Pamela N. Danziger Dec 15th, 2019
Diamonds maybe forever, but the market for diamonds surely isn’t. That is the news in the latest Global Diamond Report 2019 from Bain & Company in association with the Antwerp World Diamond Centre. Throughout the mined-diamond supply chain, sales are falling, with rough diamonds sales expected to decline by 25% and polished diamond sales to be off 10% by the end of the year. So far, the jewelry side of the business hasn’t felt what Bain describes as a “diamond industry recession” as sharply.
Global diamond jewelry retail sales will decline by about 2% this year, but sales in China, the world’s second-largest diamond jewelry market, will drop further by 5%. The only bright spot in diamond jewelry is the branded luxury sector, which is expected to advance in the high-single digits. Overall, luxury diamond jewelry accounts for about 15% of the diamond retail market.
As for the future, Bain predicts that 2020 will be another tough year for the industry with flat retail growth. “Learning from past diamond industry recessions, we foresee a resolution in the next two years,” the report states. The report details industry recessions that occurred in the late 1970s, 1985, 2008-2009 and 2015. But then, during none of those past four recessions has the industry faced the kind of disruptions that it does today. As a result, the past is no predictor of the future.
Mined-diamond industry disrupted
The Bain report identifies the three greatest disruptors in the mined-diamond market: Online sales, lab-grown diamonds, and consumers’ growing demand for environmental and social responsibility.
If the industry was facing only the disruption from online sales, the mined-diamond industry could adapt in that two-year time frame. It is only a supply-chain challenge and the industry has plenty of experience managing — or rather manipulating — its supply chain. The online sales model requires less inventory in both polished diamonds and diamond jewelry than the traditional brick-and-mortar jewelry business. The diamond supply chain could adjust to support both online and traditional jewelry stores with products profitably. Bain estimates online sales represent between 5% and 10% of total jewelry industry sales.
As for the other two disruptive trends, which go hand-in-hand, the mined diamond industry is caught literally between a rock and a hard place. Consumers today demand environmental and social responsibility from the industry, most especially the Millennials and GenZ consumers who are the primary target market for engagement diamonds. Despite the Diamond Producers Association’s efforts to communicate its responsible environmental approach and positive social impacts, the consumers aren’t necessarily buying it.
A recent Netflix Explained episode digs under the surface to reveal the reputed dirty tricks DeBeers and its cohorts have played historically to keep the diamond industry profitable at great human and environmental costs. The episode was produced by news website Vox, a property of Vox Media. The industry is described as an “incredibly opaque supply chain,” with no one really certain how effective the Kimberley Process has been keeping so-called “blood diamonds” out of the market. No matter how responsibly the industry operates, and I believe it has made great strides, the process of mining diamonds is destructive nonetheless.
However, the mined diamond industry faces an even bigger threat from a genuinely sustainable, environmentally-responsible alternative: lab-grown diamonds. The Bain report pegs the lab-grown diamond market’s growth between 15% to 20% in 2019 and given that traditional jewelers have only recently begun to sell lab-growns, their market share in the jewelry industry is only going to grow and grow fast. Seeing the writing on the wall, DeBeers, the world’s diamond market leader, introduced its lab-grown Lightbox jewelry line in May 2018. Primarily aimed at the fashion jewelry market, not the engagement/wedding market, Lightbox lab-grown prices are the lowest in the market at $800 per carat.
This further incensed the lab-grown companies, who see it as a way for DeBeers to ultimately devalue their products. “The efforts of DeBeers to price Lightbox diamonds at such a low price point are a very clear effort to denigrate the product,” says Jason Payne, CEO of Ada Diamonds, a direct-to-consumer online lab-grown diamond company, in the Netflix documentary. “Laboratory grown diamonds are superior to ‘dirt’ diamonds or mined diamonds that have come out of the earth.” Marketing made diamonds what they are. Can it do it again?
The one solution the Bain report identifies for the mined-diamond industry is to increase marketing support for natural diamonds. But then the advertising and marketing industries are in the throes of disruptive challenges of their own. It is unlikely we will ever see an advertising campaign that produces results like the 1948 “Diamonds Are Forever” campaign by DeBeers, which kept the industry humming till very recently. While DeBeers hasn’t abandoned its Forever campaign, in 2004 it launched a campaign to encourage women to buy diamonds for their right-hand, which was a non-starter.
The Diamond Producers Association (DeBeers is a founding member) should have learned the lesson but tried again last year with a “For Me. From Me.” campaign, which also disappointed. Now DPA is advancing with its “Real Is Rare” program, which was originally introduced in 2017 and continues to be the industry’s major message. “Geologists consider natural diamonds to be rare, often noting that recovering natural diamonds is like searching for a needle in a haystack,” Kristina Buckley Kayel, DPA’s Managing Director for North America, shared in a statement to me. “Natural diamonds obtain their value from their uniqueness and rarity as billion-year-old precious gems.” Rarity means scarcity which means, if demand is there, that prices will rise accordingly.
So the linchpin in the mined-diamond industry’s efforts to hold back lab-grown’s competitive threat is to raise the value perception of mined diamonds and depress the value of lab-growns. “Lab-grown diamonds are currently sold at a slightly reduced price compared to natural diamonds, but the cost continues to decline due to mass production,” DPA’s Buckley Kayel said. “Lab-grown diamond prices have dropped significantly in 2018; the price of a 1-carat lab-grown diamond has fallen by almost 50% relative to the price of a comparable natural diamond.” “Over the last 35 years, natural diamonds have shown to appreciate in price by approximately 3% on average every year, according to industry analyst Paul Zimnisky,” she continued.
To that, many say nonsense. “Because lab-grown diamonds are in every way equal to mined diamonds chemically and structurally, the conversation around lab-growns versus natural diamonds has shifted to the financial aspects of the purchase. That is their last calling card,” says Ada’s co-founder Lindsay Reinsmith, who formed the company with her software engineer husband when they were looking for a diamond engagement ring that matched their personal values. “The DPA basically asserts that this is a guaranteed appreciating financial instrument and a good place to park your money.
But just wait until you try to resell it to a jeweler,” she says. Marty Hurwitz, CEO of MVI Marketing which is a leader in market research for the jewelry industry, has a more pointed comment. “You are not in the investment business. If your customers want investments, they should go to a stockbroker or financial advisor.” For consumers looking to sell a piece of diamond jewelry, Hurwitz says, “Fortunately most consumers never have to sell their mined diamond back after they buy it. If they did, they would be shocked at the devaluation that takes place when a consumer diamond buyer becomes a consumer diamond seller. They will be lucky to achieve anything resembling their purchase price (with some very rare exceptions).” Many jewelers bolster the resale market by offering a full buy-back price if the consumer upgrades their mined diamond purchase.
But many lab-grown diamond companies, like Ada Diamonds, offer buy-back or trade-in guarantees too. Regardless whether a diamond comes from the earth or a laboratory, they are equally beautiful and being one of the strongest substances on earth, they will last virtually forever. Future of lab-grown diamonds goes far beyond jewelry
While mined diamonds have industrial uses as saws and drill bits, the industry’s future remains fixed on the jewelry market. Lab-growns, on the other hand, have application far beyond just jewelry and abrasives, including medical, scientific, industrial and computational uses. These alternative uses are the bread-and-butter of the lab-grown diamond market. The DPA wants to keep it that way. “The reason lab-grown diamonds are popular for industrial purposes is because they are cheap to produce, cheap to purchase, devoid of any inherent value, and can be infinitely manufactured,” Buckley Kayal said.
Today, only about 10% of revenue for lab-grown diamonds comes from jewelry. “If you grow diamonds, you don’t cut your truly flawless diamonds into shiny baubles, because you can make far more money selling laser lenses or surgical scalpels,” Payne explains. “Gemstones are certainly the most glamorous facet of the lab diamond industry; however, gemstones are a small part of the overall industry.” Given the multiple uses of lab-grown diamonds, which Payne described in a recent talk before the Gemological Institute of America, he predicts the total annual sales of laboratory diamonds will be well over $100 billion in the not too distant future, from about $20 billion today.
“Lab-grown diamonds are a key component to improve the human condition. In the coming decades, diamond-based devices will reduce our carbon footprint by 10% or more,” he believes. Because diamond has a lower coefficient of friction than metal, diamond-coated parts are increasingly used in all kinds of systems where friction drags on performance, including cars, planes, and turbines. Diamond coating can reduce overall engine friction by 25%, according to automaker Nissan. Diamond’s low friction, durability, and biological inertness makes it ideal for orthopedic medical devices such as joint replacements. Lab diamond spinal disk replacements are currently undergoing clinical trials in the EU. Today, lab diamonds are used to manufacture many staples of modern society, such as our cellphones.
“From the glass screen all the way down to the wires on the circuit board, lab diamonds are required to make your phone,” says Payne. “Whatever device you are using to read this article — desktop or mobile, Mac or PC — it would not exist without lab diamonds.” Ultimately, diamond will replace silicon in electronics and computer processors, as diamond is a far superior semiconductor than silicon. “Diamond-based computers are significantly more efficient and better than silicon in handling high voltages and high frequency. Electrons move more freely through diamond than silicon and diamond is far more thermally conductive than any other known material,” he says. “We are reaching the end of the road for silicon. Starting with power transformers, electric vehicles, satellites, and cell phone towers, diamond will gradually replace silicon in the decades ahead,” Payne believes. The application of diamond in many areas previously unimagined leads Payne to get philosophical.
“Throughout history humanity has advanced through eras because of technology, from the Stone Age to the Bronze Age to the Iron Age to the Information Age,” he declares. “Just as we have progressed from stone to steel to carbon fiber, we have progressed from vacuum tubes to silicon to diamond. We are advancing into the Diamond Age of humanity, where man-made diamonds increasingly will brighten the lives of billions of people around the world,” Payne concludes.