Diamonds Are Not Forever

“Large numbers of strangers can cooperate successfully by believing in common myths. Any large-scale human cooperation – whether a modern state, a medieval church, an ancient city or an archaic tribe – is rooted in common myths that exist only in people’s collective imagination.”
― Yuval Noah Harari, Sapiens: A Brief History of Humankind

The recent move by De Beers to manufacture and sell lab grown diamonds has sparked some debate about the future of the diamond industry and the investment case for Anglo American. Anglo American own 85% of De Beers and diamonds contribute around 25% of the company’s revenue. For years, De Beers dismissed lab grown diamonds as not “real”. Just two years ago they were trying to sell a $60,000 infrared detector to jewelers as even experts could not differentiate between natural and lab grown diamonds. The efficacy of this equipment is questionable and the most common advice online is to insist on a certificate of authenticity.  In 2015 Simon Lawson, head of Technologies U.K. at De Beers said “De Beers’ focus is on natural diamonds, We would not do anything that would cannibalize that industry.”

That strategy failed as the share of lab diamonds grew and began to leak into the global supply chain undetected. With the launch of Lightbox, De Beers’s strategy is to manufacture and sell lab diamonds themselves, at a price 90% below natural diamonds. This severely undercuts their competitors who in recent years have been selling lab diamonds at around 30% below natural diamonds. Biz news describe De Beers as having dropped an “Atom Bomb” on the lab grown diamond industry.

This aggressive move is a risky attempt to fully segment the market into “natural” and “lab” diamonds. It is loudly proclaiming to the world that natural diamonds are ten times as valuable as lab diamonds (according to De Beers that is).

This aggressive strategy will severely hurt other lab grown diamond manufacturers who until now were making good margins selling lab diamonds at a 30% discount to natural diamonds. The question is whether it this “cannibalization” strategy will end up killing De Beers in the process. The problem that De Beers faces is that lab diamonds and “natural” diamonds are essentially the same thing. Lab diamonds have the same chemical composition, crystal structure, optical and physical properties of diamonds found in nature.
Throughout history, alchemists attempted to turn lead into gold in search of riches. It never worked. The recent progress in technology has achieved alchemy for diamonds.


A little bit of history

Diamonds have been valued by humans for thousands of years for their beauty and scarcity, but the discovery of massive diamond deposits in South Africa put all that at risk.

“Until the late nineteenth century, diamonds were found only in a few riverbeds in India and in the jungles of Brazil, and the entire world production of gem diamonds amounted to a few pounds a year. In 1870, however, huge diamond mines were discovered near the Orange River, in South Africa, where diamonds were soon being scooped out by the ton. Suddenly, the market was deluged with diamonds. The British financiers who had organized the South African mines quickly realized that their investment was endangered; diamonds had little intrinsic value—and their price depended almost entirely on their scarcity. The financiers feared that when new mines were developed in South Africa, diamonds would become at best only semiprecious gems.”

In 1938 Harry Oppenheimer enlisted New York–based ad agency N.W. Ayer to help increase the demand and perceived value of diamonds. In one of the greatest feats in marketing history, they took a small but growing tradition of giving diamond engagement rings and made it a standard social requirement. Between 1939 and 1979, De Beers’ wholesale diamond sales in the United States increased from $23 million to $2.1 billion. It is now $43bn in the USA and $82bn worldwide. They created the story of diamonds as being scarce and valuable and successfully planted it into the human narrative. They maintained the perception of value through extensive marketing and the ability to tightly control the supply chain, which ensured scarcity (or at least the perception of it).

A new strategy

De Beers is now attempting to pull off another great marketing feat by entering the lab grown diamonds, but trying to differentiate them as being different and “not as valuable” as natural diamonds.  Given that the diamonds are identical and very difficult (some say impossible) to tell apart, it is not clear to me why the value should be any different. The lab diamond industry has also made a very strong case that the supply chain for natural diamonds facilitates large scale human suffering (blood diamonds).


Status Symbols Will Endure and Evolve

Humans have an evolutionary need to display success and status, a purpose which diamonds have served for a number of years. But the choice of display has changed over time. At points in human history, copper, silk and even pineapples were scare status symbols. Humans are competitive social creatures so the jewellery industry will endure, but the significance of diamonds will slowly diminish. While people might be able to boast about having natural diamonds for now, if no one can tell the type of diamond, the social benefit of a natural diamonds will surely lessen over time.


An Audacious Strategy

Its quite audacious to attempt to differentiate identical products. Will De Beers be able to pull of this marketing feat and maintain the value of natural diamonds? I am very sceptical. After spending years denigrating lab diamonds, they were forced to enter this market themselves as lab diamonds have continued to take market share. They have massively undercut competitors, who will now be forced to match its pricing.

Commodities which are easy to produce, can’t possibly maintain value, regardless of what story you tell. Diamond prices have fallen since 2012 in line with gold as the fear of inflation has eroded. Going forward I believe that diamond prices will fall faster as the market is flooded and the belief in the higher value of natural diamonds is worn down.

diamond and gold


A good test of whether or not you share my view is whether you find this article compelling, or utter nonsense.



South Africa’s Renewable Energy Misadventure

It is a truth universally acknowledged that South Africa’s Renewable Energy Independent Power Producer Procurement Program (REIPPPP) was a great success.

The renewable industry has done one the most phenomenal public relations jobs I have ever seen. The frequency and quantity of articles promoting renewable energy and proclaiming the success of the REIPPP programme have been astounding. Their job was made easier due to the disintegration of Eskom. The PR machine kicked into high gear last year when Eskom declined to sign REIPPP contracts associated with the fourth round of the programme. The reason for the delay was due to a combination of maladministration and Eskom’s dire financial position. The contracts were eventually signed in April 2018 by Energy Minister Jeff Radebe. He left it to NERSA and Eskom to work out the cost implications.

Yesterday, Radebe released the draft Integrated Resource Plan (IRP) and the allocation to renewable energy sources continues to increase. I believe that the REIPPP programme will go down in history as one of the great financial swindles perpetrated on a developing country. Renewable energy and financial firms have made billions of Rands, leaving SA’s treasury covering guarantees of R200bn and South African consumers with higher electricity price increases. We have not been the only ones who have been fleeced as renewable energy has seen $800bn in subsidies globally over the last decade with very poor results.
The narrative backed by the media and (aided by amazing PR firms) is that renewable energy is a complete and proven technology whose cost is now below that of nuclear and fossil fuels. The truth is very different:

Renewables are more expensive

One of the main reasons people dont realise how expensive renewables are is that it’s not easy to measure the difference in value between intermittent and dispatachable (on demand) energy. So while renewable costs have fallen below coal/nuclear in theory, the reality is that they make electricity a lot more expensive. Electricity when you DONT need it is worth a fraction of electricity that is needed when you do. Rob Jeffrey attempts to show how you need to incorporate the capital cost and load factor to get a true cost of renewable electricity, which is much higher than the Levelised Cost of Electricity (LOCE) that is touted in support of renewables. Throughout the world, “low cost” renewables have only managed to drive up the cost of electricity

Renewable energy is an incomplete and imperfect technology

Intermittent renewable energy without proper storage is an incomplete technology; solar power without the high capacity and cost-effective battery technology is NOT a viable source of mainstream power.


A Solar future has been promised to us for years, but has never been delivered:
When I was young the highlight of a visit to my grandparents was the access to my grandfather’s library of “Popular Science” magazines. It was exciting to read about how we would drive, fly and live in the future. That was around 30 years ago and unfortunately the way we drive and fly has remained pretty much unchanged. There was always great excitement around the potential for solar energy to power our homes, cars and even planes. None of that is even close to fruition four decades later even as the technology has supposedly progressed substantially. Solar power companies around the world have struggled to reach commercial viability even with great incentives and subsidies, and when those subsidies are removed they tend to go bankrupt very quickly (Solyndra, SunEdison, Solarcity). The truth is that predicting how technology will evolve is very difficult. However, there are plenty of people incentivised to make those predictions and lobby accordingly. The following are popular science covers from the 70’s and 80’s:

While solar panels have improved, the fantastic predictions on our energy future have not come to fruition. The media has little understanding of how technology evolves.

Today there is a widespread belief that renewables are the future of energy generation, even though though they cannot deliver the type of power necessary for an industrialized economy. The technology necessary to advance renewables for mainstream purposes is years, if not decades away. As a poor country, South Africa does not have the resources to contribute to this project of unknown cost and horizon. Countries like Germany have aggressively pursued renewables, and pushed up their electricity prices to among the highest in the world. Germany can make that choice as they are one of the richest countries in the world. South Africa should not.

I am not “anti” renewable energy. There is no reason not to want clean power. I just believe that South Africa should wait until the technologies are perfected before considering implementation. Judging by how poor the predictions of technology have been, we do not even know whether the current renewable strategies (solar/wind) will be the ones that prevail. Given that solar has been a failure for the last 30-40 years, it would not be my bet for a primary energy source. My understanding of the science is limited, but my intuitive belief is that nuclear or “clean” fossil fuels are more likely to be the dominant power technology in the future. Meanwhile, there exist massive vested interests who aim to capture the explicit and implicit subsidies that renewable energy generation business provides. This means that we will continue to be subjected to a barrage of misleading science and economic opinions and predictions. Given that we don’t know which technology will prevail, and how long it will take for the next generation of power technology to be perfected, poor countries like SA should not be risking scarce resources by betting on an uncertain outcome.

On the positive side, we know that South Africa specializes in economic plans that never get implemented; the latest IRP will likely be one of them. It is a consolation that no further renewable projects will be signed for the next four years, by which time it will be more apparent that REIPPP was a disaster.