Lab-grown diamonds? We doubt it – Investing community assesses new risks
- We address another area of concern for investors – lab-grown diamonds (LGD)
- We compare the LGD market (and other substitutes such as Zircon and Moissanite) with the natural diamond market
- Under our base case scenario, LGDs will find its niche alongside lab-grown opals, sapphires, rubies and emeralds
Let’s compare LGD market with a natural diamond market...
Since 1970, when BELT HPHT technology was first introduced by General Electric (the US) and Sumimoto (Japan), LGD was initially created and remained popular for industrial purposes because they are cheap to produce, cheap to purchase and can be infinitely manufactured. Diamond has a lower coefficient of friction than metal, reducing, for instance, overall engine friction by 25%, according to automaker Nissan. Diamonds may also replace silicon in electronics as a far superior semiconductor. 99.999% of LGDs are produced for industrial purposes (drilling, high-precision cutting & polishing), and only about 10% of revenue for LGDs comes from jewelry. Another interesting fact is that China produces 85% of global LGD volumes, reflecting a huge industrial base. Total global output of LGD is estimated at 8-10 bn ct pa compared to around 120 mn ct for natural diamonds produced per annum in 2020-22, by our estimates. However, according to a Bain report, the LGD market is around $0.5 bn in size vs ~320 bn of the overall jewelry market. Select jewelry designers such as Signet Pandora, and Swarovski have begun to use synthetic stones.
Zircon, Moissanite, LGD – is it time to worry now?
Natural diamonds have co-existed with substitutes for over a century. People have been striving to replicate the shine of a natural stone to finally “tame” luxury, which everybody longs for, yet few afford. While LGDs look identical to mined stones, our study reveals that one should clearly define fashion jewelry from fine jewelry:
LGDs are easily detected using widely available identification equipment
Federal Trade Commission (FTC) requires retailers to disclose clearly that the product is not a mined diamond. LGDs are identified with a “lab created” sign.
Major market players create a clear distinction between LGDs and natural gems, while the Natural Diamond Council (former Diamond Producers Association (DPA) is advancing with its “Real Is Rare” programme:
Tiffany: “Our position is LGDs are not a luxury material. We do not see a role for them in a luxury brand”. (Andy Hart, Senior VP of diamond and jewelry supply”)
De Beers: “With Lightbox Jewelry, we are offering affordable fashion jewelry that may not be forever but is perfect for right now”.
And what is important – LGDs do not have a resale value unlike its natural counterparts.
LGDs are here to stay, the same as other diamond imitators cubic zirconia, once known primarily as a diamond imitation, it is now a stone which is recognised in its own rights for its sparkling appearance and its availability in virtually all colors. The significant price spreads and higher affordability of LGDs inspired Chinese and Indian producers to boost output. The production costs to make high-tech diamonds in a laboratory have plummeted to as little as $300 a carat from about $4,000 over the past decade, according to consultants Bain & Company, with 2/3rd of the cost being fossil fuel energy, which makes the cost of production even lower, hence the price.
The LGD niche is represented by 300 entities. With relatively low entry barriers and no limits to supply growth, we may expect a continued downward price trend in LGD segment.
Under our base case scenario, LGDs will find its niche alongside lab-grown opals, sapphires, rubies and emeralds. The mystique of natural stones formed in the earth’s crust and high level of consolidation in the industry with limited new supply suggests a broadly positive long-term outlook for the diamond mining sector. Diamonds are a late cycle commodity and the economic cycle is being reset to zero (or close to). The jewelry market upside has a high correlation with GDP and purchasing power of consumers particularly in middle class group.
Speaking of marketing support...
The natural diamonds likely lost in the first round of battle when LGD’s were declared “diamonds”. The old FTC definition stated a diamond was “a natural mineral consisting essentially of pure carbon crystalised in the isometric system”. Later the world “natural” was deleted when science confirmed the same optical, physical and chemical properties of LGDs. Today we are witnessing the second round of the battle when environmental issues and the sustainability of mining businesses have become growing areas of concern. Supporters of the lab-driven evolution appeal to millennials who care about the environment, social responsibility, human rights, and labor practices. With that in mind, we would like to highlight the following:
Greenhouse gas emissions associated with LGD are 3x greater than for natural diamonds, as during the production process which takes weeks with special equipment imitating conditions 150 km below the Earth’s surface (high pressure and high temperature – over 1000 C) to produce a stone of one carat.
The LGD industry’s production chain is mostly represented by underdeveloped and environmentally unfriendly small-scale plants. Manufacturing process requires constant energy for up to 10 weeks, which eliminates solar or wind power and implies fossil fuel sources.
Man-made diamonds are framed in man-mined gold or other precious metals. We may righteously assume that the eco-friendly image of LGD’s is nothing more than a marketing campaign. And the key driver of lab-grown success remains ”cheaper price compared to the natural ones”.
The social impact of diamond mining should not be overestimated – producers use local workers providing employment in areas where otherwise there is no other sources to make a living. This makes this Veblen product a fast track for a wealth transfer from extra rich to the poor.
The professional community, however, is seeking transparency throughout the full chain of production to ensure diamonds are sourced responsibly and produced sustainably to support the inherent and precious value of stones often chosen to symbolize one’s life’s relationships. Recent statistics shows that diamonds remain a symbol of engagement in the main markets: 72% of US brides acquire a diamond engagement ring; 36% of the total value of the women’s diamond jewelry market is gifts from partners before marriage and during married life; 72% of Americans in same-sex relationships view diamonds just as important in celebrating life’s special events.
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The contents of this document have been prepared by Joint Stock Company “Alfa-Bank” ("Alfa Bank") as Investment Research within the meaning of Article 36 of Commission Delegated Regulation (EU) 2017/5...