Chaim and Tamar Even-Zohar at the SCIO Diamond Technology Corporation\u2019s lab-grown facilities in Greenville, South Carolina.<\/figcaption><\/figure><\/div>\n\n\n\nIn this process, the very thick (high) stone is synthesised as one diamond and, apparently, no \u201cdividing lines\u201d are visible. This literally means that, in terms of size potential of stones, the sky has become the limit (subject to available capacity of the growers).<\/p>\n\n\n\n
Many producers, not only Element Six, possess know-how that they keep to themselves, and patent it only at the last moment, only when the product hits the market. This is done to prevent patent theft \u2013 as it is impossible to take a CVD diamond and \u201cback engineer it\u201d to arrive at how the processes work. On the other hand, the main advantage of patenting the technology is to be able to go after other CVD producers accusing them of infringing your patent. De Beers has done that before, it is doing it now, and may well do so in the future.<\/p>\n\n\n\n
Though the market reacted sceptically to statements about Element Six\u2019s ability to sell at discounts of 75% to the prices of other LGD producers, and below 90% of comparable natural stones, my scientist friends tell me that these figures are attainable. Element Six would not be dumping, i.e., selling at prices below production cost. But the issue for the diamond market is \u201csizes\u201d.<\/p>\n\n\n\n
Somehow, Element Six is suggesting jewellery anywhere between 0.25 carats and 1.00 carat sizes. But Element Six has the know-how to grow large or even very large stones.<\/em> Says one of my friends: \u201cOnce certain barriers were overcome in CVD, the sky has always been the limit. Given the size and power of your growth chambers. Crystals don\u2019t have a \u2018memory\u2019 per se, so growing on a substrate 1 mm thick is no different than one of 20 mm. It\u2019s just a matter of feeding gases into the growers.\u201d If Element Six can make good money producing beautiful fancy coloured or pure white large stones, will they leave that part of the market to other LGD producers? Don\u2019t bet on it.\u201d<\/p>\n\n\n\nDe Beers has, over many years, prepared itself for the day it would join \u2013 and ultimately lead. When announcing its Lightbox branded line of lab-grown jewellery, whose registered trademark they interestingly applied for only in late 2017, De Beers observed that \u201cany Lightbox lab-grown diamonds of 0.2 carats or above will carry a permanent Lightbox logo inside the stone.\u201d Let\u2019s again turn the clock back some 14 years. Diamond Intelligence Briefs reported that Element Six had just (2004) applied for a patent registration for \u201ca method of incorporating a mark of origin, such as a brand mark, or fingerprint in a CVD single crystal diamond material.\u201d Much of the research, and many of the patents, had no use for industrial diamonds. However, the gemquality CVD market was always on their minds.<\/p>\n\n\n\n
One of the recently published patents also indicates methods to grow stones that can be converted into blues and pinks at a much faster rate. In these (Lightbox) colours, Element Six may indeed have a lower cost advantage over other producers.<\/p>\n\n\n\n
As a matter of fact, Element Six has patented ways of colouring the lab-grown diamonds to brown, pink, blue, yellow, etc. These are all quite different and complicated processes, and enormous resources have been invested getting to this technology. One of the patents recently published by Element Six also indicates methods to grow these coloured stones at a much faster rate, giving it a lower cost advantage over other producers. These patents weren\u2019t needed for industrial applications \u2013 this was mostly done to \u201cget ready\u201d for the inevitable day. That day has now arrived.<\/p>\n\n\n\n
Natural diamonds represent an industry where they currently have a high market share, but it is a low growing or stagnating market. These are viewed by BCG as \u201ccash-cows\u201d which typically generate cash in excess of the amount of cash needed to maintain the business.<\/p><\/blockquote>\n\n\n\n
Impact on Natural Diamond Producers<\/h4>\n\n\n\n
Though the eventual entry of De Beers into the labgrown diamond business was never doubted, the timing caught most of us by surprise. Maybe it shouldn\u2019t have. The parent company of De Beers, Anglo American (85% owner), had identified synthetics as a \u201cprincipal risk to our natural diamond business.\u201d Anglo American, in its 2016 annual report, concluded that \u201ctechnological developments are making the production of manmade gem synthetics commercially viable and there are increased distribution sources. The marketing of synthetics seeks to place them as being environmentally or socially superior.\u201d [Italics added.]\n\n\n\n
Anglo American summarises the impact of synthetics on the natural diamond business as representing a \u201cpotential loss of polished and rough diamond sales leading to a negative impact on revenue, cash flow, profitability and value.\u201d Anglo American realised that, at the end of the day, any consumer buying a labgrown diamond is a consumer who did not buy a natural diamond. It is as simple as that \u2013 and it isn\u2019t without solid reasons that in our annual Tacy Diamond Pipeline we have incorporated the lab-grown production on the supply side and thus also on the polished demand equations. It is not that the threat materialised out of thin air. It was incorporated into the pipeline quite a few years ago. So, what made Anglo suddenly recognise the threat and then for De Beers to rapidly act on it?<\/p>\n\n\n\n
Turning the \u201cThreat\u201d into a \u201cStar\u201d<\/h4>\n\n\n\n
We think the credit should go to the CEO of De Beers, Bruce Cleaver. It is probably no surprise that the strategic \u201cthreat\u201d was recognised by Anglo American when Bruce Cleaver, who has a legal background and is an outsider to the industry, took over the reins at De Beers. Many of the current executives \u201cdon\u2019t come from diamonds.\u201d They don\u2019t have the emotional attachment to the product. They have one task: deliver return for shareholders. Other stakeholders are less important. De Beers, in the last few years, noticeably relied on the strategic advice of the Boston Consulting Group (BCG). It was BCG that designed the blockchain strategy for De Beers. Some Forevermark executives occupied positions at BCG before joining De Beers.<\/p>\n\n\n\n
BCG is also famous for the BCG matrix which helps companies to analyse their portfolio of specific products based on the market share and growth rate. At De Beers, lab-grown diamonds for the jewellery market can quickly capture a high market share in an otherwise slow-growing market and grow the product industry demand. Such products are called by the BCG-matrix \u201cStars\u201d.<\/p>\n\n\n\n
Natural diamonds represent an industry where they currently have a high market share, but it is a low growing or stagnating market. These are viewed by BCG as \u201ccash-cows\u201d which typically generate cash in excess of the amount of cash needed to maintain the business. According to the BCG matrix, \u201ccash cows\u201d are to be \u201cmilked\u201d continuously with as little investment as possible. [Investments would be wasted in an industry with low growth; they are worth it if high growth and high marketshare are assured, since such investment would be wasted in an industry with low growth.] Classic strategy talks about \u201cmilking\u201d the cows and feeding the \u201cstars\u201d.<\/p>\n\n\n\n
Lightbox: The \u201cCash- Cow\u201d of the Future<\/h4>\n\n\n\n
Following the BCG logic, Lightbox wouldn\u2019t have been done just to remain a \u201cfringe product\u201d serving the \u201cfun jewellery\u201d teenager market. In the BCG matrix Lightbox is a \u201cstar\u201d. It can gain quickly enormous market share in the still infant gem quality synthetic diamond market. Therefore, it had to be linked to an \u201cundercutting competitors\u201d pricing strategy that would force other producers out of the market. De Beers expects its LGD business to go from strength to strength. Lightbox is the least \u201cpainful\u201d way to communicate the U-turn to the market. LGDs are \u201cstars\u201d that will lighten the De Beers firmament.<\/em><\/p>\n\n\n\nWith the almost hysterical efforts to convince the trade that through product differentiation the industry can sustain two \u201cdifferent\u201d markets, at the end of the day, and with due respect to all the sophisticated detection equipment, it doesn\u2019t make a difference to the consumer. Consequently, it doesn\u2019t make a difference to the retailer either. The retailer will \u201csell\u201d the product on which it makes the highest profits. It can sell the \u201cdiamond dream\u201d just as easily with LGD as with natural diamonds. Have no illusions: he will and he does.<\/p>\n\n\n\n
Pranay and I visited a jewellery store in the United States that only sold lab-grown diamonds. On the walls of the store there were huge posters depicting pictures from satellites showing the massive disruptive environmental footprint of the Jwaneng mine in Botswana. There were also pictures of child labour involved with mining and manufacturing natural diamonds, etc. Actually, all the materials produced by the natural diamond NGOs (Global Witness, or what was Partnership Africa-Canada, etc.) were thoroughly put to good use by this store\u2019s labgrown promotion efforts.<\/p>\n\n\n\n
However, what was most impressive was that over 95% of this store\u2019s lab-grown diamonds were sold to young couples, as wedding and engagement symbols. The soon-to-be newlyweds were actually seeking these lab-grown diamonds and they were willing to pay top dollar, as well. They saw it as an \u201cAmericanmade\u201d product, as an ecologically green product. American labour. American love! This is not what De Beers has been telling us \u2013 emotional wedding jewellery was supposed to be only for natural diamonds. With the millennials, this is wishful thinking, bordering on self-delusion.<\/p>\n\n\n\n
Back to Anglo American corporation. Risk management is a continuous process, conducted at top corporate levels. Strategic decisions are made on levels beyond that of De Beers. The term used is \u201crisk appetite\u201d. Whether the company can carry the risk, whether the risk mitigation efforts are working, or not. If the principal risk in any business cannot be addressed, such business would either be closed or disposed. I am not privy to internal Anglo American discussions, but if the company would control the gem-quality synthetic business, it surely could mitigate the damage to the mining business. But only up to a point.<\/p>\n\n\n\n
Exploration Funding will Dry Up<\/h4>\n\n\n\n
Pranay and I are quite tunedin to the sentiments of the mining community. What we discovered in recent years at the world\u2019s largest mining and exploration shows in Canada (PDAC) was that money for diamond exploration is drying up. Why spend tens or hundreds of millions of dollars searching for new deposits, while \u2013 after finding a deposit \u2013 more millions would be needed on resources estimation, getting bankable feasibility studies, getting environmental approvals for developing a mine, permitting, licensing, etc., if you don\u2019t know what the price and demand for the product will be ten years or more down the road? It\u2019s a vicious circle. When existing deposits are depleted, when mines close, when no new mines are put into production, the further growth of the industry will solely come from lab-grown diamonds.<\/p>\n\n\n\n
Des Kilalea observed that following the Lightbox announcement, existing mines may increase their cut-off sizes, i.e., they will not bother to mine rough in sizes of less than a few millimetres, as there won\u2019t be demand for these smalls. That part of the market will be taken over by synthetics \u2013 if it hasn\u2019t already.<\/p>\n\n\n\n
That by itself would trigger a reduced volume production of natural diamonds. This would greatly impact Russia. In a private communication, we learned that Alrosa, at the highest levels, Lightbox announcement. Alrosa consciously decided to show constraint in its public utterances, so as not to upset the market too much, but they are fuming. They probably realise what is happening here. It may herald the beginning of the end to natural diamond mining. If mining cost exceeds achievable market price, mines are closed. It\u2019s that simple.<\/p>\n\n\n\n
De Beers as Diamond Trader and Retailer<\/h4>\n\n\n\n
Alrosa is quite different from De Beers. Alrosa is a pure diamond mining company, with almost no midstream or<\/em> downstream exposure.<\/em> It owns its own mines (with the exception of an Angola joint venture). De Beers ceased to be a true diamond miner a long time ago and is more of a trader. In Botswana, it owns 50% of the Debswana mines, and it earns a margin as a trader of most of the output. Same story in Namibia. In South Africa, where it has few remaining mines, these are also joint ventures. Oh yes, it owns mines in Canada \u2013 and I am sure there are many executives at De Beers who wished they had never touched that continent. Billions of dollars were wasted there.<\/p>\n\n\n\nIn contrast, De Beers has become a fully vertically<\/em> structured diamond trader \u2013<\/em> except for polishing, because there is no money to be made in the midstream sector. [It knows that better than anyone else \u2013 after all, they are the sector\u2019s main rough supplier.] Even for Lightbox jewellery, they have already announced plans to outsource the polishing in India \u2013 as if to support my views that lab-grown diamonds are truly good news for this manufacturing country. De Beers is involved in polished recycling, polished grading, franchising its Forevermark brand, and operating its own jewellery stores. In none of these areas do they hold a competitive advantage or are particularly successful. But, looking at their activities, they can hardly still be viewed as a true mining company.<\/p>\n\n\n\nFor now, De Beers is playing down the Lightbox impact. It says it will only start producing in Oregon by 2020 and produce 500,000 carats of rough (generating 200,000 carats of polished). There are currently some 15 lab-grown gem diamond producers in the world and their output is limited. [We are not talking about the billions of carats of mainly Chinese made industrial synthetics, which is increasingly having an overspill into the gem market.] Only Singapore\u2019s IIA Technologies Pte. is producing significant volumes which we estimate at around 400,000 carats annually at the moment \u2013 and increasing. The present sales of Lightbox LGD will come from De Beers UK production and from its stockpile. Nobody knows how much there is out there. As it will start selling shortly, it must have the critical mass to sustain an effective launch.<\/p>\n\n\n\n
To soothe the industry\u2019s anxieties, De Beers says that \u201cthis Lightbox is just a $200 million business; our natural business is $6 billion.\u201d First of all, that statement isn\u2019t accurate \u2013 it views joint ventures\u2019 output as part of their own. On the sales to the sightholders, they are allowed a certain margin. It\u2019s not the turnover that is relevant \u2013 but rather the margins realised. That is as true for De Beers as it is for Indian traders. De Beers will earn 100% of the Lightbox profits \u2013 at margins it can, eventually, fully control. Moreover, if it can produce $200 million, it can also produce $2 billion. Or more.<\/p>\n\n\n\n
Undesired Spillover Effects<\/h4>\n\n\n\n
One of the more predictable spillover effects of the trade war announced by De Beers against the other LGD producers is for the endangered companies to resort to \u2013 or condone their clients to \u2013 selling undisclosed synthetics. The fact that De Beers has \u201clegitimised\u201d labgrown diamonds in a big way may make it easier to \u201cforget\u201d the origins of the stone. It doesn\u2019t really matter. Or does it?<\/p>\n\n\n\n
What it does illustrate is that if and when De Beers becomes the dominant producer and the price-setter of the LGD market, it will undoubtedly capture the monopoly of profits such production allows. Bankrupting the smaller LGD players may not be as easy as one might think. The Lightbox promotions of the lab-grown product will, in fact, be beneficial for all lab-grown producers.<\/p>\n\n\n\n
What seems certain is that for quite a while, consumers and traders will be confused. The Lightbox entry offers challenges and opportunities \u2013 and was unavoidable in any event. In the short run, De Beers will be seen by their own clients as unreliable, disloyal and untruthful suppliers. Few clients will say so aloud.<\/p>\n\n\n\n
Looking Ahead<\/h4>\n\n\n\n
In any event, many diamantaires (and De Beers\u2019 clients and partners) suffer from selective amnesia in anything involving De Beers, and disloyal acts will be quickly forgotten. They will swallow their pride and set aside their anger and happily apply for ever more natural rough \u2013 maybe in the hope to get a Lightbox franchise as well. \u201cDe Beers still does continue to try and \u201cappear\u201d like a custodian, even when it is not. [It prefers to be seen as the industry\u2019s \u201cleader\u201d.] It is like an overprotective mother who wants the child to be a \u201cmama\u2019s boy\u201d while also complaining about the son not moving out,\u201d concludes an astute industry observer.<\/p>\n\n\n\n
Des Kilalea stresses that De Beers had no choice \u2013 it had to do this to protect the natural diamond business.<\/em> \u201cDe Beers has been considering and developing this strategy for several years and the inroads of LGDs into the market for natural stones made this move inevitable,\u201d he notes. Here I totally disagree. De Beers had to do this to protect its own business.<\/em> It made a brilliant move, as we said already, for its own benefit.<\/p>\n\n\n\nAll others, including mining companies, must now consider their own response to the challenge. It goes beyond that. Strategically, this little Lightbox \u201cdynamite\u201d explosion heralds the renewed lease of life for De Beers \u2013 it will probably still be the world\u2019s leading diamond supplier long after all of its natural diamond deposits have been exhausted.<\/em> De Beers will adapt and reinvent itself \u2013 forever.<\/p>\n","protected":false},"excerpt":{"rendered":"In the mining business, shouts of \u201cfire in the hole\u201d are warnings that an explosive detonation in a confined space is imminent. They warn of a dynamite charge that has been set. Depending where you are positioned, ignoring it can be hazardous or even lethal. The Lightbox announcement of De Beers, signalling its policy U-turn…<\/p>\n","protected":false},"author":1,"featured_media":6422,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[106,79],"tags":[],"thb-sponsors":[],"class_list":["post-6421","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-manufacturing","category-viewpoint"],"acf":[],"yoast_head":"\n
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