Synthetic diamonds and the Kimberly Process � fighting the last war
Roman Grynberg | Friday June 6, 2014 16:46
For a decade now the world has been engaged in what has been seen as a battle against blood diamonds i.e. diamonds that have been used to fund wars in countries like Sierra Leone, DRC and Angola. The Kimberly process, has been a unique but flawed example of an attempt at global co-operation by producers and consumers to stamp out blood diamonds. That the Kimberly process even succeeded in being established is because it was in just about everyone’s interest for it to do so. No-one in the diamond business needed these stones which are sold as symbols of love being associated with war and bloodshed. Moreover, the blessing of the World Trade Organisation and the UN to restrict the trade of blood diamond did much to help do what the De Beers cartel could no longer do in the 1990’s. Unfortunately not all went to plan as the Kimberly process did not come with a system of traceability.
The Kimberly makeover
The Kimberly process is named after the town in South Africa where in the 1860’s Cecil Rhodes, who owned De Beers and was the first of the great African war lords, made his millions in diamonds and went on to use those funds for the pillage of Zimbabwe. Kimberly, a name that should go down in infamy as the first source of blood diamonds in Africa, has with a rare marketing brilliance, rebranded itself and has become synonymous with the good governance in the diamond industry.
Given its history it is a truly spectacular marketing makeover, almost as big a marketing coup by De Beers when in 1948 it introduced the marketing slogan that ‘diamonds are forever’ which convinced every poor consumer in the western world that if he wanted to really demonstrate love for his fiancée he would need to part company with at least two months salary to buy his beloved a diamond engagement ring. Diamonds, like his love and despite the high divorce statistics, were supposed to be forever and if the love was not going to last forever then the diamonds were supposed to stay forever off the market. As long as the diamond rings stayed off the market supply could readily be controlled which it was at least up to the end of great De Beers cartel, the Central Selling Organisation (CSO) in 2000. As long as De Beers could assure buyers that in the longer term that their diamond rings would be a real store of value rising by at least the rate of interest after taking into account inflation then diamonds were indeed forever.
But now it is Zimbabwe and the De Beers success in the marketing of diamonds that is requiring a fundamental change in the decade old global consensus around the Kimberly process. For NGOs like Global Witness, which were amongst the original drivers of the war on blood diamonds, the multiple sins of the diamond industry went well beyond the funding of Africa’s wars.
The abuses of human rights at the alluvial Marange diamond fields as well as the use of child labour in cutting in India were all human rights issues that needed to be addressed. But many of the participants in the Kimberly process want no part of an expansion of its mandate beyond the narrow confines of what are conflict diamonds. Like all international organisations the Kimberly Process is made up of 54 countries and works on consensus and many of the participants who profit from a system without real traceability want no part of the extension of its mandate to human rights or to polished diamonds.
But some participants in the Kimberly process like the US as well as NGOs like Global Witness which withdrew from the Kimberly process in 2011 want to see fundamental reform. The Kimberly certificates, which allow trade in parcels of rough diamonds are issued by governments and are in some, but not all cases are simply not credible. Because there is no system of traceability of rough and polished diamonds some certificates cannot be trusted. Conversations between diamond traders will inevitably turn to the cost of the bribe one has to pay to launder one’s diamonds in one or other jurisdiction. It was also in the interests of the major diamond mining companies to control the value chain for diamonds and to get the international community to do voluntarily what De Beers had so effectively done as a cartel for 80 years. But without traceability it was simply not far enough.
Synthetics – real diamonds but not real value
The De Beers marketing campaign has not yet run out of steam and as more and more people enter the urban upper middle classes in China and India, the more diamonds are becoming part of Asian engagement ceremonies. As a result, diamond demand is rising in Asia but diamonds, at least in nature, remain rare and supply is not keeping pace with the success of diamonds. Enter synthetics!
In the early 1950’s synthetic, as opposed to imitation diamonds, were first developed. At first the synthetics were only used for the production of industrial diamonds. Up until the late 1990’s the technology to create these synthetics was dominated by three companies, De Beers in Europe (Element 6), General Electric in the US and then Sumitomo in Japan.
The three flooded the industrial diamond market with millions of carats and the price in the US and EU collapsed over a period of three decades. But suddenly now the technology for making these near perfect copies of mined diamonds, which are virtually undetectable to the naked eye, is no longer dominated by the traditional producers.
The big boy on the diamond block is no longer Botswana or Russia and certainly not South Africa but China, which with no diamond mines to speak of, has entered the market and is now the world’s biggest producer of diamonds selling what the US Geological Survey estimates to be between 6-10 billion carats of diamonds for largely but not exclusively for industrial uses. Total world production of mined diamonds in 2012 was only about 128 million carats.
In most countries gem diamond traders and retailers are supposed to inform buyers whether the goods they are buying are mined or synthetic. However, despite the best efforts of De Beers to brand some of its own diamonds, develop machines that can, at a price, detect synthetics and work with agencies such as the Gemmological Institute of America to issue certificates to differentiate mined from synthetic diamonds more and more of these synthetics are entering the gem market without being detected.
But with the smallest of diamonds below 0.2 carats called melees the cost of detection of an individual synthetic diamond is so high relative to their price that significant penetration of synthetics into the mined diamond value chain has already occurred. Unless the whole diamond value chain can be controlled from ‘mine to mistress’, and this can only be done with a system of traceability, then diamonds almost certainly have no future as a store of value.
The moment the average divorcee finally becomes aware that diamonds are no longer rare, and can be made, as Karl Marx once famously said, ‘as cheap as bricks’, then the diamond ring she has in the jewellery box from her last failed marriage, which she believes is appreciating in value every year will suddenly hit the market and then we will all discover that diamonds are not forever.
The biggest threat to diamonds is no longer blood diamonds or the effect of Marange or child labour exploitation in Surat but synthetics. One large diamond trader in South Africa said to me that he knew that the synthetics that he sells in increasing volumes would kick the bottom out of the lower end of the mined diamond market. But he assured me this was only the bottom end. Unfortunately most mined diamonds are very small – about 80-90% of stones are under half a carat. If this market collapses the profits from the entire mined diamond sector will collapse with it as well as the stock market funds for further diamond exploration.
There is at least a partial confluence of interests once again. It is in virtually everyone’s interest in the diamond industry, even the synthetic producers, not to allow the value of gem quality diamonds to follow the experience of industrial diamonds. But markets are markets and they are driven by human greed and what is true of China as a whole is certainly not true of each individual synthetic producer in China.
To control the supply of diamonds, both rough and polished can, be done by extending the mandate of the Kimberly Process beyond its current mandate of rough diamonds. This was recommended in a draft report late last year on the Kimberly process by Harvard University and the so-called Multi-Stakeholder initiative integrity. Extending the Kimberly process to polished diamonds will require a system of traceability which those in the low profit middle of the diamond value chain will find difficult to afford. Moreover, those who profit from issuing of Kimberly certificates for laundered diamonds would also lose and would certainly oppose such an extension.
Consensus will not be possible
Much to the chagrin of the South African government the Americans are using the developed world’s proxy of choice, the Organisation for Economic Co-operation and Development, as they did in the past over tax havens a decade ago, to impose a new trading regime on the developing countries without any real consultation. It is a fundamentally undemocratic process and yet it is in the interests of virtually all participants that the Kimberly process be extended from rough to polished diamonds. It will then make the Kimberly a truly global standards body. But the South Africans are mistakenly leading the charge because they believe that all countries need to be consulted. While it is also in Zimbabwe’s and DRC’s interests that the value of diamonds not collapse, they will not voluntarily agree to a global trade regime which imposes higher human rights standards on them.
The mined diamond industry is living on borrowed time and unless it is able to show developed country consumers that the products they are buying are both ethical and mined and hence rare, then the industry’s demise seems only a matter of time, just as happened with industrial diamonds two decades ago. Only a truly global process that offers traceability of rough and polished diamonds ‘from mine to mistress’ will give the NGO’s and the US the instrument of control of human rights in mining that they seek.
By extension this same system, will also give the industry the instrument it needs for diamond to survive as a store of value. Seeking global consensus from individuals that profit from illegal trade and laundering and with countries that will not agree to heightened standards will only delay the process of establishing a global diamond standards body and time is not on the industry’s side.
* These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated.