Forking over more for bling

Diamond supplies are tight and demand is surging. Guess what's happening to prices.

By Parija B. Kavilanz, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Next time you get the urge to splurge on a diamond, be prepared to pay a little bit more.

Some industry experts say last year's film "Blood Diamond," starring Leonardo DiCaprio, which highlighted the horrors related to the illegal trade of "conflict" diamond in Africa, could potentially add to the industry's supply chain costs.

Moreover, the global diamond industry is faced with a demand-supply imbalance which is pushing up prices for the precious stone.

Diamond bling shines in China, India

Christopher Jones, analyst with Oppenheimer & Co., said diamond jewelry has become a status symbol among India's rising middle and upper-middle class population and among China's rapidly-growing club of new millionaires.

Both countries traditionally have been big consumers of gold jewelry.

"There are more wealthy people in the world today than 10 years ago. Traditionally we haven't seen high demand for diamonds in countries like China, India or Russia," said Jones.

However, while demand for high-quality diamonds remains robust in America, and more recently in Asia and elsewhere, experts caution that there's also an ongoing shortage of high-quality diamonds that are mined mostly in African nations such as Botswana, South Africa, Angola, the Democratic Republic of Congo and Sierra Leone.

But as with any naturally occurring mineral, Jones said it's not easy to rapidly increase production to meet a periodic burst in demand.

In the last decade, he said there's only been one major new diamond mine discovery, in Canada.

"It's not as if you can quickly build the infrastructure to accelerate diamond production when prices and demand spike," Jones said. "And even if you can, only a small fraction of diamonds that are mined are worthy of being sold as premium gems."

Melissa Otto, analyst with WR Hambrecht, thinks "Blood Diamond" has generated debate within the industry about ways to improve conditions for African diamond miners.

"The African diamond industry isn't developed. It's also very opaque and nebulous," said Otto. "The governments don't provide any incentives to improve the systems. And the only people that are profiting are the middlemen. Given these conditions, and diamond still rising, prices for diamonds will go up."

Otto said (NGOs), government and industrial organizations, now want to take a closer look at the overall supply chain of diamonds in Africa, which accounts for half of the volume of global diamond production, followed by Russia and Canada.

"This is not just an issue for Africa. If the monitoring process for conflict diamonds was working, we wouldn't see smuggling of conflict diamonds in trading centers around the world, including the United States," said Corinna Gilfillan with Global Witness, a Washington-based non-profit group that was co-nominated for the Nobel Peace Prize for its work on raising awareness about conflict diamonds.

Before the movie was released, U.S. jewelry merchants feared it would unfairly cast all diamonds, even those that are certified as non-conflict diamonds, in a bad light and hurt their sales.

DeBeers, the world's major diamond consortium, maintains that strict regulations currently in place have reduced the trade in conflict diamonds to less than 1 percent of all diamonds traded.

Additionally, New York-based Jewelers of America, the national association that represents more than 11,000 merchants including Tiffany and Zale Corp., requires its members to pledge annually not to trade in conflict diamonds.

One industry expert with Rapaport Group, a provider of industry pricing information, told CNNMoney.com said that while prices for high quality diamonds had shifted higher, most jewelry retailers said they hadn't yet seen a negative impact on sales because of the movie.

Still, Otto suspects the movie could pressure leading jewelry retailers like Tiffany (Charts), Zale (Charts), Kay Jewelers and their suppliers to do more - and spend more - in efforts to appease public concern.

"From a marketing perspective, retailers may have to invest more money in communicating to consumers and educating them about these measures that protect them from conflict diamonds," she said.

Global Witness' Gilfillan agreed. "A lot more people in the United States know about conflict diamonds because of the movie," Gilfillan said. "Our own survey of jewelry retailers that we conducted after the movie was released showed that consumers were asking more jeweler retailers more questions about their diamond policy. I think this is a unique opportunity for the industry to clean up its act, do more due diligence, act more responsibly and use its power to combat the blood diamond trade."

Eventually, Otto said the combination of greater demand for quality diamonds and pressures from NGOs to improve conditions and the infrastructure for diamond miners in Africa, will push up costs in the diamond industry.

"Ultimately, we think longer term, these additional costs will have to be passed along to retailers and consumers," Otto said, who has a "sell" rating on Zale and a "hold" on Tiffany.

"It will pressure Tiffany's margins as it aims to sell more fine diamond jewelry rather than its (more profitable) silver jewelry," she said.

Time Warner (Charts) is the parent company of both Warner Bros. and CNNMoney.com.

Tiffany, Zale and Kay Jewelers could not immediately be reached for comment.

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-- Analysts quoted in this story do not personally own shares of the companies mentioned and their firms do not have an investment banking relationship with those companies. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.