to limit the upside

Anglo's huge platinum business should benefit as rising household incomes bolster Chinese demand for automobiles and jewellery, categories that collectively account for 84% of platinum and palladium use in China. However, persistent problems related to labour, geology, and electricity in South Africa, which have weighed on profits in recent years, threaten to limit the upside.

An 85% stake in De Beers makes Anglo the world's largest diamond miner. As with platinum and palladium, there's big upside to Chinese diamond demand, which now stands at 10% of the global total. Realizing that upside will take more than rising Chinese incomes, as diamonds lack the cultural resonance they have in the U.S., maximizing Chinese diamond demand will really come down to marketing. If Chinese brides come to view the diamond engagement ring as a "must have" like their American and Japanese counterparts did in the 20th century, diamonds have tremendous upside.

Although "overweight" consumption-oriented commodities, Anglo has major exposure to investment-oriented commodities, including iron ore, copper, and metallurgical coal. We expect waning demand growth for these commodities as China rebalances. This will increase the importance of cost competitiveness, an area where Anglo doesn't stand out. Investment-oriented commodities are also where Anglo has made some of its biggest capital outlays, including the long-delayed and over-budget Minas-Rio iron ore project in Brazil.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Anglo American PLC3,523.50 GBX1.63Rating

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Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.