While De Beers, gov’t negotiate, new threats emerge

Mbongeni Mguni | Monday June 26, 2023 06:00

It would have been natural to assume that the 30,000-plus diamond industry professionals who gathered in Las Vegas, USA for the annual JCK Show recently, would have, uppermost in their minds, the ongoing talks and tensions between government and De Beers on a new deal.

After all, as has been repeatedly pointed out, the 54-year old deal between the two partners is the diamond industry’s single most important covenant, each year producing the world’s highest production of rough diamonds by value.

The well-publicised misgivings from the government side on the fairness of the deal, together with statements of possibly ending the arrangement, have certain generated a great deal of anxiety, particularly as it comes at a time when supply from Russia, the largest producer by volume, has been sanctioned due to Moscow’s invasion of Ukraine.

Government and De Beers have given themselves a deadline of 30 June to agree on a new agreement governing sales from Debswana and other arrangements for mining leases which expire in 2029.

However, the thousands of delegates attending the JCK this year – the diamond industry’s largest trade show – seemed to have other matters on their minds.

The biggest of those, although many would not readily concede publicly, is the growing threat of lab grown diamonds to natural diamonds, particularly the manner in which the synthetics are increasingly undercutting key segments of the market for natural producers.

Having held lab-growns at bay for years by successfully highlighting the store of value natural diamonds have, their enduring symbol as a bridal centrepiece and the real world good they do for economies such as Botswana, natural producers have increasingly ceded key ground to the cheaper lab-growns, whose prices have plummeted as output has ballooned in line with demand at lower price points of the consumer market.

In fact, according to De Beers’ own data sets, the numbers of synthetic diamond labs in India is due to jump to 9,000 this year from 6,000. In the United States last year, which represents the key market for diamond jewellery or about 54% of an $80 billion pie, a third of all diamond engagement rings sold were synthetic. Engagement and bridal rings are a crucial selling point for natural diamonds.

“It’s a tsunami of lab grown diamonds going into the US market and it’s really the US market at the moment,” Paul Rowley, De Beers’ executive vice president for diamond trading told local journalists earlier this year.

“The prices of lab grown diamonds are coming down at one hell of a pace.

“It has come with tremendous growth in production and what’s happened is the prices are going down dramatically.”

The trend comes as consumers demand more “ethically produced diamonds” and higher traceability or provenance for stones at a time when sanctioned Russian production is still flowing into the market and as the laboratories claim their production is less environmentally damaging and conflict-free.

Add to this the uncertainties in the global economy, particularly in the US which experienced banking collapses earlier this year and where interest rates continue to rise, and it is clear why some jewellers are increasingly pivoting to synthetics, rather than the pricier naturals which sit for longer on the shelf – up to a year or more, according to some jewellers in Las Vegas.

The price trajectory for lab-growns has fallen very steeply down at production level, but less so at retail, meaning greater price margins for jewellers, who are eager to sell off and stay profitable in an unsteady economy.

“There’s no doubt that the lab-grown market will continue to grow, especially because many major jewellery retailers have product lines focussed on lab-grown diamonds,” reads research developed by the Plumb Club and circulated at the Las Vegas show this year.

“In 2021, the world’s largest jewellery company, Pandora, made a major shift by announcing that it would stop using mined diamonds and would switch to lab-created diamonds in its jewellery.

“Pandora said it is instituting the change as part of an effort to sell sustainable jewellery and also because consumers are asking for it.”

The Plumb Club, a 40-year old jewellery association, says lab-grown diamond prices fell in 2021, while natural polished diamond prices rose by about 30%. Generic lab-grown diamonds are priced as much as 80% lower than natural diamonds of the same “quality” and the lower pricing allows couples to buy a bigger stone.

De Beers, Botswana and other natural diamond producers and proponents are not resting on their laurels, however. Intensive research, strategising and marketing by the diamond company, coupled with a redoubling of the storytelling around the “diamonds for development” campaign by the government, is designed to clearly widen the gulf between lab-growns and naturals.

Together with other natural diamond actors, the objective is to hammer home the message of just where natural diamonds source their value: their rarity, formed over three billion years, the inimitable sentimentality and emotion around the natural diamond and the measurable impact the stones make for producers such as Botswana, where health, education and other social benefits are anchored on diamonds.

De Beers’ Group Executive Head of Human Resources, Malebogo Mpugwa, made the point on the social benefits, at the opening of the group’s exhibition at the JCK.

“I’m fascinated when I think about the value that diamonds create, whether it’s a young girl in a remote village in Botswana who wakes up in the early hours of the morning to get education in school because of diamonds.

“Whether it’s about our operators who wake up to go to the mines with dedication, leaving their families, to work to extract these diamonds.

“You want to think about a polisher who brings out the brilliance in these amazing diamonds, doing that with dedication.

“Or that retailer who is there trying to convince you to buy this natural diamond, talking about the product and its source, hoping to make the purchase,” she said.

Besides investing millions of dollars over the years to successfully detect and distinguish lab-grown diamonds from the naturals, De Beers has also opened up its blockchain traceability platform, Tracr, to the broader natural diamond industry in an effort to present an industry-wide solution to consumers’ concerns about the source of natural diamonds.

In Las Vegas, group CEO, Al Cook, announced the roll out of De Beers’ Origin Suite of Services, which brings together diamond traceability from source, powered by Tracr, with digitally enabled storytelling about the origin and impact of natural diamonds discovered by De Beers. Consumers who buy De Beers’ diamonds will have access to a personalised digital record on the journey their diamond has taken from its formation, recovery and processing, including the people involved at each stage, as well as a rarity score updated each year to reflect annual production and also a record of the impact the diamond has made in its home soil.

Natural diamond producers are hoping and expecting that the fall in lab-grown prices will reach an inflection point – the level where the lab-growns price themselves out as alternatives to naturals and retreat to a status of being fashion jewellery, creating a clear market demarcation as opposed to being positioned as substitutes to the natural.

Martin Rapaport, the founder of RapNet, the world’s largest diamond trading network with daily listings of diamonds valued at $7.4 billion, is outspoken about lab-growns and the possibility that they could stand toe to toe with naturals.

“The synthetic diamond business is an interesting one when it comes to selling sparkle like cubic zirconia or custom jewellery, but unfortunately, the synthetic diamond business has started or is evolving to people trying to sell it instead of real, natural diamonds,” he told Mmegi in Las Vegas.

“We’ve proved that these diamonds are not real to the extent that they do not retain value.

“What we are experiencing now is a sharp drop in value and I predict these things will be sold for tens of hundreds of dollars, not thousands and we are talking about perfect large stones.

“Therefore the long term benefit to the jewellers selling synthetic diamonds is very negative.”

According to Rapaport, jewellers who throw their lot in with lab-growns will ultimately rue their decision.

“They are not a substitute because as I say, engagement is a serious matter and not a time for gifting of costume jewellery and furthermore, the idea that jewellery retains value, is fundamental to the gifting of it.

“It’s saying, I’m giving you something of great value and retailers need to understand that this is an essential part of the jewellery business.

“You might be selling little things but you are not selling jewellery and I would challenge whether that is real jewellery or not to the extent that it fulfils the function of what a jeweller should be selling.”

He continues: “I think there’s a problem with jewellers figuring out who they are and what they sell.

“If a customer wants ping pong balls, will you sell them in your jewellery store just to break even?

“The idea that a synthetic diamond is a substitute for natural does not work in the long term interests of the jeweller.”

Mmetla Masire, the managing director of Okavango Diamond Company (ODC), the state-owned diamond trader, believes room exists for the country to better market its diamonds, the story around their ethical sourcing and impact on the community.

In Las Vegas, very few of the hundreds of exhibitors showing all types of diamond jewellery, appeared to know that Botswana is the world’s largest producer of natural diamonds by value. As multi-million dollar deals were sealed for jewellery, the country-branding opportunity and potential benefits were evident.

“We have a lot of marketing and branding to do,” Masire told Mmegi.

“So we are trying to now build a stronger relationship with the manufacturers and jewellers so there’s a direct link.

“A lot of people here do not relate diamonds to Botswana.

“Right now people just see diamonds from Africa and they don’t know where they are coming from.

“For a very long time, we were just focussed on selling and not really worrying about that, but with the provenance issue coming out, it’s important that people can relate ODC to Botswana and can relate Botswana to ethical sourcing of diamonds.”

In Las Vegas, minds were also focussed on new research that suggests that besides ceding ground at lower price levels to lab-growns, other minerals are gaining ground on diamonds in consumers’ jewellery choices.

Diamond research veteran, Edahn Golan, has noted increasingly discernible patterns of consumers opting for minerals other than diamonds in recent years. The patterns are still quite slight, but evident for industry watchers such as Golan.

“In 2020, out of every 100 engagement rings sold, six were non-diamonds and this year it’s eight, which is a jump,” he said.

“Demand is decreasing and people are choosing something else, often emeralds, which is exciting for those in emeralds, but less so for those in diamonds.

“This is not just a number, it’s a trend and we have seen it three years in a row.

“There are people turning completely to something else and not just lab growns.

“If I was the CEO of De Beers, I would say maybe let’s look at this.”

The trend is likely influenced by the stain on the natural diamond industry caused by sanctioned Russian diamonds.

In fact, after lab-growns and emerging trends of minerals competing against diamonds in engagement ring sales, Russia is a major issue occupying minds in the diamond industry. More specifically, the industry is concerned what the upcoming G7 sanctions will look like and what impact they will have.

The United States and other members of the G7 are attempting to tighten sanctions against Russian diamonds, the world’s biggest producer by volume, in order to stop the continued flow of revenues from Moscow’s stones into that country’s war against the Ukraine.

While supportive of the tighter sanctions, producers and their industry bodies are concerned about the potential for an inadvertent impact of the measures, particularly where this concerns the entry of diamonds into the US.

“There are questions about whether the US government will outlaw these diamonds and how they’ll outlaw them and what changes that will make,” Rapaport told Mmegi.

“These are real issues and how do you deal with them?

“That’s what the US retailer is thinking about because they may have customers who are asking ‘what are you selling me and are you selling me diamonds that are fuelling that war?”

Besides the broader, long term issues, the industry is also concerned about the short term, specifically, the second half of the year and the possibility of reduced demand for natural diamonds due to uncertainties in the US economy. Last week, Bloomberg reported that some of the world’s biggest bond managers were sticking to their forecasts for an economic downturn in the US, due to a lagged effect of the string of interest rate hikes effected by the Federal Reserve.

“By their reckoning, the damage from 10 straight increases has been done and the collapse of three US lenders in March was just a taste of the bigger crisis to come as central banks stay hawkish until something else breaks,” Bloomberg reported.

The ODC, which is the largest retailer of Botswana-only diamonds, is concerned.

“The lower demand is a combination of things and it not just the high uptake from previous years,” Masire told Mmegi.

“There is a lot of talk about who is buying natural and financially people are going through a difficult time.

“The US economy is not performing very well and the reality is that most diamonds are bought here so if people are faced with economic challenges, it’s only natural that the retail demand will drop.

“It’s a combination of factors and we also believe with the Ukraine war, the Russia issue, a lot of jewellers are not willing to commit long term.

“They want quick access to liquidity and don’t want to invest too much into the long term.

“They won’t want to carry a large stock or inventory of diamonds.”

The ODC and other producers are hoping inventory clears out of the midstream early in the second half which would prop up retail sales over the key period between Thanksgiving in the US and the Chinese New Year when, per tradition, most natural diamonds are sold.

So where does the De Beers, government debate rank in the minds of the industry? The sense is that the reason the negotiations are not front and centre of minds is because the industry expects a renewal and that the agreement will take place. Many are more focussed on what the terms of the new deal will be, rather than the possibility that the agreement could end.

The 54-year old partnership, the most important in global diamond production, is simply too critical to be done away with, the industry says.