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Zimnisky: Hard to protect lab-diamond price as production methods, economics improve

23 april 2018

paul_zimnisky_xx_excl.jpgPaul Zimnisky, an independent diamond industry analyst and consultant, said it will be very difficult for the lab-diamond manufactures to protect price as production processes and economics improve.

He told Rough & Polished’s Mathew Nyaungwa in an exclusive interview that this will ultimately result in lab-diamonds becoming more of their own separate product class entirely distinct from natural diamonds.

Zimnisky said lab-diamond companies that build a very strong brand through marketing or proprietary jewellery design will be less susceptible to price pressure, citing Swarovski as a leader in this area.

He also said price differential is most apparent in generic lab-diamonds, while companies that are building a brand around their product have been more protective of prices.

Zimnisky is of the opinion that price is a lab-created diamond’s greatest advantage over a natural equivalent.

He said that the production capabilities of lab-created diamond manufacturers are improving as is the number of players in the space, resulting in more readily available higher-quality lab-diamonds.

Zimnisky's estimate for natural diamond production in 2018 was 147 million carats of which about 60 million carats would be gem-quality, while current lab-created gem-diamond production was projected at less than 5 million carats.

NB: Zimnisky has a monthly subscription-based diamond industry newsletter called, State of the Diamond Market and a proprietary rough diamond price index available at www.roughdiamondindex.com.

Below are excerpts from the interview.  

What is the quality of lab diamonds available on the market?

Relatively speaking, very high-end quality and sizes are still not that widely available, but medium-and-small quality and sizes are. This is changing quite rapidly though, and I would imagine in the next five-years or so there will be a lot higher-quality product available as production technology improves.

It is important to understand that CVD technology, one of the two primary processes used in the creation of lab-diamonds, is primarily being advanced through investment in other industries, such as LED light and polysilicon manufacturing for solar panels, so improvements in CVD technology will continue to be transferred to the lab-diamond industry from other industries as well, which will further accelerate advancement.

What is your projection of the state of synthetic industrial-quality diamonds, say in a decade given the massive technological advancements we are witnessing?

I think it will be very difficult for the lab-diamond manufactures to protect price as production processes and economics improve. Ultimately, I think this will result in lab-diamonds becoming more of their own separate product class, maybe not in the realm of “fashion jewellery,” but their own, completely distinct product class from natural diamonds.

Lab-diamond companies that build a very strong brand through marketing or proprietary jewellery design will be less susceptible to price pressure. I see a company like Swarovski being a leader in this area.

You recently noted that prices for synthetic laboratory-created diamonds are becoming less expensive relative to natural equivalents. What is causing the decline?

I think this is simply a function of supply/demand. The production capabilities of lab-created diamond manufacturers are improving as is the number of players in the space, resulting in more readily available higher-quality lab-diamonds. The price differential is most apparent in generic lab-diamonds, while the companies that are building a brand around their product have been more protective of prices.

Also, in relative terms, the price spread growth has been most significant in larger diamonds, say 1.5-carats versus 0.5-carat, I think this highlights inherent rareness of larger natural diamonds.

What is the net-effect of this development on the synthetic diamond industry?

I am a believer that price is a lab-created diamond’s greatest advantage over a natural equivalent, some think its sourcing and social-and-environmental responsibility perception, but at the end of the day I think most consumers vote with their pocket book, at least within reason. So, I think a greater discount will lead to greater penetration of the product in the industry and wider customer acceptance.

Why do you think that the price spread between lab-created and natural diamonds across all sizes and qualities will continue to widen?

Lab-created rough still has to be polished and manufactured into jewellery and then retailed, just like natural diamond, so the price differential will only be on the upstream segment of the business, i.e. rough production.

So, this will somewhat limit the ultimate price differential, but technological improvements should reduce lab-diamond upstream fixed costs like new entrant R&D for example, however variable production costs such as electricity/power will be less sensitive.

What is the market share for synthetic diamonds compared with natural diamonds?

Specifically talking engagement-ring-quality lab-diamonds, still in infancy stages globally, well under 10%, probably closer to 5% or even less.

Which countries consume the bulk of lab-created diamond jewellery?

The U.S. consumer market is probably five-years or more ahead of the rest world, especially China, in regards to accepting lab-created diamond jewellery. The U.S. is by far the primary market at the moment for lab-created diamond jewelry.

You are expecting an increase in the quality of synthetics from industrial to near-gem quality in the not so distant future. Will that have an impact on demand for natural stones?

Of course, this is a difficult question, as it will be up to the consumer. That said, the natural diamond industry is doing a lot of things right at the moment, for example, increasing transparency, incorporating block-chain into the supply chain, reintroducing generic diamond marketing, I think all of these things will help natural diamond demand.

The engagement ring tradition is very strong, and the emotional perception of what diamonds represent runs deep, which is something that the natural industry certainly has going for it. As mentioned earlier, I think lab-created diamonds will ultimately become a product class of their own, just as other gem-stones are at the moment.

I think the biggest threat to the natural diamond industry is decreasing marriage rates and changing consumer preferences of younger generations away from material possessions.

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished