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.

 

Standard

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s