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The future of the market goes hand in hand with gemology

10 february 2020

yuriy_shelementyev_xx3.jpgAfter 2019, a challenging year for the global diamond industry, we asked Yuri Shelementyev, head of the Moscow State University (MSU) Gemmological Center and president of the National Gemological Association (NGA), to share his views on the diamond market and consumer behavior in the market. In the interview, he shares his views about why synthetic diamonds were taken for granted, what is happening to jewelry in the secondary market and how the behavior pattern of the young generation of purchasers has changed.

What is the gemologists’ attitude to what is happening in the diamond and jewelry market?

We live in an era of change, and what the ancient Chinese considered damnation is a reality for us: today, everything changes very quickly, and the speed of these changes is unprecedented. We can take some changes as a disaster, and some as an opportunity.

Around 2011, active discussions about synthetic diamonds began in the media and they were clearly positioned as the evil, which would bring sufferings to both the natural stone market and the consumers. But in some time, more and more factories growing synthetic diamonds appeared producing the diamonds of various properties and colors, the synthetic diamond jewelry collections also appeared, and the synthetic diamonds began to be taken for granted. Now, the synthetics are recognized because everyone understands they came to stay. The same companies that considered the synthetic diamonds to be the evil, see them as an opportunity for themselves - they have come to understand that they are something new today. Some companies, like De Beers, can launch a new jewelry collection with synthetic diamonds, especially with colored ones, and this is a new trend. Everyone wants something new so that to be able to tell the customers - come and see our new product. 

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Image credit: Moscow State University Gemmological Center

What do you think about fancy color synthetic diamonds?

In January 2020, the MSU Gemology Center turned 25 years old, and we have seen colored synthetic diamonds for 25 years. The first synthetic diamonds were brownish-yellow because it is technically easier to produce brown and yellow diamonds than colorless ones. And today, they can be pink, blue, green, orange ... In the colorless diamond market, it is more difficult for a synthetic diamond to compete with a natural one: the stone is actually the same, but synthetic, and therefore, cheaper. However, in the colored diamond market, in addition to price, it can also compete due to the variety of colors, for example, a jeweler can offer a new jewelry collection based on the synthetic diamonds of various colors - multicolor stones.

Tell us, how true are the figures cited by media regarding the share of synthetics in the jewelry market?

At the NGA conference, we told how many synthetic diamonds pass through our laboratory. We refuted the figures that 30-40% or even 50% of the stones in the jewelry market are fake, synthetics, or there are ‘counterfeit’ goods. Now, we estimate their share in the diamond market to be about 4%.

Nowadays, jewelry pieces are brought to our laboratory, in which the jeweler used both the natural and synthetic diamonds. When purchasing the stones, the jeweler might have not recognized that some of the stones were synthetics. Such cases indicate the important role of gemological laboratories. The market will behave in different ways when there are devices or specialists on the market able to distinguish between natural and synthetic diamonds.

What other important challenges do gemologists care about?

We feel there are many challenges in the market. Every year, increasingly more stones and jewelry pieces come to our laboratory. Last year, for the first time, the number of precious stones from the secondary market exceeded the requests for grading the stones from the primary market. That is, the number of people who want to sell their jewelry is growing. The question arises, what to do with the jewelry that our consumers bought earlier, for example, in the 1990s? Maybe the jewelry pieces belonged to their grandmothers, but tastes, styles, preferences changed, and people do not want to wear them anymore. Or, they do not see it possible to wear these jewelry pieces because they consider them out of fashion. 

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Image credit: Moscow State University Gemmological Center

Diamonds have always been positioned as a profitable investment. At least, they were considered to be investment attractive.

According to a well-known marketing concept, the diamond pipeline was designed as unidirectional. It was assumed that everyone was engaged in promoting diamonds from a mine to a consumer. But when the consumer buys a polished diamond, we are no longer interested in it. Next year, new diamonds can be found and cut, new jewelry pieces can go to jewelry stores to be sold. And what will happen to the jewelry that has already been purchased, which is already stored?

Here, the question arises, if people cannot get rid of their jewelry and get money, why would they buy new jewelry in the primary market? If the secondary market is underdeveloped, this is an obstacle to the sales growth in the primary market. That is, we are discussing another reason for the jewelry crisis, which affects not only Russia - it affects the entire global market today. This reason is the underdevelopment of the secondary market.

Really, the secondary market is a hot topic.

Earlier, when end consumers were buying their jewelry they assumed that it would be an investment. And now, they have the thought - maybe, I will first get rid of the old jewelry pieces and then buy new ones? If they approximately remember at what price they purchased the piece in the 1990s or 2000s, or they kept a receipt, they can compare the purchase price with the prices on the secondary market. So, the undeveloped secondary market suggests that the purchase prices will be significantly lower. I know the case when a jewelry piece with a colored stone was bought for $90,000, and now no one gives more than $15,000 for it in the secondary market. Can it be considered an investment?

In this case, is not this due to the greediness of the people in the pawnshop who evaluate it?

In general, I would not have used such a notion as greediness on the market - I would have used the notion of ‘economic rationality’. That is if a person brought some product to a pawnshop bought earlier for $90,000, and there is an understanding that - having taken this product from the client for $60,000 today - they will be able to sell it for $65,000 tomorrow, they will, of course, take it for $60,000 today. However, a very big difference in price, for example, $90,000 and $15,000 shock the consumer. And as soon as the consumer experienced a shock, he or she realizes how much the prices in the secondary market differ from the prices in the primary market. The consumer begins to think that no jewelry is an investment.

In the secondary market, pawnshops play a leading role. They become the beneficiaries of the crisis because, during the crisis, jewelry bought by the customers in the pre-crisis time sometimes finds itself in pawnshops as the people need money. Our pawnshop business is rather developed, it is controlled by the Central Bank and there are pawnshop associations. Nevertheless, about 90% of pawnshops in our country do not deal with stones. In fact, if you bring gold jewelry pieces with stones there, you receive money for the metal only, because pawnshops understand how to work with this metal. In many cases, the stone is not evaluated, and most pawnshops work this way. 

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Image credit: Moscow State University Gemmological Center

Of all the stones, a diamond is easiest to be evaluated. The diamond market is systematized as there is an evaluation system, the price list issued by the Ministry of Finance, and a Rapaport price list. And nothing happens to a diamond in a jewelry piece in the secondary market - it’s forever, that is, eternal. Then, it can again come into the primary circulation. Therefore, the more pawnshops begin to work with diamonds, the better for the secondary market. Still, you need to understand that a pawnshop is not buying, it is not directly involved in purchasing a stone - it can take your stone, you receive a loan against your jewelry piece. That is, a pawnshop, in fact, is a credit institution. And only in case if you do not repay the loan, the pawnshop is engaged in selling this diamond or a diamond jewelry piece, including through online stores. Now in Russia, there are digital platforms where you can buy diamonds. At the recent NGA conference, such a project was presented, the Diamond Club.

So, a structure has been created enabling both organizations and citizens to sell and buy diamonds, has not it?

In their format, projects like the Diamond Club are not pawnshops. The Diamond Club is rather an online diamond trading platform. Since we understand that the secondary market is developed in other countries, we can assume that the business models already existing in the developed markets will sooner or later come to Russia - including the online business solutions. By the way, just recently, in November 2019, a government decree was issued that allow selling and buying jewelry and loose diamonds via the Internet. That is, in fact, one administrative barrier has been removed, which means that now we expect the appearance of trading platforms in the online environment.

From your point of view, is this really promising?

Of course, the role of the people who created the Diamond Club is very important here, they have extensive experience, including in the secondary market. They initially stem from large Arbat pawnshops, they know the secondary market and see a constant flow of our people who come and offer diamond jewelry pieces - both branded and non-branded ones - and want to receive money for them. I see the Diamond Club as a development of the secondary market - instead of buying a diamond back, the consumer will be offered to put it up for sale. Probably, it will be more profitable for stone owners.

What, in your opinion, are the challenges facing the market as a whole?

Now there are increasingly more talks about the crisis of the overproduction of rough and polished diamonds - and not in Russia, but globally. This is due to the fact that the consumer often buys those products that have an expiration date, and they go out of order or fail. As De Beers used to say, a bunch of flowers would fade, and diamonds would remain forever. And for our industry, most of the time this seems to be a plus - they will shine forever. However, if the flowers wither up, for the following occasion they are purchased again. If a diamond is not ‘faded’ and does not lose its luster, the next year, no one will take care to get a new one - after all, a diamond is purchased for the entire life. And we live in a time when every year or two, we update mobile phones, buy new clothes, household appliances, cars, but we don’t need to buy new jewelry pieces all the time, because they are made for decades and centuries. This is a product category that does not grow obsolete or old. 

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Image credit: Moscow State University Gemmological Center

De Beers put a lot of effort into positioning the diamond as something that would never get cheaper.

Until some point, the consumer model that existed in the Soviet Union regarding carpets, sideboards and crystal items, assumed an accumulative behavior pattern. That is, people in their life should buy one carpet, one sideboard, and some crystal items to put in it, and this was considered the right consumer behavior. Today, people practically do not buy any carpets, sideboards, or crystal, especially the younger generation. So, it happens that in view of the new consumption priorities, the diamond ring can be regarded by the young people as their grandmother's things got out of fashion. They can say, ‘my grandmother wanted to wear diamonds - but I will not do this’. This is a real challenge, and today, many industry media and marketers are discussing how to motivate young people to buy jewelry - for example, to buy a diamond ring.

In general, as a gemologist, I see that for several years, the demand for diamonds has not been growing. Today, the market for colored stones is growing, such as emerald, ruby, sapphire, as well as the stones that are not formally considered precious, such as tourmaline, opal, aquamarine, amethyst. Demand for them has never been fueled through advertising campaigns, nevertheless, there is an understanding in various countries that they are precious. Jewelers actively use a variety of colored stones and, of course, a jewelry piece is classic if a colored stone is in the center framed by diamonds. For an end consumer, there is no sharp separation into the diamond market and the colored gem market. In the industry, there exists a clear-cut separation, but at the jewelry store counter, there is no such differentiation. Maybe, it's time to advertise colored stone jewelry?

In general, there is a constant demand in the luxury market in the world. Affluent consumers are happy to spend money on luxury. However, if earlier, jewelry was perceived as the manifestation of luxury, now its share among all luxury goods is gradually decreasing. The gemologists can stop this decline. An in-depth understanding of gemstones, their unique nature and value can be transmitted from a gemologist to a jeweler, to a seller and then to a consumer. I think that the future of the market goes hand in hand with gemology.

Galina Semyonova for Rough&Polished