Tuesday, June 16, 2015

The Top 10 issues for 2015 - #3: The Third of Three Tipping Points of Man-made Diamonds

The last two posts covered scenarios that I think are totally possible, even probable, as we move further into a time of declining production of diamonds and increasing production of MMDs - man-made diamonds.

Until relatively recently, MMDs were too often the means for people to realize extra profits by deceiving buyers.  Even experts cannot detect MMDs without special equipment, and for years no such equipment was available.  Yes, labs could detect MMDs, but it is very safe to assume that only a tiny percent ever got that far - most MMDs are smaller stones.  In addition, productions were so small, that finding them was more by accident then by a directed search.

I recall being told years ago that a New York based lab found MMDs because a major auction house checked all diamonds being auctioned, mounted or loose, as a matter of course.  I have never heard of any other company doing that.

Of course, diamond "imitations" have been around a long time.  There was always glass, but also yags and CZ's.  CZ has found its own place in the jewelry business. But none of them, or for that matter stones like white sapphires or moissanite, have been viewed as replacements for diamonds. But all of these had the same objective - offering the public a much cheaper alternative to diamonds, and/or precious metals, that have a diamond look.

The public understood all that at the same time that it understood that there were very different virtues and benefits to owning "the real thing."  There is the lasting value of the piece, and there are the many psychic lifts that "real" jewelry offered.

Even so, with rising metal and stone costs (not just diamonds, but colored stones as well), many designers and jewelry manufacturers have opted over the last few years to bridge the two worlds of fashion and fine jewelry.  We have seen a boom in diamonds set in silver, for example, something that I am sure the diamond producers were not too unhappy to see.  After all, that allowed more value to go into stones instead of metal, and gave them some room, supposedly, to raise prices.  No sense leaving too much profit on the table for others.

Innovation is everywhere!  In the battle to control costs we see the use of brass, diamond coated CZ's, and metal plating of every sort, and now full bore collections of MMDs, many using a mix of natural stones and MMDs.

The caveat I extend is that while the scenarios I described in the last two posts seem highly plausible, timing is harder to predict.  As I noted, these market forces, disruptive as they are, may gather momentum more slowly than expected.  Our industry has persistent inertia, even in the face of obvious changes in the business.  We know the quote: "This industry never misses an opportunity to miss an opportunity."  But there are thousands of businesses deeply invested in the natural diamond pipeline, and most will fight to sustain the existing business models.  So it goes.

Even not knowing how and when these changes will progress, the question arises; what is the end game?  Fair enough, and without laying out every possible outcome, let's look at Tipping Point #3.

We start with the condition I last described, which is a general and broad use of both naturals and MMDs.  The public will largely accept the situation, I believe, and we probably will see a fairly stable market.  The question is, who will be the suppliers?

If we make a reasonable prediction that diamond prices, both MMDs and naturals, will be set by MMDs, even if there is some spread between the two.  (I exclude larger stones, for which there will probably be a distinct market, especially for stones with known provenance.)

But here we have a real split in possibilities.  If manufacturing of MMDs is widespread and production capacity climbs well beyond the needs of the market, then we would expect prices to fall, possibly precipitously.  This would presume that the cost of equipment and supplies for production of MMDs will go low enough to warrant widespread use.  If that happens, the image of diamonds could be severely impaired.  The attributes of rarity and "investment" could be destroyed.  Jewelry sales would continue, but the historical emotional content we have come to associate with diamonds might fade.

If that seems scary, a different outcome might be worse.   Should the cost of equipment and supplies remain relatively high, then companies that are now producing MMDs, when prices on the stones are still high, will have strong competitive advantages when stone prices decline.  Many installations today are growing rapidly because the high prices of MMDs (which only need to trail naturals by 30% or so to make them attractive) allows machinery to be amortized in 18 months or less.  Once such a base is established, new entrants would not be able to justify the cost vs the returns.  And the production of MMD's could be controlled by a handful of companies.

I am reminded of plain gold bands - another commodity.  Nobody can consider entering that business today.  The cost of new equipment can only be absorbed by those few companies that already own that business and possess long established production capability.

The bottom line in this case will be who owns the business?  In one recent conversation, a person considering entering the retailing of MMDs worried most about assuring consistent supply, about not finding at some future date that the producers only want to feed their own channel.  Does that sound familiar?  It should.  That is how De Beers ran their sales and distribution for decades.  Might we end up with another cartel?  A cartel could see that prices are high enough to maintain the perceived value of diamonds, but low enough to fend off competitors.  At best, that will be a difficult balance.

Or we will see diamonds acquire a much larger base of consumers as low prices puts diamond jewelry into the reach of many more people.  But with what image?

My purpose here is not to frighten people or predict doom.  I have no ax to grind.  But technology plays no favorites, and reasonable people need to look ahead and consider the disruptive possibilities that MMDs could bring to the industry.  Some progressive thinking and planning is in order.

All of this, of course, is looking far down the road.  Or maybe not.

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