Wednesday, June 3, 2015

The Top 10 issues for 2015 - #2: The Second of Three Tipping Points of Man-made Diamonds

Last week I posted a blog covering the first of the three tipping points for man-made diamonds (MMD's), moments when MMD's will have dramatic effects on the diamond business.  (If you have not read it, I suggest doing so before going on with this blog.)

No sooner had I posted tipping point 1, when news came out that a very high quality 10-carat diamond was produced by New Diamond Technology, a Russian company claiming that they possess a new process that is far more efficient.  They claim it took them 300 hours to create this stone, which was cut from a much larger piece of rough, over 30 carats.  Let's see, 300 hours is 12.5 days for a 10-carat diamond.  Whether is was a promotional effort of regular production, most miners would love to have a finished 10-carat high quality stone every ten days.

Then I read that both Helzberg's and Sam's Club, each of whom address somewhat different market segments, are both offering larger diamonds in pink, yellow and white, priced in the thousands.

So the first tipping point may already be arriving - sooner than I thought.

There are some good reasons for retailers to make the move to MMD's, aside of the price differential.  The major producers of naturals, De Beers, Alrosa, Rio Tinto, etc, know what's coming, essentially the end of the road.  So they have three strong motivations.  Sell as much as possible as fast as possible and at the highest price possible, because the rules of the game may change abruptly.  So keep up the marketing (I see that "A Diamond is Forever" is being re-launched), pooh-pooh those diamonds that did not take millions of years to make (only 300 hours...) and squeeze out every dime they can from sightholders.  Martin Rapaport, at his heavily attended annual breakfast at the JCK Show in Las Vegas, says that the producers need to see to it that the entire production and distribution chain, all the way to the consumer, needs to be protected.  It isn't likely at all that this is on their minds.  Their futures are too short.

This has had the deleterious effect of overloading the pipeline with diamonds (Rapaport states that his RapNet lists over one million stones), crushing margins for cutters, and scaring away bankers from such low-margin businesses.  But producers have few options.  They cannot really cut back production in an effort to create scarcity because they will never come to agreement between them to do that (even OPEC is failing at that) and because that might not even create the desired effect!  Recycled goods and MMD's might fill that hole and at a lower price, thereby undermining the producers' business even further.

So we will see a continuation of a push to raise prices, ex-plan special deals, and sight sizes and prices only backing off at the last moment, when sightholder rebellion is evident.

This is not normal commercial business. In every other commodity, when demand is down, prices drop and mining is curtailed. The buyers' needs drive production and prices. 

The advent of MMD's introduces other hazards for producers.  De Beers did a great job of building the image of diamonds as a scarce, expensive gift from mother earth.  The thought of diamonds being produced like widgets has to be a scary prospect, especially when you don't end up with imperfect cheap diamonds, but mostly higher quality cheap diamonds.  That factor alone could eventually undo the viability of many mines that produce mostly low quality diamonds.

All the more reason why all producers today are full steam ahead.

Under these conditions, the temptation to shift to MMD's (and quit sights, perhaps) is compelling, and apparently under way.  A major aspect facing jewelry manufacturers is throughput.  Keeping a factory busy is important, which is why we have seen so many shift to alternative materials and stones.  And volume is much more important to them than moving diamonds.  The consumer buys finished jewelry.  The diamond may be an important component, but that is what it is - a component.

This brings us to tipping point number 2.

It is a reasonable assumption that the production and sale of MMD's under all these factors will expand far faster than we might imagine. We already see pieces that combine MMD's and naturals, some for centers, some for side stones.  The moment will arrive - actually must arrive - when manufacturers will need certain assortments and quantities of diamonds to meet orders, and the only way to achieve that is by using both naturals and/or MMD's as available to get the job done.  I'd venture to say that is already been happening for quite a while, but without disclosure.  (There are known cases, and both manufacturers and retailers are livid over being overcharged, never mind being deceived.)

We know, of course, of all the efforts being made to develop scanners and testers that would allow easy, mass detection.  Good try, I say, but the likelihood of fast, cheap, broadly distributed detection devices is very faint.  And even if it did miraculously happen, it does not solve the problem of availability of a steady, reliable supply, at a workable price, that all jewelry manufacturers would like to see.  Not in a world with rising demand and declining production of naturals (especially middle to better quality stones).

So tipping point number 2 will occur when MMD's are ubiquitous, and the wholesalers and retailers will not want to, or be able to, deal with the job of guaranteeing use of natural stones.  That will become next to impossible.  So everyone will revert to saying that all these stones are "diamonds" and that some or all are natural, some or all are MMD's.

The diamond world, at that moment, will change profoundly.  A paradigm shift we will call it, and one with many implications that I will cover next time before suggesting tipping point #3.

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