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“Après Moi, le déluge”

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(“After me, the Flood” Louis XV)

The worrying future of expensive lab-grown diamonds in an oversupplied market

In 1902, Queen Victoria’s oldest son and the future King Edward VII, commissioned Jacques Cartier to make 27 diamond tiaras for his coronation. It was with reason that he named Cartier “jeweller of kings and the king of jewellers”. Now if Jacques had turned to his Majesty and enquired if “His Majesty prefers some cheaper lab-grown diamonds because he could have had much bigger ones for the same price”, there would probably have been more than just a royal eyebrow that rocketed skywards. An instant command to the Grenadier Guards to “fix bayonets” and Cartier might well have become part of history.

Following some recent comments about lab-grown diamonds by Cartier CEO Cyrille Vigneron1, the industry tittle tattle2 is that they are considering the launch of a line of lab-grown jewellery, possibly with the intent of attracting a younger audience at a lower price point. That would be quite a move. So, it seemed sensible to ask what the future holds.

The economic case for lab-grown diamonds seems irrefutable, production costs are a fraction of the cost of recovering the equivalent natural diamonds. However, predictions that they would dominate the fashion space alone has not as yet come to pass. Unlike natural diamonds, the cost of manufacture is linear (to grow a two-carat diamond simply takes around double the cost as for growing a one-carat diamond). Except this is not how they are being priced at retail where consumers are being persuaded to buy them priced at a 30-50% discount to their natural equivalent. As a result, the bigger the lab-grown diamond, the much greater the margin for everyone involved, hence their growing encroachment at higher price points including in the engagement ring space. It is why lab-grown production is rocketing, why so many sight-holders love lab-grown diamonds, why the polishing industry loves it, why the retailers absolutely adore it. Everyone can make real money, aided perhaps by a lack of consumer and retail education. This presents a very real challenge for the natural diamond industry.

Are lab-grown diamonds succeeding because of a sleight of hand? Did they mislead the consumer? Did they misrepresent their product? For the most part, it’s none of the above (excluding a handful of companies who promote their product by denigrating the natural diamond industry).

Undoubtedly, one of the reasons behind increasing lab-grown sales is the failure by many in the natural diamond industry to differentiate their product by telling their own story and telling the story of natural diamonds. The natural diamond industry also remains fixated on talking itself into the ground about product when the luxury world has spent the last twenty years talking about values. Commodities are about products while brands are about values (that statement in itself is a far more extensive topic best left for a later discussion).

It is also a supply/demand issue; higher price point lab-grown diamonds are a relatively new category (in volume) and the supply has been relatively limited, perhaps giving them the perception of the rarity associated with larger natural diamonds, aided by lack of publicly available lab-grown diamond production numbers. This may have lent credence to the view that mined diamond production is falling, so lab-grown diamonds will simply fill the gap at a better price point for the consumer.

Why this is suddenly becoming an issue is because we are about to witness what may be a dangerously large increase in production. The trade statistics from India, which remains the world’s major cutting and polishing centre for both natural and lab-grown diamonds (not something some of the “Made in America” retailers like to advertise!) tell the story. In the twelve months to the end of March 20183, India exported USD 216 million of polished lab-grown diamonds (equivalent to under 1% of India’s polished natural diamond exports). In just the first six months of 2021, export had rocketed up to USD 406 million4 equal to 3.3% of natural diamond exports.

3.3%...? “So, what on earth”, you might ask yourself, “is the problem?” The problem is not the value, but the volume, and where that volume is focused. Since the cost of production of lab-grown diamonds is linear, it should have been possible to reverse engineer the export figures and work out the carats. True, except that since the industry now priced them against the implied rarity of natural diamonds, the outcomes going to be less accurate. Nevertheless, it’s still worth doing. What we discover is a bit of a shocker, but first a quick explanation about pricing for non-industry people, disclaimer: all the following numbers are for illustrative purposes only.

For forty years most categories of polished natural diamonds have been priced in the trade as a discount to the Rapaport polished price list, the so-called RAP List5, for our purposes it is usually somewhere near the 30% mark. Anecdotal evidence6 and the lab-grown price lists that I have seen suggest that lab-grown diamonds tend to trade at somewhere nearer a 90% discount to the listed RAP price. So a natural diamond with a listed RAP price of USD10,000 should be trading around USD7,000 (30% discount), while the exact equivalent lab-grown diamond should be trading for around USD1,000 (90% discount). To put it another way, a lab-grown diamond trades at a 1/7th of the price of the exact same natural diamond. Let’s consider what happens if you apply that logic to the Indian trade statistics for this year.

analyt_02082021_eng_1.png

If the average price of all polished natural diamonds exported from India during the first five months of 2021 was USD 792 per carat, using the pricing logic above, then the average value of lab-grown diamonds exported is USD 113 per carat (1/7th of the price) assuming a like-for-like basis. Well, USD406 million divided by USD113 per carat = 3.59 million carats for H1 2021, which on an annualised basis works out at over 7 million carats of polished lab-grown diamonds this year (so at least double that number in the rough). That doesn’t fit in with Bain & Co’s8 estimate that total rough lab-grown production for 2020 was between 6 and 7 million carats, which is probably more like 3 million carats once they become polished of which the majority were likely smaller diamonds.

Two thoughts spring to mind; production is increasing by leaps and bounds, and some of the existing9 and most of the new lab-grown production is not aimed at replicating the smaller very cheap diamonds which make up the bulk of natural diamond production. Rather it is predominantly focussed on producing larger sizes because that is where they can make HUGE margins. It may mean fewer carats than the numbers suggested above, but it means increasing discounted competition for natural diamonds in the mid-priced diamond jewellery segment, possibly eventually swamping what is really a small but valuable market segment.

When it is reported that US lab-grown producer Diamond Foundry alone is increasing production from an estimated couple of hundred thousand carats a couple of years ago to an annualised 5 million (rough) carats10 by the end of 2022, this has some concerning implications indeed! According to the Financial Times11, Diamond Foundry sell their stones for USD282 per carat …. 5 million carats at USD282 per carat implies an annualised billion dollars of additional lab-grown production from them alone, to add to the expected substantial increases in production occurring in China, Russia, India and other countries.

While the annual global production of polished natural diamonds is somewhere around 25 million carats, around 90% of polished natural diamonds (stones not carats admittedly) are less than 0.1 carat. The next figures are slightly dated, sourced from 2014 but they probably haven’t changed much. Industry experts Tacy12, estimated that the global annual production of polished natural diamonds of between 0.5 carats to 0.99 carats was only 1.7 million carats and of 1 carat+ a mere 1.27 million carats. That’s only an annual 3 million carats in a size range where a substantial amount of the new lab-grown production is focussed... “Houston, we may have a problem!”

On second thoughts… “Cancel previous message Houston… false alarm!” What normally happens to the price of any new technology product as production costs fall and volumes exponentially increase? The retail price falls. That is what has happened to lab-grown diamond prices since De Beers in 2018 launched its Lightbox lab-grow jewellery offering at USD800 per carat (see chart below), and the discount between natural diamond prices and lab-grown diamond prices widens. As the production of a product of potentially infinite supply increases and prices almost certainly continue to fall, three factors come into play.

analyt_02082021_eng_2.png

The obvious question is to ask whether lab-grown diamonds have any resale value. “Who cares about the resale value” you might reply, “that’s not why I bought it!” Fair point, and if you paid thousands of dollars not caring if it had any resale value, then no problem at all, just so long as you knew that. Certainly, when the person who has enjoyed wearing a billion-year-old natural diamond for twenty years because it symbolised a meaningful moment in their life, tries to sell it, they may be disappointed in what the jeweller offers them for it, but they need to know it had some value14. What will a consumer who spends USD10,000 on a lab-grown diamond engagement ring feel if they find out it has virtually none?

“I didn’t buy it with the intention of selling it!” you respond, and that is almost certainly true for most consumers, but that misses a far more important point… Enduring Value. Luxury products carry a perception of value, they are a status symbol, wearing luxury tells a story about you to the people around you. That’s what luxury products do; they communicate a story to the people around them. If you give someone a luxury present, you are telling them how much you value them. What happens if that perception of value evaporates? Let’s say that in mid-2016, you paid USD19,600 for a Tank Louis Cartier Watch15. That watch has a value to you, it says something of value about you. Everyone who sees you wearing it knows it is an exclusive, expensive watch. Wearing it makes you feel good. But how would you feel if you walked into Cartier today and you see that a new Tank Louis Cartier Watch is now priced at only USD6,000. How will you feel if in two years’ time you see it is priced at USD3,000? Maybe you wouldn’t feel it meant quite the same…. maybe you would not go on wearing it. How would you feel if you had purchased a lab-grown diamond engagement ring for US10,000 and a few years later you see the same ring with the same size diamond in the same shop but priced at only USD2,000 or less? Luxury is not Fashion; its value must be timeless.

Perhaps a more important question is, what is likely to be the impact on consumer perceptions of the value of lab-grown diamonds versus natural diamonds if, because of a massive increase in supply and little positive category marketing, the discount between the two widens to 60%, then 70%, then 80% then 90%?. How long will existing lab-grown retailers be able to “hold the line” at a 30-50% discount to natural diamonds if an obvious oversupply results in lab-grown diamond prices generally becoming more aligned with their linear production costs. Maybe the consumer will start to see two different products standing for very different sets of values. Maybe? No, almost certainly.      

The good news is that we’re not there yet, because supply remains tight, as existing lab-grown retailers are increasing sales and new retailers have to purchase inventory, and that situation is likely to continue well into next year, maybe into 2023.

There are a few companies which have a differentiated lab-grown diamond product, such as Lightbox with its fashion jewellery offering and ALTR Created Diamonds who have successfully positioned lab-grown diamonds as part of a branded jewellery offering, and good luck to them. However, most retailers seem to be simply positioning lab-grown diamonds as “the same but cheaper than natural diamonds”. Production is likely to go on rising exponentially and it is likely (and without a greater marketing effort, probably definite) that we will start to see a substantial oversupply of polished lab-grown diamonds between 0.5 and 2 carats. This, if combined with falling prices and the realisation by the consumer that the product is of infinite supply and has little intrinsic or resale value, could leave those consumers who purchased them now at high price points … literally “holding the baby”. That is not a good scenario and if it happens, then it is likely to hurt everyone, but especially the lab-grown industry. We would do well to remind ourselves that if a luxury isn’t scarce, then it isn’t a luxury. How long can the party last? Who knows? “Make Hay while the Sun Shines” seems to be the industry’s mantra; and at the moment, its summer, the sun is blazing down and there isn’t a cloud in the sky! Enjoy the sunshine… while it lasts!

By Richard Chetwode

Richard Chetwode runs a diamond consultancy business. He is also Chairman of Namibian Diamond Mining Company Trustco Resources, is Chairman of the Advisory Board of Australian technology company Yourdiamonds.com as well as consulting to several diamond (and other) businesses. All the opinions in this article are his own.

 

1 “Cartier CEO Cyrille Vigneron on why The Tank Must Watch went solar” by Roberta Naas. 5th May 2021. www.forbes.com.
2 Rapaport Podcast: “After Pandora, Is Cartier Next?” and other news reports.
3 At that point in time, only annual statistics are available, and these were the earliest available figures I could find. Annual Indian trade statistics go from April 1st to March 31st of each calendar year and there are no monthly ones before June 2018. GJEPC (Gem & Jewellery Export Promotional Council). www.gjepc.org. giving monthly statistics from June 2018 is probably linked to the May 2018 De Beers’ announcement of the launch of Lightbox, its lab-grown jewellery line.
4 Monthly polished lab-grown diamonds exports. GJEPC statistics. www.gjepc.com 
5 Martin (Rapaport) usually only changes the RAP List when there have been major (long-term) price moves, but the discount is driven by market forces and moves the whole time.
6 Discussions with industry experts.
7 Source: GJEPC Statistics. www.gjepc.com
8 “Brilliant under Pressure; The Global Diamond Industry 2020–21” Figure 42. p41. Management consultant Bain & Co. www.bain.com/globalassets/noindex/2021/bain_report_diamond_report-2020-21.pdf
9 For instance, the largest producer in the US, WD Lab-Grown Diamonds, sells lab-grown diamonds …“(typically) ranging 0.5 to 6+ carats with a large selection of 3+ carats”. Doesn’t sound like the small cheap end of the market to me!
10 Accepted that some of these will be for industrial/semiconductor usage.
11 “Diamond Foundry valued at $1.8bn after $200m fundraising” by Henry Sanderson. Financial Times. 27th April 2021. www.ft.com/content/34254394-a1dd-42a0-8d95-e4dd39254eac 
12 Tacy was owned by Industry guru Chaim Evens Zohar
13 "Paul Zimnisky is a U.S.-based analyst and consultant who publishes a monthly diamond industry report called State of the Diamond Market". www.paulzimnisky.com/products
14 That market is actually now evolving with new C2B auction platforms like www.yourdiamonds.com which is a new auction platform to allow the consumer to sell their natural diamonds into the diamond trade. They are currently holding the first ever public tender of Argyle pinks. I am Chairman of the Advisory Board.
15 It is today’s price, but I use it for illustrative purposes. Excluding sales tax. Small Model, Hand-Woven Mechanical Movement, White Gold, Diamonds, leather. www.cartier.com/en-us/collections/watches/all-watches/tank-all/wjta0011-tank-louis-cartier-watch.htm...