By Jalpa Bhoolia
Diamonds are the ultimate symbol of love, luxury, and status. They form part of a complex yet captivating industry with a rich history that originated in the 1300's. The value chain spans from mining and cutting to polishing and trading. Mined (also called natural) diamonds are considered one of the oldest and most unique treasures found in nature. They formed under a combination of heat and pressure in the earths' mantle over a period between 1.33 billion years to 3.5 billion years. While the production of diamonds in a laboratory made for a remarkable discovery that dates to the late 19th century, the process, at that time, was too expensive relative to natural diamond mining, and the diamonds were mostly flawed. After decades of technological advancements, lab-grown diamonds (also known as cultured or synthetic diamonds) can now be formed over a period of weeks to a few months and are of excellent quality.
Currently, there are two main lab-grown methods of production:
1. High pressure/high temperate (HPHT): This process uses extreme temperatures and pressures on carbon to replicate the conditions within the earth's mantle where natural diamonds are formed.
2. Chemical vapor decomposition (CVD): A process that involves a vacuum-filled chamber chemical reaction from a gas mixture of hydrocarbon.
Physically, chemically, and optically, lab-grown diamonds are identical to their natural counterparts and are even graded the same way according to the four Cs of cut, clarity, carat, and colour. However, it comes with a price tag at a fraction of the price of a mined diamond as mining costs are eliminated, the supply chain is significantly shorter, cartel control is eradicated, and production costs are low. For context, a price comparison done via Cape Diamonds for a one carat diamond (colour: D; Clarity: VS) comes in at R115 000 for a natural diamond versus R18 400 for a lab-grown diamond of the same colour and clarity.
Brilliance without the baggage
Cost may not be the only factor that tilts the scales. While diamonds may be forever, mining isn't. With the lustre and shine of traditional mined diamonds comes significant environmental and ethical considerations. Natural diamonds hold a long-standing association with environmental degradation, water pollution, exploitive mining practices, and deforestation. While on face value these factors are eliminated in a laboratory environment, this is somewhat nuanced as the exorbitant amounts of power and natural resources needed to sustain the lab diamond process shouldn't be ignored. Some food for thought - according to a 2023 report from the Natural Diamond Council, more than 60% of lab-grown diamonds are produced by China and India, where 63% and 74% (respectively) of grid electricity is sourced from coal.
Beyond the glitter
According to a 2022 report from Straits Research, the global diamond market is expected to see an annual compound annual growth rate (CAGR) of 4.4% between 2024 and 2032. Diamond prices, both mined and lab-grown, have been under pressure for some time now, however, with the macro-environment slowly softening on the back of lower interest rates and improved consumer confidence, we could see improved consumer demand and some stability return to diamond prices.
The diamond dealers
De Beers, 85% of which is owned by Anglo American and 15% by the Government of the Republic of Botswana, once commanded close to a monopoly on the diamond industry, however, market share has declined from the peak of ~80% in the late 1980's on the back of fresh competition (Russia, Australia, and Canada among others) and increasing regulatory pressure. A 2022 report published by Statista attributed ~30% of market share to the Russian diamond mining conglomerate, ALROSA, with De Beers coming in a close second, accounting for ~29% of the global diamond production market share.
In 2018, De Beers announced the launch of Lightbox Jewellery, a new consumer brand of laboratory-grown diamond jewellery developed to offer consumers high-quality, fashion jewellery designs at lower prices than existing lab-grown diamond offerings. While this may have seemed like a step in the right direction for the group at the time, the company announced earlier this year that it will cease creating synthetic diamonds for its Lightbox brand, thus marking the end to the diamond producer's six-year experiment. The group will continue to tap into existing inventory for the foreseeable future, after which it will decide on how to proceed. By contrast, the sanctions-ridden ALROSA has steered clear of dabbling in the lab-grown jewellery market and intends to directly interact with consumers through its brand "Only Natural Diamonds".
Not bright enough?
There are several companies that offer exposure to lab grown diamonds - Pandora (PNDORA DC), best known for their charm bracelets, continues to enjoy success as it leans towards lab-grown diamonds as part of its strategic bet. French luxury goods conglomerate, LVMH (MC FP), entered the lab-grown market in 2022 with an investment in an Israeli-based lab-grown diamond company, Lusix. This was a sharp contrast against the natural diamond brand under its wing, Tiffany & Co. Adamas One (JEWL US), known as the "Original Lab Grown Diamond Company", is backed by 36 patents on the production of lab-grown diamonds and is a pure-play lab diamond company in the micro-cap space. Signet Jewelers (SIG US) is another company that is riding the lab diamond wave, noting an improvement in the trading environment during its the mid-year results release.
Nevertheless, while an investment in lab-grown diamond stocks may exude appeal as it sets out to disrupt the traditional diamond market, the outlook is also not clear cut. At a recent event hosted by De Beers in Hong Kong, group CEO, Al Cook, offered key insights into the industry's landscape and outlook. While 2023 presented material challenges, Cook predicted that a gradual recovery would be seen in 2024, citing a notable shift in the market while lab-grown diamond prices continued to plunge, exposing attractive margins on natural diamonds relative to lab counterparts, in turn prompting retailers to return their focus to natural diamonds. ALROSA shared a similar stance on the outlook, with good fundamental factors driving a market recovery.
We remain on the sidelines when it comes to the diamond market currently. The push and pull of consumer preferences between lab-grown and natural diamonds and the demand and supply dynamics are still very unclear. We foresee continued pressure on diamond miners near term and persistent margin pressure on the lab market, despite the improvement in the macroeconomic outlook.
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