Synthetics add to diamonds’ difficult year
Mbongeni Mguni | Tuesday August 22, 2023 11:42
Retail and consumer data analytics consultancy, Tenoris, this week released a report that, under normal circumstances, should raise eyebrows in the diamond industry.
According to the firm, in July, after months of gradually nearing each other, natural and lab grown unit sales in the United States market reached a 50/50 share for the first time. The US is the world’s foremost market for diamond jewellery, accounting for 54% of a pie estimated at beyond $80 billion annually.
In certain sizes of stones, lab growns have taken over from the naturals.
“(In the market share for loose diamonds), the trend for the coming year is one of growing lab grown diamond sales while natural diamond sales remain at a relatively steady supply and demand, by which lab grown diamond gains share,” Tenoris analysts said.
Loose diamonds are diamonds that have been cut and polished, but not yet set in a piece of jewellery. These are ready to be mounted on a ring, earring or any piece of jewellery. Many jewellers sell loose diamonds as well as pre-made jewellery.
Loose diamonds are a smaller piece of the market when compared to finished jewellery, but for those tracking trends in the industry, they do provide a useful thumbsuck for broader patterns in the market.
This year, the figures being shared for lab growns come as natural diamonds experience a difficult period, with De Beers recently reporting that the value of its first half sales dropped by 23%, while prices achieved also dropped 23%.
The major factors facing the natural industry this year are high inventory levels of polished diamonds in the midstream, which affect demand for rough diamonds, as well as ongoing global economic uncertainties, particularly in major markets such as the United States.
The US Federal Reserve raised interest rates to a 22-year high recently, further pressuring consumers, after a series of similar increases.
While lower consumer appetites affect all classes of luxury products, the lab grown producers appear to be coasting by. Thousands of synthetic laboratories have opened in India and China in recent years, flooding markets, particularly the US, with increasingly cheaper stones.
These products are consistently marketed as being ethically and sustainably produced compared to natural diamonds, which plays well with the increasingly discerning American consumer, especially at a time when sanctioned Russian naturals continue to trade in the market.
More critically, many labs are only too happy to market their products as the real deal, further muddying the waters and threatening the space occupied by natural diamonds.
Legend has it that diamonds are forever. The question is: does this refer to the ones from the ground or from the labs?
Concealed in the great sands of the Kalahari Desert stretching to the shores of the perennial Okavango Delta, the glittering gemstone abounds. It is similarly plentiful in the northern terrains of Russia and the riverbanks of the Congo basin.
Diamonds are not only special because they are difficult to find, but they also carry a special essence because of the crystallisation process of nature that happens underground, one that spans on for billions of years, before the precious stone is ready to be unearthed.
While the story of diamonds taking billions of years to crystallise beneath the ground upon which we tread may seem special, India and China have mastered the process of simulating this process using technology to birth what has now become known as “synthetic diamonds” or “lab-grown diamonds”.
While the diamond industry successfully fought off the first onslaught of synthetics some 20 years ago, these alternatives have gained more market traction in recent years, as their costs of production have dropped sharply, but not at the same pace as their shelf price, which provides a tidy margin for retailers.
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 begrudgingly and increasingly ceded ground at certain sizes of stones to the cheaper lab-growns.
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.
Quizzed on whether De Beers is facing competition in the market due to synthetic diamonds, De Beers group Executive Vice President, Paul Rowley, recently said that though they had noticed a small degree of substitution with synthetics starting to undercut the group on the low value market, he believes that synthetics have a parallel market. He further said that though synthetics have entered the market like a ‘’’tsunami” they are not a threat to the rough diamond market.
“We have seen a small degree of substitution for small value diamonds, synthetics are starting to replace them, but they will find their own market, they will not disrupt or disturb the rough diamond market,” he told media earlier this year.
Natural diamond producers such De Beers frequently talk about “bifurcation” when asked about lab grown diamonds. Bifurcation or the splitting of the market into two parts, is increasingly evident in the diamond retail market, with the prices and consumers of lab growns on one end and the prices and consumers of naturals on another.
Analysts explain that when a customer walks into a jeweller carrying $8,000 and shopping for diamonds, even if the lab growns are going for ever cheaper prices, they are likely to prefer whatever natural is available at that price range even if this is smaller than a large lab grown. Similarly, a customer who walks in with $800, will walk over to the lab grown section without even glancing at the naturals. The market, therefore is split into two, with volumes higher for the more plentiful and cheaper lab growns, but values far greater for the naturally scarce naturals.
The challenge this year, however, is that thanks to the uncertain economy and continuous interest rate hikes in the US, the numbers of customers carrying $8,000 are fewer. In addition, the number of jewellers stocking the naturals is declining too, as these take longer to shift off the shelves, in some cases up to two years.
However, prominent diamond market analyst, Paul Zimnisky, tells Mmegi that many of the trends around the growth of lab growns are being misread.
“I study the industry at a global scale and from my analysis, the lab growns in value, are still under 20% of the global jewellery market,” he said in an interview from his New York base on Wednesday.
“The US is ahead when it comes to lab growns, but these make up a small proportion of the business in India and China. It’s not as big as some may think.
“The two largest diamond jewellers in the world don’t sell lab growns, but there are select jewellery companies that are aggressively selling them because of the price.”
According to Zimnisky, the growth story around lab growns is about the volume, not the value, where he estimates that prices this year are on average 80 to 90 percent down in certain sizes of stones.
In fact, the price crash that has resulted in lab growns making waves in terms of volumes, could also be their undoing in terms of any form of challenge to the naturals.
“I’m hearing that a lot of jewellers are hesitant to stock lab growns because the price is falling so much and they are available all over the place,” Zimnisky told Mmegi.
“I think in the medium term, or as the market normalises, retailers will be much more hesitant to stock lab growns because of their history of price decline.”
Zimnisky’s comments echo another diamond industry veteran, Martin Rapaport, who recently told Mmegi that lab growns, while being the flavour of the day at some price points of the market, could not stand toe to toe with naturals.
“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 added: “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.”
For Botswana, the rising tide of debate on lab growns has led to some suggestions that the country needs to strategise around what to do about the synthetics. This week, Wynter Mmolotsi, the chairperson of Parliament’s Public Accounts Committee, asked the Ministry of Minerals and Energy, whether government would consider investing in lab growns in order to counter the anticipated depletion of natural diamonds.
According to Minerals and Energy permanent secretary, Ellen Richard Madisa, there are no such plans. Government has an indirect investment in lab growns via its 15% equity stake in De Beers, which in turn owns Lightbox, one of the biggest synthetics manufacturers, launched in 2018.
Zimnisky agrees with the policy posture.
“The Indians and Chinese have a core competency of producing lab growns very cheaply.
“I don’t know what Botswana’s competency would be in that or if they could product them cheaper than India and China.
“Producer nations need to focus on their core competency which is natural diamonds.
“They have to spend money on proper marketing and not rely on private companies do to all of the work.
“Everyone in the industry with a dependency on natural diamonds has to be working together.
“If the product is properly marketed, I’m confident consumers will still want it and pay a proper premium for it.
“It’s up to the natural diamond industry and producer nations to maintain relevance.”