Don’t panic, but synthetic diamond production is soaring
Mbongeni Mguni | Tuesday April 11, 2023 09:29
For the outside observer, of late, the diamond industry has been dominated by debates over the sanctions against Russian diamonds, the efficacy of the Kimberley Process and more recently, De Beers’ negotiations with Botswana.
Debates on lab grown or synthetic diamonds – which exploded onto the news in the 2000s and posed an existential threat to the natural stones as well as economies reliant on them – appeared to generally take a backseat in recent times.
But that in no way is to suggest that those who create them and those who buy them have been quiet. In fact between the synthetic factories and their rising buyers, the entire ecosystem has been buzzing in recent times, as seen in data around the number of factories, their operating margins, their target buyers, incredulously competitive pricing and growing dominance in certain tiers of the market.
In the US, which accounts for more than 50% of the diamond jewellery market, young ethical consumers, one of the industry fastest-rising and most important market demographics, are opting for synthetics. Synthetics don’t carry the issues around Russia or any conflict diamond and, as the labs argue, synthetics are greener or closer to carbon neutral than the natural diamond mines powered by fossil fuel.
Diamond group, De Beers, recently shared some alarming statistics on the growth trends in synthetic sector.
De Beers long adopted a vanguard position in the natural industry’s response to synthetics, when the existential threat first emerged more than 20 years ago. In fact, De Beers has long taken the position of being a sort of defender of the natural diamond industry, not only because it’s one of the industry’s oldest producers, the entity most responsible for monetising diamonds in the modern era and most responsible for discoveries, but also because of its close partnerships with producer countries such as Botswana. For Batswana, the natural diamond versus synthetic, is not a question for idle debate or choices, but an economic life and death issue, as it is for De Beers, one of the richest companies in the diamond world.
“A lot of that (lab grown) manufacturing has grown in India, massively so, and they have gone from nothing to 6,000 reactors and the expectation is that it will be 9,000 by the end of this year,” says Paul Rowley, De Beers’ executive vice president for diamond trading.
“It’s a tsunami of lab grown diamonds going into the US market and it’s really the US market at the moment.
“There’s not much elsewhere at this stage - Europe not necessarily and the UK doesn’t seem to be getting into it too much but the US has found a slot.”
In fact, according to De Beers’ research, about a third of all diamond engagement rings in the US last year were synthetic or lab grown. That, however, does not simply mean consumers switched from the natural to synthetics. Rather, some buyers would not have bought a natural anyway and instead would have bought another semi-precious jewel. Others would not have bought anything at all. However, the trend does show the increasing dominance of synthetics as a choice for or preference for diamond jewellery consumers.
One key driver is price. De Beers’ researchers have already noted that synthetics have taken over the lower quality ranks of the natural diamonds jewellery due to the dominance of the product and its aggressively cheaper pricing.
“The prices of lab grown diamonds are coming down at one hell of a pace,” Rowley says.
“With lab grown, it’s very interesting what’s happening. It’s moved around rapidly.
“It’s had significant growth, huge actually in every single way. The growing capacity has really come on board and it’s actually not a bad thing. It has come with tremendous growth in production and what’s happened is the prices are going down dramatically.”
He adds: “The price trajectory is very steeply down at Business to Business level, not so much or as steep as yet, at retail.
“And so consequently, that definition says if your raw resource is getting a lot cheaper, but the retail price is remaining a little bit higher, then profitability is high.
“And that’s been one of the issues we have seen here is that retailers have been almost incentivised by that higher profit margin that they have been able to attain, to push lab grown diamonds over this period.”
Essentially, while prices of synthetics have fallen making them significantly attractive for consumers, they have not fallen at the same rate as the labs’ costs of production, a margin that incentivises more labs to join the game. Diamond jewellery retailers, meanwhile, are enjoying the reduction in synthetic prices at Business to Business level, which encourages them to seek these stones out more, in some cases, more than they do than the natural.
Synthetics have capitalised on the US market’s demand for ethically sourced diamond jewellery, at a time when the natural producers are scrambling to improve their traceability and transparency initiatives. Should the US and other Western nations tighten their sanctions on Russia, as is expected in the next few months, that supply gap in the US will again open up more room for the synthetics.
And yet, Rowley says De Beers is not panicking.
Other natural diamond producers and traders are equally nonplussed, a point hammered home recently by global diamond authority and Rapaport chairman, Martin Rapaport, who told a New York meeting attended virtually by Mmegi that “lab growns will blow away like chaff”.
One of the reasons for De Beers’ confidence is the amount of investment it makes every year in detecting synthetics. The prime danger posed by synthetics to natural diamonds is that the lab growns are sold or marketed as naturals, a situation that would collapse the premium price naturals are able to leverage on the market and essentially disarticulate producers and the related economies in countries such as Botswana.
De Beers says over the years it has invested hundreds of millions of dollars in technological research and development, with a key focus on technology that ensures all synthetic diamonds can be readily detected. The diamond giant says it will continue to invest as required to support consumer confidence in natural diamonds.
“Let’s be clear, people are capable of becoming operational within a matter of three or four months, they are up and their innovation and technology means it’s getting cheaper and cheaper to do it,” Rowley explains.
“The important part of technology in the De Beers Group is the ability to differentiate lab grown from natural because the moment we can’t, then I’m afraid it’s game over.
“It would be impossible to tell the difference and being unable to tell the difference would mean the end. “That part of the technology is pivotal to our long term sustainability, all of us with governments actually. “We are very good at it fortunately and so let’s rest assured but that’s not to say people aren’t constantly trying to find new ways of treatments and masking.
“We have to keep on top of it constantly and we spend millions of dollars doing that, making sure we are ahead of the game.”
With the detection technology in place and the market observing the rules of differentiation, natural producers such as De Beers expect that as labs churn out even more synthetics, the rift between the two products will become clearer for consumers: one a pretty, mass produced fashion accessory appropriately priced lower and the other, a rare, natural wonder priced at a premium, mined responsibly in countries such as Botswana, where it continues to transform the lives of Batswana.
“With lab grown prices going down dramatically, we believe they are on track to be that differentiated product,” Rowley says.
“They will co-exist with the natural, but they are really quite different.
“Do we have a moment in time where we are seeing a degree of substitution? Yes, we should be open about that and there’s nothing to hide and, yes, about a third of engagement rings are now lab grown at this stage.
“I’m not sure that will continue because as the price point falls and it will continue to do so as production increases, we will see these going to much more the fashion areas that we always perceived would happen because you can grow as many as you want.
“They are pretty but they are not finite and not rare.”
For his part, Rapaport believes the drop in prices of synthetics indicates their diminishing threat to the premium priced natural diamonds.
Rapaport is a highly influential member of the global diamond industry. He is the founder of RapNet, the world’s largest diamond trading network with daily listings of diamonds valued at $8.7 billion (P114 billion). Rapaport also publishes the Rapaport Price List, the diamond industry’s standard for the pricing of diamonds.
“Lab growns are on a one-way trip to the garbage can,” Rapaport told a roomful of diamond industry players recently.
“If someone is running to a cliff, don’t stop them.
“These lab growns are going to blow away like the chaff.
“Ignore them and focus on your business and what you want to do.
“Lab grown prices are down 70 to 80% and they are on a one way trip; don’t worry about them.”
Rapaport’s advice to the natural diamond industry is to focus on the price premiums available for traceable natural diamonds, particularly which carry the added responsible mining stories such as the Botswana product.
“Natural diamonds retain value and support the livelihoods of millions of people, from the guy in Botswana, to the cutter in India, it’s a community.
“When you have something of great value, you feel different.
“Lab growns, don’t worry about them; just because at the beginning they gave you a pinch.
“This stuff is not significant enough to give you a problem.
“We have been in this industry for hundreds of years.
“We are like those trees that are solidly planted; the wind will blow and it will go.”