A recently launched Citi Research report indicates that laboratory-grown diamonds are a growing threat to the diamond mining industry. Technology to grow diamonds is improving resulting in high quality diamonds. However, the threat to the diamond mining industry is not immediate as campaigns geared to promoting ‘real’ diamonds over ‘synthetics’ continue to lead consumers in the right direction.
But, as the supply of natural diamonds comes under threat with no new mines coming on stream, synthetics may become more appealing, especially as the gap in cost between real and fake diamonds grows. According to the Citi report, this is no more than 10 or 15 years away.
“We conclude that lab-grown diamonds will represent a growing threat in the future, but it will be a slow-growing threat because of consumer taste and resistance, aided by the defences that the industry has invested in. While sellers of lab-grown diamonds in the key markets are required to declare that they are lab-grown, we think there is likely to be resistance from consumers. This looks to us like a problem for the industry in ten or 15 years’ time, not an immediate threat. Consumer and social trends change rapidly, however, and so we expect lab-grown diamonds to remain a threat on the sidelines for many years into the future,” the report outlines.
What is technically possible
Chemical Vapor Deposition (CVD) diamonds have the same physical properties as mined diamonds including ultra-high thermal conductivity, optical transparency and a very high elastic modulus and hardness.
The high pressure, high temperature (HPHT) technique restricts the size and quality of diamonds and often results in brown or orange colored diamonds. The CVD technique does not come with these drawbacks.
The diamond lab-grown technology is constantly improving and therefore lowering production costs. This trend has resulted in growing encroachment of their usage into the luxury goods market.
The CVD technique can only grow high-grade, Type IIa diamonds and these diamonds have minimum nitrogen impurities. Amongst mined diamonds, Type IIa diamonds are rare, as less than 2% of world’s diamonds are in this category. Furthermore, CVD diamonds have more brilliance and sparkle compared to most mined colourless diamonds.
The CVD technique also produces the same cuboidal shape as is typically found in mined diamonds.
Infiltration of the market
A study was done in Japan a few years ago on yellow melee diamonds in the market to determine the proportion on synthetic diamonds. The researchers found that 10% of the loose yellow melee-size diamonds submitted to the lab over a four month period were synthetic. Moreover, approximately half the jewellery items set with yellow melee that the lab received during the same period also contained synthetic diamonds. A substantial threat therefore emanates from the penetration of synthetics into the production of melees.
The consumer will decide
The key feature that gives diamonds their value is the matter of scarcity. The matter then boils down to whether customers want to buy a Rembrandt painting or a perfectly copied Rembrandt painting. This is only the case in the better-quality and larger stones, however. As one progresses down the size and quality range into the melees, many ‘commercial level’ jewellery consumers may be happy to buy any jewellery item with something that looks exactly like a diamond and perhaps shines even better than a diamond.
Given that mined-diamonds seem to be heading for a shortfall of mined supply vs. demand in 2016-2018, we think rises in the price of mined diamonds could see the traditional discount of 25% widen out to 35% or 40%, which could present a dilemma.
Attitudes are changing constantly and it is difficult to form an opinion on what the attitudes of the trade and the consumer might evolve into in the years ahead. Recent developments have made jewellers more inclined to consider lab-grown diamonds because supporters are promoting them as environmentally friendly alternatives to mined diamonds. In the ethical controversy over ‘conflict diamonds’ mined in war zones in the late 1990s and early 2000s, some retailers are also emphasising synthetics’ certifiable, conflict-free origin.
US authorities require a jeweller to state if a diamond is not a natural diamond and it gets labelled as ‘synthetic’. There is still significant consumer-resistance to buying a synthetic diamond (even though it appears exactly the same to the human eye) and it could take a long time before these consumer attitudes change.
The industry defence
The response of the industry to the threat of synthetics has been through branding, certification and documentation of mined and synthetic diamonds. The industry in the main markets of the US and EU so far not had a widespread education campaign amongst the public as this brings the danger of making the public even more aware of the options available. It has been easy for the miners and the key jewellery brand-names to put up their ‘internal defences’ and squeeze the potential sales down into the less-trusted retailers.
The report concludes: “We conclude that lab-grown diamonds will represent a growing threat in the future, but likely a slow-growing threat because of consumer taste and resistance, aided by the defences that the industry has invested in. This looks to us like a problem for the industry in ten or fifteen years’ time, not an immediate threat.”
For more information this report and others compiled by Citi Research, visitwww.citivelocity.com