 Key points
• The jewellery industry is becoming more accepting of lab-grown diamonds, while consumers are more aware of them – though demand is hard to quantify • Environmental and sustainability claims by both lab-grown and natural diamonds are coming under greater scrutiny • Profitability problems in the natural diamond supply chain have varied causes, unrelated to lab-grown diamonds competing for market share » View '2019: A year in diamonds' Timeline |
While frequently marketed as a cutting edge modern product, gem-quality synthetic diamonds were first manufactured in 1970 by US company General Electric, using technology pioneered in the early 1950s.
Synthetic (‘lab-grown’) diamonds are estimated to currently account for around 2 per cent of the market – a share that’s predicted to increase to 3.4 per cent over the next five years, according to industry analyst Paul Zimnisky.
An analysis by management consultancy firm Bain & Co. estimates 2 million carats of lab-grown diamonds are produced per year – or less than 5 per cent of the total production of gem-quality stones.
The report predicts this figure could increase to around 17 million carats per year by 2030. By 2035, Zimnisky estimates the lab-grown diamond market will be valued at $US15 billion.
So, why has it taken five decades for synthetic diamonds to reach this ‘tipping point’?
The answer is simple: quality.
Early lab-grown diamond production – formed with the high-temperature, high-pressure (HPHT) method – were yellow or brown due to higher nitrogen content, and filled with plate-like inclusions.
They displayed an undesirable strong fluorescence under short-wave UV light and X-rays, making them easily distinguished from natural diamonds. The cost of production was uncommercial, reaching thousands of dollars per carat. Each of these factors made mass-produced HPHT diamonds undesirable to consumers and uncompetitive with natural colourless (‘white’) diamonds. As a result, they were relegated to industrial use.
Cost per carat
By the 1980s, intensive research had begun into the chemical vapour deposition (CVD) method of diamond synthesis. Using CVD, manufacturers were able to create better quality white diamonds with a higher degree of precision.
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| Natural uncut rough diamonds Image: DeBeers |
However, in 2008, the cost per carat of producing a 1-carat G VS CVD diamond was still $US4,000, excluding polishing and certification; the current production cost is estimated to be $US300–$500 per carat.
According to the Bain & Co. figures, a CVD diamond wholesales at, on average, 20 per cent of the cost of a natural diamond. In the meantime HPHT technology has also dramatically improved and can consistently produce gem-quality diamonds.
Lower wholesale prices mean the lab-grown diamonds have become extremely attractive for retail jewellers as well as consumers.
As a guide, lab-grown diamonds are priced around 20 to 40 per cent lower than natural diamonds at retail. However, in 2018, international mining company De Beers – which once controlled the natural diamond supply chain – introduced another level of price competition with its own synthetic diamond brand, Lightbox Jewelry.
Lightbox – a direct-to-consumer product with no formal wholesale channel – retails pink, blue and white diamond fashion jewellery at a uniform price of $US800 per carat. Notably, Lightbox diamonds are ungraded and compete only in the fashion category.
The positioning of lab-grown diamonds as either fashion, fine or bridal jewellery is still a topic of speculation. Indeed, the extent of true consumer demand is difficult to quantify.
In January this year, MVI Marketing – a US-based research and luxury industry consulting firm – released the results of its survey into consumer attitudes toward lab-grown engagement rings.
Entitled A Diamond Choice 2019: Lab-Grown Diamonds and the Future of the Diamond Industry, the market research – which was commissioned by the International Lab-Grown Diamond Association – found overall consumer awareness of lab-grown diamonds had increased from 9 per cent in 2010 to 51 per cent in 2018.
Of those who were actively shopping for engagement rings, 66 per cent said they would consider a lab-grown diamond – however only 23 per cent answered that they ‘would definitely buy’ a lab-grown stone.
Lab-grown fashion jewellery
Another MVI consumer survey, conducted in July 2019, found respondents were still more likely to purchase lab-grown diamonds as fashion jewellery, rather than for engagement or wedding rings.
Additionally, a recent US survey of 21,000 engaged or recently married couples, conducted by wedding planning service The Knot, found only 15 per cent of respondents preferred a lab-grown diamond for a marriage proposal.
Speaking at the recent Diamond Conference in Gaborone, Botswana, De Beers CEO Bruce Cleaver noted, “The young generations – known as Millennials and Gen Z – are already the largest purchasers of [natural] diamonds worldwide.
“As these consumers reach financial maturity, as female self-purchasing continues to grow, and as 100 million new households enter China’s middle class over the next decade, consumer demand has the potential to power an industry expansion.”
While the North American market accounts for around 50 per cent of international diamond jewellery sales, US retailers have increasingly embraced lab-grown diamonds.
In May this year, the largest US retail jewellery group, Signet Jewelers, entered the lab-grown category through its e-commerce brand James Allen, and also launched bricks-and-mortar product trials in its Kay Jewelers and Jared stores in October.
Canadian retailer Spence Diamonds, which operates five stores in the US and eight in Canada, was an early adopter, beginning to stock lab-grown alongside natural diamonds in 2016. CEO Veeral Rathod recently said 80 per cent of the business’ customers choose the former over the latter – with one key caveat: “when educated on the environmental, animal and human impact of earth-mined diamonds”.
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| Pink CVD/HPHT Seeds for growing pink lab-created diamonds |
He added: “Though we also offer ethically sourced, conflict-free earth-mined diamonds, we want to educate everyone about this alternative because we believe lab-grown diamonds are the future of the industry.”
Yet the ethical and sustainable perceptions of lab-grown diamond manufacturers are far from clear-cut, and, in fact, their claims became a key battleground of the diamond ‘PR war’ in 2019.
Tensions flared in April after the US Federal Trade Commission (FTC) issued warning letters to eight lab-grown diamond manufacturers over unsubstantiated ‘green’ and eco-friendly marketing claims
Following the FTC’s intervention, the Diamond Producers Association – an organisation funded by the seven largest diamond-mining companies – released an independent report from Trucost, a sustainability assessment company, which determined the socio-economic impacts of diamond mining.
The report found that a mined diamond produces 69 per cent less carbon emissions per carat than a synthetic one, due to the intensive electricity requirements of the latter. It also found that mining companies offset their extensive land usage with conservation programs.
Responding to the controversy, the newly formed Lab-Grown Diamond Council (LGDC) commissioned SCS Global Services – an international certification and standards development business – to begin developing a third-party sustainability certification for synthetic diamonds. The first stage of the process – auditing – began in October.
Notably, when jewellery chain Michael Hill recently introduced a collection of lab-grown solitaire engagement rings, there was no mention of environmental credentials or sustainability. Instead, the company’s website emphasised the ability of customers to purchase stones with larger carat and better clarity within their budget – priorities reflected in MVI Marketing’s consumer research.
Industry reactions
Yet while retailers and consumers may be more knowledgeable about, and open to, man-made stones than in previous years, the product continues to polarise the wider diamond industry.
In late May, members of RapNet – the world’s largest diamond trading platform – voted to ban synthetic diamonds and against parent company Rapaport offering a price list for the stones. Six months later, the Lab-Grown Diamond Exchange and Price Index, founded by a former executive of grading laboratory International Gemological Institute, were launched.
Indeed, grading labs have also entered the great diamond debate, with HRD Antwerp and the Gemological Institute of America (GIA) updating their lab-grown certifications this year – drawing both praise and ire.
HRD began grading them on the same scale as natural diamonds in March, while in July, the GIA changed the name of its Synthetic Diamond Grading Report to Laboratory-Grown Diamond Report. The change was made to comply with the FTC’s updated Jewelry Guides.
Each laboratory maintains that differentiation of the two products is critical, and certification remains one of the key steps in preventing mixing, which most parties agree is to the detriment of the entire industry.
However, despite efforts to prevent it, mislabelled synthetic diamonds have been detected in both melee parcels and large individual stones. In August, Bill Sechos, founder of Sydney’s Gem Studies Laboratory (GSL) told Jeweller his laboratory had recently tested a collection of melee parcels in which nine out of 10 contained synthetic stones. In six months, three large stones mislabelled as natural were found to be synthetic.
The GIA has also detected natural diamonds with synthetic coatings, either to increase size or alter colour.
Upstream in the supply chain, several members of the World Federation of Diamond Bourses debated allowing the trade of synthetic diamonds.
While the Israel Diamond Exchange has maintained its long-standing ban, interestingly the Dubai Diamond Exchange hosted the first tender of synthetic diamonds in May.
The Federatie der Belgische Diamantbeurzen in Belgium recently reaffirmed its restriction on lab-grown trading within the halls of its four bourses, though transactions in private offices are allowed, while Mumbai’s Bharat Diamond Bourse has recently indicated its total ban on lab-grown trading may change in the future, pending further reviews and member demand.
Contrasting markets
The key consideration for the diamond bourses is the impact on the natural diamond category, which has once again fallen into crisis.
Natural diamond prices have decreased 9 per cent in the past year, according to Edward Sterck, analyst at BMO Capital Markets. At the same time, the RapNet Diamond Index price for a 1-carat diamond fell 4.7 per cent between 1 January and 1 November 2019.
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| Natural uncut pink and white diamond roughs |
Two of the industry’s largest miners – De Beers and Alrosa – have reported extensive losses across 2019, even compared with a relatively subdued 2018.
With nine of its 10 yearly cycles reported, De Beers’ revenue is more than $US1.2 billion below the same period in 2018.
Alrosa, the world’s largest diamond mining company by volume, reported revenue of RUB173.6 billion ($AU3.96 billion) for the first nine months of 2019, versus RUB238.3 billion ($AU5.44 billion) in 2018.
Elsewhere, mining operations have faced significant financial pressures, with Canada’s Stornoway Diamonds handing back its Renard Mine to creditors in September while Petra Diamonds – which operates the Cullinan site in South Africa – lost more than 80 per cent of its market capitalisation between January and November this year.
The reasons for the downturn are myriad.
The impact of the US-China trade war and the political unrest in Hong Kong were felt across the Chinese luxury sector; notably, jewellery retailer Luk Fook reported a 37 per cent drop in same-store sales between July and September. Even Chow Tai Fook, which recorded a 12.47 per cent increase in profits over FY19, acknowledged that same-store sales growth had significantly weakened in Q3 and Q4 due to the ‘volatile macro-economic backdrop’.
The diamond price collapse has severely impacted the midstream – diamond cutters and polishers, around 90 per cent of which are based in India. Unemployment in Surat is increasing, with the Gujarat Diamond Workers’ Union recording more than 15,000 ‘jobless’ registrations between March and October, according to the Times Of India.
India has also been at the centre of another financial crisis following the 2018 Punjab National Bank fraud, in which jewellery industry titans Nirav Modi and Mehul Choksi allegedly illegally obtained up to $US2 billion.
PNB’s share price collapsed when the financial discrepancies were made public, wiping $US1.9 billion off its market value.
The Indian banking industry is still feeling the effects, leading to significant tightening of lending restrictions, which are critical to the diamond trade in India.
Today’s conditions mimic those of four years ago. In an article dated 28 August 2015, JCK news director Rob Bates wrote: “At De Beers’ July sight, clients declined or delayed purchasing an unprecedented 60 to 70 percent of the goods on offer – a sign of a growing chasm between upstream and midstream distributors...
“[The price collapse can be attributed to] a drop in demand from China and Hong Kong; continued poor sales in other major markets, except for the United States; a lack of liquidity due to banks’ unwillingness to finance the business; the heavy debt load carried by many companies; and the continued inability of rough prices to keep pace with polished prices.”
The overall downturn in the diamond market has also been felt in Europe, with Amsterdam-based bank ABN Amro recently refusing to finance rough purchases except in specific circumstances, citing “concerns regarding the current lack of profitability across a wide range of goods across the midstream pipeline” in a July letter to its clients.
Former ABN executive Erik Jens attributed the profitability problems to pricing. “We should really understand... how much people are willing to buy diamonds for,” he said. “We need to reset the pricing mechanism. If that means that prices come down, so then margins come back, so be it.”
Indeed, at its November 2019 sight, De Beers reportedly reduced prices by 5 to 7 per cent, with added discounts on smaller diamonds. It also offered to buy back 20 per cent of goods weighing more than 2 carats; in September, the buy-back offer was 30 per cent. The company has also offered payment deferments to sightholders, which it calls ‘supply flexibility’.
Notably, the November sales figures were promising, increasing to $US390 million from $US297 million in October.
There are further signs the market is improving, with Alexey Philippovskiy, chief financial officer Alrosa, recently noting, “[In the first nine months of 2019] the diamond market was impacted by the oversupply of polished diamonds and challenging situation in India’s financial sector.
As major producers have reduced diamond supply by a quarter since the beginning of the year and Indian cutters begin to see stocks gradually winding down, the supply and demand in the diamond pipeline seem to be heading towards balance again.”