Lab Grown Diamonds are forever

Sascha: [00:00:02] From Equity Mates media This is the dive I'm your host Sascha Kelley, where the podcast that asks who said business news needs to be all business? It turns out eight diamonds are having a moment. No, I haven't just decided that that's the case. I'm not fashion arbiter of the dive. It's that a new threshold has been reached. Last year, lab grown diamond jewellery surpassed 10% of the world's total diamond jewellery sales for the first time. It's Friday, the 8th of September. And today I want to know what is happening in the diamond industry and how is the traditional diamond industry responding to this surge in sales? To talk about this today, I'm joined by my colleague and the cofounder of Equity Mates. It's Alec Renehan. Alec, the man to talk about diamonds today. 

Alec: [00:00:52] I guess so. I have no knowledge on this topic. Price probably could have come in and spoken about it. He went diamond shopping last year, two years ago, but his hiatus on The Dive continues. So you stuck with me. 

Sascha: [00:01:07] Well, I'm glad you're here because I don't know who else I'd turn to, to be honest. But let's start with the basics. Give me the context. How big is the diamond market? 

Alec: [00:01:16] Yes. So it's massive. Estimates differ, but around $100 billion a year. That's sort of the size of total diamond sales in 2022. So when you tell us in your introduction that lab grown diamonds have surpassed 10% of total diamond jewellery sales. We're talking big business, big business. 

Sascha: [00:01:36] And before we started recording, we try not to do this, but we were chatting about what we knew about the topic and both of us said that we thought when you talk about alternatives to diamonds, you're talking about cubic zirconia. You know, the shop I know that big in Australia called secrets, just pretending that you're getting real diamonds. But that's actually not what we're talking about today, is it?

Alec: [00:01:59] Yeah, that's right. What we're talking about here, a lab grown diamonds. They are physically at an atomic level. They are diamonds. A cubicle. Konya is not a diamond lab. Grown diamonds are, you know, the same carbon atoms arranged in a diamond cubic crystal structure for those who want to go at a molecular level. The only difference is its origins. Mines. Diamonds are mined, Lab grown diamonds are made in the lab. A cubic zirconia is not a diamond. It just looks like a diamond. It has zero carbon at an atomic level. So lab grown diamonds have been around for ages. Didn't realise this, but General Electric created the first batch of lab grown diamonds in 1954. Initially, the quality wasn't suitable for jewellery, but over the past couple of decades, they've slowly been emerging. By the 1980s, labs had improved the quality of lab grown diamonds enough to make them suitable for engagement rings and jewellery. But the popularity of lab grown diamonds really surged in 2014 as shoppers as soon to be engaged couples were looking for budget friendly and environmentally responsible alternatives. Now, Sascha, 2014 The first thing I Googled once I read that that was when lab grown diamonds really started to take off was what year was Blood Diamond the movie released? Like, did those two things coincide? Blood Diamond was released in 2007, so we can't quite point to causation there. But yeah, it's really been sort of the last ten years that lab grown diamonds have been surging. [00:03:43][104.6]

Sascha: [00:03:44] So we're talking about this today because they've hit this new threshold, 10% of the world's total diamond jewellery sales. Earlier, you just said 100 billion in 2022. Is that kind of the size we're looking at? [00:03:57][12.4]

Alec: [00:03:57] Yes. So to put the numbers in context, so let's rewind to 2016. In that year, there was $700 million in lab grown diamonds sold around the world. $700 million. That's big business. But it has massively grown from there. By 2020 to $12 billion of lab grown diamonds was sold. So from 700 million to 12 billion in six years, that's a bit shy of 10% growth a year. So it's growing quickly, but it's speeding up. That's the really notable thing. The 12 billion in 2022 was up 38% from 2021. And if we look at this year, so 2023 so far, that number is already 14.6 billion with still a few months to go. So the lab grown diamond market is already up 22% this year with what, three and a bit months to run. So it shows Sascha that it's growing, but it's accelerating as well. 

Sascha: [00:05:04] Yeah. So what has driven this accelerating rise in demand price? 

Alec: [00:05:09] It's all this is a story of price. 

Sascha: [00:05:10] It comes down to money. 

Alec: [00:05:13] They're getting a lot cheaper.

Sascha: [00:05:15] And how cheap are we talking in? Like they log off and go buy one for myself.

Alec: [00:05:20] So let's rewind back to 2016. To put this in context, again, when lab grown diamonds were 700 million in sales. So the prices in 2016, you were paying about $6,538 per carat for a mined diamond and about $5,450 for a lab grown diamond. Okay, so what about 10% difference? Not a huge difference for shoppers. That has changed massively in the six years since then. These days, a mined diamond, you're getting about $5,185 per carat. I don't know why I keep saying about when I've got very specific numbers. So that price for mined diamonds has fallen about 21% in that time period. That's a meaningful fall. 

Sascha: [00:06:14] Yeah, that's significant. 

Alec: [00:06:15] But lab grown diamonds have fallen 74% in price in that time from $5450 to $1425. So that means in 2016, there was about a 10% price difference between mined and lab grown. By the end of 2022 that had stretched out to 80% cheaper, lab grown over mined. 

Sascha: [00:06:41] So what can we attribute this to? Like what's driving down this price?

Alec: [00:06:45] The machines and the components that you need to make? Lab grown diamonds have got a lot cheaper. Sascha, have you heard of chemical vapour deposition machines?

Sascha: [00:06:55] And would it surprise you, Alec, to say I have not heard of chemical vapour.

Alec: [00:06:59] Which wouldn't surprise me. But if we're going to get into the lab grown diamond game, that's what we need. Okay, so for context, China and India account for about 75% of the lab grown diamonds produced around the world. So they're the two diamond powerhouses in India in 2019. You were buying a chemical vapour deposition machine for 300 grand. 

Sascha: [00:07:23] Okay. 

Alec: [00:07:24] Today, you can get it for under $100,000. So the cost of capital equipment to make these diamonds has just massively come down, allowing more entrants into the market and allowing these Liberian diamonds to be priced cheaper. The other thing to note is that the Indian government has really leaned into this as an industry.

Sascha: [00:07:45] Okay. 

Alec: [00:07:46] India is big in a lot of precious gems, but the Indian government have been developing subsidies and capital equipment, financing incentives for new lab grown diamond producers. So, you know, the price has massively come down and government support has massively gone up, and that's led to lower prices. 

Sascha: [00:08:05] Now, Alec, we can't talk about the diamond industry without discussing one very powerful group who've been very involved with diamonds, and that's the De Beers. We're going to talk about how they and the rest of the diamond industry are responding to the rise of lab grown diamonds. In just a minute. A kiss. The hand may be quite continental, but diamonds are. Welcome back to the Dive. Today we're talking about the boom in lab grown diamonds from a $700 million industry in 2016 to just shy of 15 billion this year. That is a massive growth. The diamond industry has been controlled by powerful interests. None more so than the De Beers Diamond Consortium. Alec, what are they doing about all of this? 

Alec: [00:09:04] Yeah. Now, for people unfamiliar, the De Beers Diamond Consortium was a South African British conglomerate that controlled the diamond trade from its inception in 1888 until the start of the 21st century. De Beers controlled about 80 to 85% of rough diamond distribution. If you bought a diamond, it was a De Beers diamond and they ruthlessly enforced their monopoly. Competition has started to dismantle their monopoly in the 21st century. Now De Beers sells 29 and a half percent of the world's rough diamond. Measured by value. 

Sascha: [00:09:44] Okay. 

Alec: [00:09:45] So they've got a lot smaller, but they're still incredibly powerful. And the diamond industry is still controlled by a few very big players still. But, Sascha, we've got to talk about De Beers for a minute, because if people don't know the history, it's fascinating. They invented the idea of a diamond engagement ring. The De Beers copywriter Mary Frances Garrity. Let's give her credit. She coined the phrase a diamond is forever in 1947, and it just led to a boom in diamond engagement rings. The diamond engagement ring. How else could two months' salary last forever? A diamond. It's forever. De Beers. To put some numbers to it. In 1939, De Beers sales of diamonds was $23 million. By 1979, $2.1 billion was full. 

Sascha: [00:10:39] That's the message: Diamonds are forever. 

Alec: [00:10:43] And I think it's worth having a quick aside on the effect of advertising on the diamond industry. So we mentioned there that Diamond is Forever campaign and what that led to. But there are some more recent studies in Japan and China that show that diamonds are just a market, a dream, I guess, or just all marketing, you could say. So in Japan, J. Walter Thompson created a series of ads that linked diamond rings with, quote, modern Western values in 1967. In that year, less than 5% of engaged Japanese women received a diamond ring. It just wasn't a cultural custom by 1981. So 14 years later, 60% of engaged Japanese women did. It turned Japan into the second largest market for diamond engagement rings after the United States.

Sascha: [00:11:33] Wow. 

Alec: [00:11:35] Yeah, that's pretty crazy advertising in China. A similar story more recently, though, according to De Beers. Traditionally, again, diamond rings not a part of Chinese culture. Giving diamond rings barely existed in the 1990. So in our lifetime, according to De Beers data, today, more than 30% of Chinese brides now wear diamond engagement rings. 

Sascha: [00:11:59] I think that's all very interesting. And as someone who's rewatching Mad Men at the moment, definitely on point. But let's get back into the lab grown game and talking about the rise of these synthetic diamonds. 

Alec: [00:12:12] Yeah, fair enough. Let's go back to Vegas. So to be is another big diamond industry players. Big diamond, let's call them. They've spent several decades trying to suppress the synthetic diamond industry ever since they first had that breakthrough in the fifties. They've seen the competitive threat and they have tried to. Squash it, I guess. And up until really recently, they were, you know, advertising against it. So in 2016, the Diamond Producers Association, which is De Beers and a number of the other big diamond players, they had an advertising campaign read is real, and they were trying to persuade millennials to buy natural mined diamonds even if you weren't interested in marriage or anything. So 2016, that's not that long ago. And that's sort of, you know, we keep talking about that's when the industry of lab grown diamonds was just $700 million. Since then, De Beers and a lot of the other big players have decided if you can't beat them, join them. They're getting into the lab grown game. By 2018, De Beers had launched LightBox, which is the lab grown Diamonds company, and somewhat surprisingly, they came out and massively undercut the natural diamonds business. They were offering some of the cheapest lab grown diamonds on the market, you know, 200 to $800 per carat compared to, you know, upwards of $5,000 per carat for natural diamonds. And they wanted us to embrace diamonds not just for weddings, but for things like and I'll quote their advertising here, birthdays and beach days and just because days. 

Sascha: [00:13:56] Well, Alec, I'm not sure when the last time you decided to split a diamond is, but I don't think there's anything wrong with wearing something shiny on a just because day. But obviously the target market was shouldn't they be concerned? I mean I'm obviously not in the diamond business, but aren't they just undercutting their own market. 

Alec: [00:14:14] Yeah. You think that wouldn't you like they're providing a much cheaper alternative to it and the product is literally chemically like at an atomic level. Exactly the same. Yeah. Aren't they're just massively undercutting themselves. I think why Big Diamond have really got into this game is because some of the lab grown diamond companies were trying to pitch their products as a substitutable good for engagement rings have a lab grown diamond because you're worried about how natural diamonds are mined, about the environmental impact of mining or just because you want a cheaper option. What a lot of these big diamond players have come into the market and done is try and reposition the lab grown diamonds not as an alternative to the engagement ring, but as incremental demand as diamond jewellery for the everyday, you know, for your beach days. And you just because that is so what they're trying to do in you know, massively reducing the price and position it differently is rather than cannibalising their natural diamond sales is to grow the market and create incremental demand and make diamonds more an everyday item. And they've been pushing them into a lot of the cheaper jewellery players as a result. So take Pandora, the massive discount jeweller out of the US. They didn't traditionally sell diamonds, but now they exclusively sell blood diamonds at a lower price point for, you know, cheaper jewellery. So as the price point between natural and lab grown diamonds widens, our perception of these two products starts to diverge and starts to change. And we start to see them as two separate categories rather than substitutable in the same category. And it's a real reminder that diamonds, like so many of these luxury goods, are Veblen goods. 

Sascha: [00:16:14] Okay, You're going to have to explain what Veblen goods are to me. 

Alec: [00:16:17] Yeah, yeah, it's a fascinating concept, but it's basically that types of luxury goods where demand increases as the price increases. Okay, So if you think about your, you know, your high school economics, supply and demand shock, what should happen is as the price comes down, consumer demand increases. But Veblen goods work the opposite way. They have an upward sloping demand curve because as sellers keep raising the price, more and more consumers see them as a luxury goods, see them as a good investment, see them as a status symbol, and there's more demand as the price increases. And one of the classic examples of that is natural diamonds. 

Sascha: [00:16:59] That's so interesting. And I'd say Emma's bags, but that's a conversation for another day. Yeah. So where does this all lead us? Where do we go? 

Alec: [00:17:07] So don't think that engagement rings will be swapping natural mined diamonds for lab grown diamonds anytime soon. I think where this ends up is we see an expansion of the overall diamond market and we see a lot more diamond jewellery. Sascha, for your beach days and your just because days now you can rock more diamonds. I think also from a design perspective, lab grown diamonds are more flexible than. Traditional diamonds. The manufacturers, because they're being made in a lab, can make them in different shapes. They can make them in different colours that sort of aren't found in nature. So expect to see, I guess, more creative diamond jewellery. But don't expect your engagement rings to get any cheaper any time soon.

Sascha: [00:17:54] I wonder if anyone's made a recreation of the heart of the ocean from Titanic yet, because that would be one of the first things that I'd be trying to make with my machine. 

Alec: [00:18:04] Well, there's less than $100,000, so actually you could probably convince a couple of investors and buy a machine and do it yourself. 

Sascha: [00:18:11] Yeah, there you go. But when you invest in goal on the horizon for me. Well, Alec, let's leave it there for today. I certainly have really enjoyed digging into this topic. If you have one small favour from us, we ask you every time, but it really does make a difference. Send this to a friend who you think would enjoy the dive. And then while you're at it, why don't you jump into your podcast player and give us a five star review? Alec, thanks so much for joining me on the Dive today. 

Alec: [00:18:36] Thanks, Sascha. 

Sascha: [00:18:36] Until next time.