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Predicting a synthetic future

There is more than meets the eye behind De Beer’s move into lab-grown diamonds says GARRY HOLLOWAY. Indeed some of the early ramifications have been ‘unintended’, or were they?

It was more than a decade ago when I forecast that De Beers would one day sell its own man-made diamonds.

In a 2008 letter to the editor to Rapaport I wrote: “There is no reason why synthetic diamonds can’t develop strong market positions given time and investment in branding. Some well-informed consumers have already found appealing attributes over natural diamonds.”

My reasoning came about when I discovered that De Beers had patented a way to ‘grow’ synthetic diamonds with a logo inside the stone. De Beers had many other patents where it was trying to make it difficult for other manufacturers to grow diamonds as quickly and cheaper as it could but this was an instance where the patent was registered to insert a logo during the growing process.

It has been 10 years since my prediction, which came to fruition in late May when De Beers blindsided the industry by announcing it would offer its debut synthetics range at what many people believe is below manufacturing cost.


 
Cutting carat cost

Of the 1,000 loose diamond and diamond jewellery exhibitors at this year’s JCK Las Vegas, there were perhaps a dozen or so companies selling synthetic diamonds.

The synthetic diamond manufacturers at JCK were selling stones at half the price of a natural diamond. In doing so, they were saying, “Natural diamonds are 30 per cent off the Rapaport price list so we are going to sell 60 per cent off the list.”

However, out of the blue De Beers came along and announced it was going to take 90 per cent off the Rapaport prices, completely pulling the rug out from under man-made diamond competitors.

Using the high-pressure, high-temperature (HPHT) method of making diamonds made in presses, it is very expensive to make larger sizes; however, with the advent of chemical vapour deposition (CVD), a technology developed mainly for high-speed computer cooling chips and weapons systems, equipment became cheaper and growing a diamond twice the size simply required machines to run twice as long.

It’s important to note that generally speaking the price of a natural diamond rises fourfold when it doubles in weight. Therefore, a one-carat diamond costs four times as much as a 0.50-carat one. Larger crystals are genuinely rare despite what people tell you, and this is consistent with the Rapaport price list.

The cost to manufacture a large diamond is far less than to mine one. If all a company has to do to double the size of a diamond is leave the machines running, the attitude of De Beers is that it can do just that and bank a fortune by trading off the rarity of larger natural stones. In addition, the restriction on CVD diamonds is the depth whereas the diameter is the restriction on natural and HPHT diamonds; 90 per cent of natural and HPHT diamonds are cut too deeply reducing brilliance and perceived size. CVD diamonds will prove to be better cut and look bigger for their carat weight.

When De Beers entered the man-made diamond market and announced its pricing strategy at US$800 per carat, investors were shocked to find that the ‘rarity factor’ does not apply to man-made diamonds.

If a natural, one-carat diamond were to sell for US$10,000 then the man-made diamond companies believed that they could offer it for sale, with a good margin at US$5,000 but what De Beers has chosen to do with Lightbox Jewelry is sell its one-carat lab-grown diamonds at US$800, regardless of rarity-based industry price listings and competitors.

If De Beers can indeed manufacture clean, colourless and attractive pink and blue diamonds, all with great eye-clean clarity, and if it isn’t even going to bother to certify or grade these stones, it’s easy to see why this could be a most profound effect the diamond giant has on the market.

The strategy is both a pro and a con for the wider industry, including business for natural diamond companies.

Chemical Vapour Deposition (CVD) diamonds are grown in a methane gas cloud
Chemical Vapour Deposition (CVD) diamonds are grown in a methane gas cloud

 
Lightbox, for local enonomy

What few people have understood is that the US Federal Trade Commission’s (FTC) recent decision to amend the definition of diamonds was most likely in the best interest of the American economy and government.

De Beers registered its patent back in 2008 and in the time since, it’s generally believed that the company would have been in talks with the US Government to secure sponsorship for its Element Six Factory, which is currently under construction in Portland, Oregon. The factory is set to produce upwards of 500,000 carats annually and will bring the manufacturing process to the US.

President Donald Trump has spoken about wanting to reduce imports and increase exports. Given the US does not mine diamonds commercially – it has a recreational diamond mine – Lightbox Jewelry offers an inroad into a new diamond-manufacturing sector with enormous export potential. If Trump wanted America to enter the high-tech diamond manufacturing business, who would be better placed than the company that conducts the most industrial diamond manufacturing in the world and manufactures and sells diamonds at US$800 per carat?!

CIBJO diamond nomenclature in the Blue Books originally states, “A diamond is a natural mineral consisting essentially of pure carbon crystallised in the isometric system.”

This conflicts with the new US FTC ruling that does not require the word ‘natural’. The ruling provides man-made diamond manufacturers with the opportunity to change their marketing tactics, only in the smaller print clarifying to consumers that their products are synthetic.

Detection is getting much easier for all man-made diamonds, whether they are HPHT or CVD stones. All synthetic diamonds are type II whereas only a small percentage of natural diamonds are type II.

GIA has released a device for less than $AUD10,000 that reportedly identifies type II set or loose diamonds in a few seconds from large sizes down to stones of one point or less. If a piece of jewellery contains more than five per cent type II diamonds, it is very likely that the stones will be synthetic and should be removed for further spectrographic testing under liquid nitrogen conditions.

Twenty years ago nobody had the techniques to be able to verify whether or not diamonds were possibly synthetic and it won’t be long now until all of the ‘crooks’ attempting to hide synthetics in diamond parcels will inevitably be caught.

CVD crystals can be added to. They are HPHT treated to make them colourless.
CVD crystals can be added to. They are HPHT treated to make them colourless.

 
Man-made popularity

Another recurring pattern we have seen in our industry is the rise in popularity of coloured gemstones in spite of synthetic counterparts.

When companies introduced synthetic emeralds to the market in the 1950s, it was argued that it would reduce the demand for natural emeralds. In fact, some people will argue that emerald demand increased across the sector for both synthetics and natural stones because more people were wearing emeralds

We have seen this trend repeated countless times; entry-level jewellery consumers purchase a synthetic gemstone, develop an appreciation for its appearance and then want to purchase the real thing.

In terms of Lightbox Jewelry, the notion that it is being marketed to Millennials may also be a misconception – I know people aged in their 50s, 60s and 70s who own many natural diamonds yet these same consumers are buying Lightbox diamonds cheaply and having them re-set in ‘fun’ pieces.

God forbid any husband or partner who gifts these ladies anything other than ‘the real thing’!

Don’t think for a second that this brand is only for Millennials; that’s absolutely untrue. Another consumer group who will be attracted to lab-created diamonds will be ‘tech heads’, mostly because they love the science behind it. This is also a consumer group that hates the idea of visiting a real store and talking to real people only to be ‘ripped off by jewellers’.

They loathe shopping and I estimate 50 per cent of tech heads buy their diamonds online to avoid the bricks-and-mortar stores.

Will lab-created diamonds reduce mining and monopolise the sector? Only time will tell. In fact, they may even increase demand. Lab-created diamonds are gaining popularity at the same time as moissanite, a stone that would have otherwise taken over as the most preferred substitute for lower-priced diamonds.

Charles & Colvard first introduced moissanite, regarded as a diamond alternative to the jewellery market in 1998, with some optical properties exceeding those of diamond. The company controlled the use of moissanite in jewellery by patents; however the worldwide IP began expiring in August 2015.

Therefore, it is the moissanite market that is probably going to be hit harder by Lightbox Jewelry than anything else, just as far better and much cheaper moissanite is available now that the Charles & Colvard patent has expired.

Muddy mining ethics

It is often said that synthetic diamonds will appeal to ethically-conscious consumers such as those people who are attracted to fair-trade-coffee.

These consumers are said to be concerned for the welfare of miners in African countries where purported exploitation occurs and ‘blood’ or ‘conflict’ diamonds are mined.

However, the problems associated with conflict diamonds are now confined to the Democratic Republic of Congo as a result of the successful Kimberely Process.

Even NGOs like Global Witness, who blew the whistle on the conflict diamond scene in West Africa, would agree.

An alternative view to this takes into account the livelihood of the more than one-million artisanal diamond miners in the world, according to the Diamond Development Initiative. As a result, the rise of man-made diamonds – purchased by consumers who feel no blood is spilled in the synthetic process – could result in the starving of thousands of artisanal miners who won’t have demand for their product, let alone the chance to receive a premium price, as do the fair-trade coffee growers.

Man-made diamond manufacturers also appear to promote their factories as ‘green’ or environmentally-friendly by using electricity or wind power rather than coal. These claims appear to be unsubstantiated at best and the locations of these factories are often not even close to wind power stations.

One US company, Diamond Foundry, claims Leonardo DiCaprio as an investor; however a friend who is close to the company told me the shares were gifted/donated to the star of the ‘Blood Diamond’ movie in return for international publicity.

If true, it’s another example of the skewed ethics of ‘do-gooders’ where millionaire celebrities are given more ‘money’ to promote man-made diamonds than what we are willing to give to starving Africans.

These lab-created manufacturers clearly recognise that their products are marketed to consumers who want the satisfaction of purchasing seemingly ethical products and want to appear to fulfil those aspirations in all aspects of their production.

It’s a noble cause but the benefits are, as yet, unsubstantiated and which could have more negative ramifications than benefits.

Brilliant future?

Production of man-made diamonds equals less than 1 per cent of total worldwide mined diamond production, however De Beer’s entry into the synthetic diamond market may impact the industry in unexpected ways.

Most pundits have analysed the strategy from the consumer’s perspective however, few have taken into account the affect on investor confidence. If Lightbox Jewelry is selling its man-made diamonds below the cost price of other manufacturers/ competitors, then synthetic diamond manufacturing investors will now question the return on investment.

In truth, the synthetic diamond market is in its infancy and therefore relies heavily on improvements in manufacturing processes along with advances in technology and equipment. Both of these require deep pockets with the funding being provided by long-term investors.

Furthermore, by selling diamonds at US$800 per-carat, the market has already had to suffer a sudden and unexpected a 60 per cent price drop in one hit. This price decline, along with crippling investments, means that the value of man-made diamond product depreciates rapidly and instantly – consumers cannot sell their man-made diamond rings for even a quarter of the price they paid.

In fact, at this very moment they may be lucky to get $10 for a synthetic stone that cost $2,000.

Another price reducing influence is that there are engineers in China, Russia and India who are without jobs and it would not be far-fetched to consider that it will only be a matter of time until they also build their own backyard CVD machines. Faced with unemployment and the poverty that comes with it, these engineers probably won’t care too much about cheating on De Beers patents, which outline in detail how to best manufacture diamonds.

Maybe soon those engineers will start ionising carbon and methane, and Bob’s your uncle – we will have another 100 companies in the market manufacturing synthetics!

De Beers’ decision to enter and control the man-made diamond market is really one without precedent and no one can possibly foretell precisely how the diamond industry will be affected. The only sure thing is that any impact will bring large and probably permanent changes.

 


 

'The Great Diamond Debate' Contents » 

Innovation vs Disruption: Spectators don't win games
Coleby Nicholson, managing editor of Jeweller
 
Diamonds and Youth: Millennials and Gen Z drive sales
Lab-created diamond jewellery market to grow to US$15B by 2035
Paul Zimnisky, paulzimnisky.com - indepdendent analyst

 











ABOUT THE AUTHOR
Garry Holloway

Diamond Cut Expert • Holloway Diamonds


Australian-born Garry Holloway is a self confessed “cut nut”. He graduated as a Geologist in 1973 and in 1975 he established two fine jewellery stores in Melbourne. While studying for the Diamond Diploma in 1984, Holloway became obsessed with diamond cut research; he invented the Ideal-Scope and Patented Holloway Cut Advisor. Holloway lectures on diamond cut at the Gemmological Association of Australia and works with a group of Russian and Indian researchers known as The Cut Group. Visit: hollowaydiamonds.com.au









Sunday, 16 December, 2018 07:19am
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