An annual tradition, industry veterans Chaim Even-Zohar and Pranay Narvekar present the 2018 iteration of The Tacy Diamond Pipeline, with an in-depth look at the impact that the rise and acceptance of laboratory-grown diamonds has had on the industry this past year. The Tacy Pipeline graph is available here, and the accompanying article, “The 2018 Diamond Pipeline: Faking the diamond dream“, is available in full here. What follows is a highly abridged version.
In his inaugural statement after taking over as CEO of De Beers in 2016, Bruce Cleaver reflected, “We must never lose sight of the fact that for the entire diamond pipeline to succeed, every individual part of the diamond pipeline needs to succeed.” The rough traders and manufacturers have not lost sight of this message, but it seems the rough producers might have. The 2018 pipeline numbers belie a sense of stability, write authors Chaim Even-Zohar and Pranay Narvekar, while fundamental changes have emerged regarding the underlying assumptions on which the industry has relied. This is especially true when it comes to the legitimacy and acceptance of Lab-grown diamonds, or LGDs.
As we all know, De Beers entered the LGD market last year with its launch of Lightbox, a rude – if unsurprising – awakening for the entire industry. While the initial impact of the physical product was modest and its stated purpose was to differentiate LGDs as a separate product from natural diamonds, Lightbox did not have to sell a single stone to make its presence felt: “Amazingly,” the authors remark, “the announcement of LGD pricing some 80% below the competitors caused immediate price pressure on other lab-grown producers, who were forced to reduce selling prices before a single Lightbox stone was even available.” Eventually, the significantly lower-priced LGDs in small sizes had a domino effect on smaller natural diamonds as well – and these prices have gone on a downward trend ever since.
The authors note that as of 2018, we are now in the midst of the diamond pipeline evolving from having only one product to having two distinct products within the same pipeline. Both products will have areas which are independent and have their own defined market within the jewelry space, as well as in overlapping areas where the differentiation might not even be relevant. Rather than making an either/or choice, many companies might choose to be in both lines of business within the pipeline.
Natural diamonds will have their own dynamic driven by mine life, profitability, type of products and production, while LGDs, which are manufactured products, will eventually move to a cost-plus model for the rough. With LGDs, the mid-stream will add much more value as compared to natural diamonds. Again, companies could well work successfully in both pipelines, as long they to manage these different businesses.
In the case of the industry, eventually the only solution would be the acceptance of both the products in a common pipeline. For the time being, product differentiation seems the preferred strategy – and it seems to work. They are still seen as two totally different businesses, but to effectively cope with the future may require adapting to the new business realities. Except for natural diamond producers, all pipeline participants, from trader to manufacturer to retailer, only earn money on the products’ added value – the difference between buying and selling prices (minus costs). The supply of natural diamonds is, by nature, limited and deposits are exhausting. With lab-grown diamonds, the sky is the limit.
For these reasons, the authors suggest we are at the beginning of the ‘Fourth Diamond Rush’: the previous restraint in dealing with LGDs has been replaced by the fear of being left behind, with nearly everyone, from rough producers, polishers, traders, jewelry manufacturers, laboratories, trade associations to retailers considering their options. Investment (and risk) capital for ‘LGD exploration’ seems plentiful, sourced from within as well as outside the traditional pipeline, which we will take a look at now.