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Lightning before the thunder

03 september 2018

The mining business requires large planning horizons. In 1866, just five years after the abolition of serfdom in Russia and the end of the civil war in the United States, there were found diamonds in South Africa, in Kimberley. Mankind was already entering the First World War, but nevertheless hundreds of miners continued to dig the Big Hole, confident that the precious stones they were extracting were worth it. And even now Kimberley, strange as it may seem, is still producing diamonds, albeit in small quantities, and also makes money on tourists coming from all over the world to look at the huge pit - a monument to human passion for wealth.

150 years - this is the time frame of this project, as it occurred.

In 1957, production of diamonds was started at the Mir diamond pipe in Russia. A little more than 10 years have passed since the end of the Second World War, and those who designed this diamond quarry were to calculate a working model of Mir to ensure diamond mining for decades to come. They could not imagine the collapse of the Soviet Union, but they could calculate the angle of slopes to make the mine and the neighboring city stay for decades. And the mine did stay - as a quarry until 2001 and since then as an underground project for another 16 years - until it got flooded last August.

Such long-term plans can be built based only on a very solid foundation - the certainty that the product you are mining will be valuable for future generations, regardless of how the countries will be called and what political regimes will dominate in them. Hence the inertia.

You can draw an analogy with the arms business: you cannot stop financing high-tech defense projects, for example, in the field of counter missile defense and retrench tens of thousands of engineers only because today people across the globe started to sing "We are the world, we are the children." If you do this, you will lose technology and fall behind for decades, if not for ever. Therefore, you are compelled to convulsively invent phantom enemies for those singing "We are the world..." - and it does not matter who they are, these enemies, be they funny North Korean leaders, Russian hackers, the U.S. military, Islamic terrorists or even ghouls from Transylvania and, for that matter, the entire world surrounding you - but the project cannot be stopped.

The same goes true for the diamond mining business, which means that weddings, love confessions and such perceptions as "That’s how he values ​​me," or "My life is a success," or "I am by origin above all others" - all this should not, just does not have the right to do without a diamond.

As in the case of weapons, enemies are eternal, so in the case of diamonds passions, ambitions, greed, treachery, arrogance, love, devotion, desire for beauty - all this hellish cocktail is also eternal.

But is the present fetish itself eternal, which is needed as a material symbol for all this?

For some reason, the example of weapons keeps coming to my mind... The nuclear bomb - the achievement of the 20th century civilization playing the role of the last argument - is completely useless in current conflicts, where Hollywood-like war planning is mixed with high-precision weapons, private armies and corrupt tribes. Nuclear weapons have not been tested for more than 30 years, so it is not clear what these missiles have now inside them and if it will really explode. A ring with a natural diamond is the last ‘must have’ in a premarital relationship, later finalized as ‘forever together.’ That is why it is expensive, that is why it is valuable, that is why the world ‘diamond’ is so much valued, as it projects onto all the quarries, mines, factories - everything. But there is ever less talk around about this kind of ‘must’ and no marketing programs help stimulate the ‘enlightened’ consumer.

There are less marriages and the purse of the modern middle class is not getting fatter, rather it is getting leaner. There are more temptations and fewer attachments. People wonder why they should need an apartment bought with a mortgage credit, if you can rent an apartment for decades, and there is no place for diamonds on their wish-list. But all these diamond mines were once built to cater what we call the middle class.

The influence of the word ‘diamond’ on public opinion is truly atomic. It may mean a unique pink diamond and tiny diamonds on watches which cost nothing but increase the latter’s price by an order of multitude. This word may also mean two monthly salaries saved for an engagement ring and Sotheby's auctions. There are movies about blood diamonds and there are human rights activists who fight against what they saw in the movies about blood diamonds, there are also governments that pinned entire cities to the ephemeral value of the word ‘diamond’ and now, struggling with costs, demand super prices, hoping probably that this stone is the same as oil, only smaller in volume.

Everyone is busy on this diamond high-day, but for how long? In Russia, many remember the shrewd expression about the demise of the USSR in a matter of three days: "It was forever, until it was over."

How is the old diamond business coming to its end, the diamond business which we all remember and probably will sadly remember on short summer evenings? The process is simple and ordinary, and one may even come out with a joke in this regard.

I'm a buyer called N and I'm offered to choose one of the two things: the first one is made of natural material called X, but it is not beautiful, while the other is made of a synthetic imitator called X1, but excellent in design. Aesthetically, I will prefer the latter, because ultimately it is the beauty of the product, which is of paramount importance for me. But the material is also important. Therefore, I dare to ask: "Is it possible to make a product of similarly good design for me using the natural material X?"

"Well, it is possible, but several times more expensive," I will be told. "Why?" I will ask. "Because the mining of natural materials requires social responsibility, huge capital investments, payments to the government for environmental damage, support to local communities, appeasing non-profit organizations and much more," they will say. Of course, I will not be satisfied with this answer and will turn to producer X: "Is it possible to produce this material as it was done before, so that a man with a hammer pick went into the pit to get it for me?" "It is possible but a little later and meanwhile, please pay attention to X1. Yes, we made it in the nearby building, but it is not at all worse, and even more beautiful,” producer X will say, modestly concealing that in this case X will become even more expensive and more valuable.

Indeed, if the buyer is primarily interested in aesthetic evaluation of a product, then why should the manufacturer overpay for component parts? Just because there is the magic of the word ‘diamond’? Come on, this magic is used very unprofessionally – diamonds are mined like coal but bear such price tags as if they are the elixir of eternal life – there is no use in such a magic for a network jewelry store neighboring to Apple or Samsung stores competing with it for buyers. Synthetics - but no, now I do not have to call these stones synthetic, so let's call them hand-made eco-friendly diamonds – so, these diamonds really look good, even very good. Pink, intensely yellow, transparent - and subconsciously, you are ready to pay a premium for this product, because the magic of the word ‘diamond’ is there and though you are not going to pay for it the same money as for a natural stone, still you are not against paying some premium - and this is enough to make this business very interesting in terms of margin, which is 4-5 times as high compared with natural stones, if we forecast in figures.

Why should you need all these problems associated with African communities, cities in the permafrost area, conflicts and governments in faraway countries, if you are engaged in hard competition for every dollar and you need cheap standardized components and good marketing and not stories about destroyed environment and war crimes in the CAR?

Well, and what about the engagement ring, the gift of nature, billions of years old, certified by the GIA, all these clarity grades indistinguishable with the naked eye? I want a natural one!

And this is when our old good friend, the ‘man with a pick hammer,’ this time brought forth by the 21st century, comes onto the stage. How many weddings are there in the world? In the US, their count is over a million, and the US is half the market. And how many weddings are annually celebrated in China, Japan, India or Europe? Let's say 20 million. But the global diamond production exceeds 130 million carats - over 130 million carats of natural diamonds. And their main consumption destination is the jewelry industry for the middle class. But where are you, the good old middle class?

You will agree that choosing an engagement ring, you will not buy some trifle and your ambitions will start at least from 0.25 - 0.5 carats and if we talk about the US, then it will be one carat.

For such a special occasion, against the backdrop of explosive growth in synthetics production, you will need the guarantees from famous brands that the diamond you are going to buy is a natural stone carefully extracted by "a man with a pick hammer" specially for you and that he used some part of the money thus earned to buy textbooks for a neighboring school. You will have to pay a little more for these guaranties, as well as for the brand, but this is a special purchase, so you will pay in much the same way as you pay for additional insurance of your smartphone.

The question is why all this needs 130 million carats? Why should the jewelry business support someone's political ambitions, environmental programs and cities in the permafrost, while digesting millions of carats of expensive melee, if now all this can be received at any time and in any amount. Do you think the consumer will not agree? Who told you so? If it's beautiful, then why not.

If you need a sacred symbol, you may easily have it - but then these huge mining facilities appear to be a hindrance. If a diamond was recovered by a ‘man with a pick hammer’ this is one thing and then this diamond turns to be ‘a rare thing’ and thus ‘so much valued,’ but if kilograms of diamonds are being daily churned out by concentration factories, this is quite another thing and here there is no place for sacred symbols. Well, it’s hard to believe that people used pick hammers to mine diamonds weighing several points in Kimberley 150 years ago. If they did, the slogan “A diamond is forever” would never have popped up.

The ‘man with a pick hammer’ consumes less, but brings more money, while the factory at a quarry in the permafrost consumes more and already brings less and less money.

This storm was predicted long ago. Now it can be safely given a name - Lightbox. Putting it almost like classics: Once I gave birth to you and now I will reincarnate you. Those keeping almost never certified polished melee in their inventories have to get rid of them at any cost, knowing what kind of wave is approaching. This puts price pressure on raw materials and companies, whose costs go off scale even without it.

Psychologically, hand-made diamonds eliminate the homogeneity of this product in the consumer’s eyes, as it happened to pearls.

There will appear designer made products with beautifully sparkling pink, yellow, blue, transparent stones for every day wear, while natural stones used in jewelry will grow larger, go up in price, move to an outright premium segment and gain new legends. But to achieve this, there should be fewer natural stones. In fact, it is the de-industrialization of the diamond mining business and the uplift of the synthesis industry. A holy place is never empty. Synthetics will be offered to mass consumers, while natural diamonds will become fewer, but larger and more expensive.

The survivor in the mining sector will be the above mentioned ‘man with a pick hammer’, that is, small diamond mining enterprises able to rigorously manage their production costs and offer premium goods. Their time is coming. But in the beginning, there will be a storm. In a storm, all hopes are pinned on captains, the new leaders. The collapsed Western Roman Empire was replaced by legends about King Arthur and the sagas of the Vikings, which in some ways are even more poetic than ancient arrogance.

Sergey Goryainov, Rough&Polished