Alex Popov, President of the Moscow Diamond Exchange and head of the Âme jewelry brand, which uses lab-grown diamonds to produce jewelry, sat for an interview with Rough&Polished sharing his views on the coexistence of natural and man-made diamonds in the market and the problem of transparency in the supply of diamonds and their grading reports. He also commented on the issue regarding the work of artisanal diamond miners and spoke about how he sees the future of the diamond industry.
The confrontation between the two market stakeholders - natural and man-made diamonds – is fraught with a danger that man-made diamonds may edge out that part of natural goods that will fail to compete with them. This applies mainly to small-size rough diamonds and could be a significant problem for both De Beers and ALROSA. What is your opinion?
I do not see here opposition, rather coexistence. We talked about this a while ago, and it was about De Beers creating the Lightbox brand. And at that time, I said that De Beers had done this not only in order to adjust prices for lab-grown diamonds but also in order to weaken ALROSA because 60% of the latter’s product mix consists of exactly this kind of rough - Indian goods or small-size diamonds. On the sidelines of one of the international industry meetings, I asked some of its participants what, for example, a 45-year-old woman, who earns very little, would choose being at Walmart and seeing two $ 1,000 rings in the showcase each graced with a two-carat cluster of diamonds, but one ring having natural, not very well polished SI stones, and the other having lab-grown, absolutely white stones of excellent clarity. Despite the ensued controversy, the answer was obvious, and this proves that the entire segment of natural smalls in such competition will leave the low-end market.
Today, the process of grading these stones is three times more expensive than the stones themselves. And it doesn't make any sense. A person who is engaged in jewelry in such large countries as America or China does not need this headache at all. He or she doesn't care what kind of stones to use, because, in fact, the chemical and physical properties of natural and lab-grown gems are the same. And a piece of jewelry with these stones is sold at a price that matches its value. Let Cartier sell such a product for $ 7,000, while others sell it for $ 1,000. And both have a 40% margin at least, if not 60%.
There are efforts to make the rough diamond supply chain transparent. What kind of approach will be used to deal with rough supplied to the world market by artisanal miners, the amount of which is close to 15% of global diamond production by volume, according to some estimates? After all, artisanal miners do not have the opportunity to prove the transparency of their supplies in the same way as large companies do - they have no communication equipment, no computerization, or digitalization. May it be that transparency will undermine diamond production at this level giving an immediate benefit to synthetics, where transparency is achieved readily?
My opinion is as follows. First, transparency will undermine all this artisanal mining. No artisanal miner works alone. Their crews are all individual, and they do not have the money for transparency, as they are controlled by chains of dealers for whom they work, and these are often criminal elements. For transparency and traceability to take place, someone has to invest colossal amounts of money. What does it mean? This means that large companies such as De Beers or ALROSA should come to this segment and put things in order there. But I do not think that this will be a reason for the rise of synthetics. Because these artisanal miners are looking for stones of a certain size and higher, as it is also unprofitable for them to take out smalls, which are taken out in abundance by ALROSA and De Beers, moreover by industrial methods. So artisanal mining in most cases does not interfere with the segment of small-size rough, in which there is now a competition between natural and lab-grown stones. I would call this kind of natural rough unnecessary, because after a while it will really be useless to anyone, except perhaps a few large brands, and even those may think about switching to synthetics of the same size. As for the idea of transparency in artisanal mining, the artisanal miner has only one idea - how to get through the day and put a piece of bread on the table for his children.
What can you say about grading the mined melee diamonds? This idea is sometimes mentioned within the movement for total transparency.
If someone succeeds in roping artisanal miners into the transparency zone, then the price of such stones will inevitably go up, and this is only before diamond cutting. Grading starts within the process of diamond cutting. How much does it cost to grade a stone? Grading comes into the picture for stones that sell at least at $ 250 per carat. That is, a stone weighing one point costs $ 2.5. And it should be said that there is no way to earn something on such a stone. The only ones who can afford this kind of grading are huge companies like ALROSA and De Beers, which extract these stones from the earth bowels like a vacuum cleaner. After all, not a single person will go to Sierra Leone or Liberia for a stone weighing one point. Why would he or she risk his or her life for this? So, the very idea of such grading is contrary to common sense because the market says that these stones should cost $ 250 per carat. In Switzerland, watch brands are willing to pay $ 450. And the price may go up to $ 700. But if they are forced to grade every stone, what will happen? Only large jewelry manufacturers need such stones, and of high clarity - D, IF. Their number is scanty. Today, regular stones in this category are priced between $ 254 and $ 400 per carat. When they are sold to the watch market, the price starts at $ 600 per carat. Not because diamonds are better, but because it is the Swiss who are sitting and sorting them out being paid Swiss salaries. Immediately, the price will go up. Moreover, they are sorting such diamonds for the second and third time (since they were sorted for the first time in India), and everything that is not needed is returned. But watchmakers are willing to pay a premium for it. Rolex, for example, takes the top class of stones - pointers measuring 1.3 mm, 1.5 mm, 1.7 mm - and pays for them as much as $ 700 per carat, that is, $ 6-7 per stone. Now let's imagine that every such small stone needs to be graded. If it is done properly, then every seven-dollar stone will add on about ten dollars in price. This means that Rolex will buy them for $ 17 apiece, adding on its own markup, by no means a small one. As a result, it’ll turn out that the final product will double or triple in price. Who will buy it? Further, people who buy diamonds 5 carats and more in size will gladly pay twice as much for their grading. If a stone costs $ 40,000 and grading will drive that amount to $ 40,800, so what? It doesn't bother anyone. But everything which regards the grading of melee diamonds is a stillborn idea. It’s all about the money.
It was the Indians who triggered the processing of melee diamonds. This market emerged thanks to them. It was non-existent before that. Some people say that it needs to be closed and only worthwhile stones should be traded. On the other hand, this market lives on and it will not be easy to abandon it. Now lab-grown stones have aggressively entered this market, and they seem to give it a new lease of life, while simultaneously transforming polished diamonds into mass consumer goods. Don't you think so?
I think this is the evolution of diamond "proletarianization." This phenomenon occurred in the 1970s when the Indians began to come for rough diamonds receiving subsidies for each cut and polished stone and therefore taking everything. They built this market. We must give them their due. They caused the price of stones to fall to unimaginable lows that barely covered the costs, and thus edged the Israelis and Belgians out of the diamond cutting business. Now it turns out that they are devoured by their own tactics. The fact is that a stone cannot cost more than a certain amount in this market. Today the stones demanded by big jewelry firms - De Beers, Cartier, Louis Vuitton, Tiffany - cost about $ 400-450 per carat. And this is what they demand for their high-end segment of the market, not for the mass market. So, they say that they will trace diamonds and strive for transparency and disclosure of their origin. Sounds wonderful! In this way they killed all jewelry manufacturers using small diamonds in China, India, Thailand, half of the Italians, and so on, that is, all such jewelers were left without bread because they cannot afford to make a product that will compete with such brands. And these jewelers, in order not to close their businesses and go bankrupt will start using synthetics, because they all perfectly understand that there will be only benefits from this since they will earn more. Today, paying $ 450 per carat for small stones, they are forced to sell them at $ 500 per one carat in jewelry pieces. And they will buy synthetic diamonds for $ 250 and sell them with a good markup. I also see that machine diamond cutting will come into the picture spreading in a year or two. It exists today, but it has not been developed because it is very difficult to pick up identical natural stones to carry them from place to place using vacuum. When you deal with synthetics, you may use a laser to neatly cut ideal diamond cubes, which are easy for the machine to work with. Such machines are developed in Switzerland on the basis of equipment used in the watch industry. And although they say in India that they do not care what to cut - natural or lab-grown diamonds - it may turn out that machine cutting of lab-grown diamonds will settle down in Switzerland. And then the market will return to where it was.
Let's talk about terminology. Currently, a variety of names are used for man-made diamonds. For example, the World Jewellery Confederation (CIBJO) recommends calling them synthetic, laboratory-grown, or laboratory-created, while the US Federal Trade Commission favors such names as laboratory-grown, laboratory-created, or [manufacturer name] -created. Wouldn't it be easier to use the word "artificial" instead, which means "man-made" in all languages? And to divide the diamond market exactly on this basis into the markets of artificial and natural stones?
At the linguistic level, this sounds good, but at the level of a girl shopping in Walmart, it sounds bad. However, if we take artificial leather, it is a normal term, it is accepted. Artificial meat - accepted. Artificial fish - accepted. All of these are today made from plants. There are several firms in Israel that produce artificial meat; they even opened a restaurant with artificial meat. The taste is absolutely identical. But since real diamonds have been cherished for years, as soon as you use the word ‘artificial’ you have your first association with glass. When people say artificial, they mean a different chemical composition, different physical properties, and so on. It looks like a real thing, but it is not. In this case, we are dealing with a product that is absolutely identical to the natural one. Absolutely identical. Whatever people say, it's the same product. It's just that people synthesized, created a process by which a stone is created in the earth's crust. It is the Swarovski Crystal that is artificial. It's a matter of perception. If someone had called it artificial in the 1940s when experiments began, it might have taken hold, but today it is impossible. When you make artificial leather, you know that it is not leather. This is a leather substitute that was made in order not to kill animals. This is a good thing. And what is here? It’s a current paradox: no one has the right to tell the truth that this is a one-hundred-percent geological product that has nothing to do with causing harm to the environment and has not taken a single human life, as is the case in mines. That's all there is to say. And all this hullabaloo about lab-grown diamonds being environmentally unfriendly has nothing to do with reality. Laboratories do not cause any harm to the environment. What is environmental sustainability? If tomorrow you’ll stop producing lab-grown diamonds, you will not leave a plowed field behind you, you will just close your lab and go home, while it will turn into a bookstore.
Do you think that there should be one market for natural and lab-grown diamonds or there should be separate markets?
I think that the markets will merge by themselves, without our participation. I believe that the markets will merge in a certain segment and the distinction between lab-grown and natural diamonds will cease to exist. And this is absolutely right because it will enable those who deal with natural stones to earn more, as in this case, their product will go up in demand since they will have something that others do not have. It is important to let the overwhelming majority of jewelers in the world work in peace without getting involved in this contention between natural and lab-grown stones. And this will soon become a reality. Please note that Diamond Foundry's capitalization is already $ 1.8 billion. All this ultimately boils down to the war going on in the field of public relations today, there is nothing else behind it. After all, it is clear to every child that if you make stones in the laboratory, you will not do anything bad to the environment, even if you want to. Everything is perfect there. Yes, the process consumes a lot of electricity. Air conditioners also consume a lot of it. Does it mean that we must give up air conditioners?
What in your opinion will happen to the industry in 30-50 years, given that no new large diamond fields have been found yet?
Diamond mining will become a kind of business pursued by an exclusive club. The way it was in past centuries - in the 17th or 18th century. Only large stones will be extracted from the earth’s bowels, such as are being mined now, for example, in Botswana. This business started to degrade at the beginning of the 20th century bringing about the current situation. This is a case of business degradation. Those who are now mining diamonds will have fewer and fewer good stones, but their prices will be higher and higher. People will always be willing to pay for something unique. And in the future, this is a broad field of business for mining companies.
But there will be a field of business for lab-grown stones, too. The fact is that it has become possible to grow a stone you want and make what you want out of it. This is where the future lies for synthetics.
If, over time, diamond mining will be ceased and the diamond market becomes fully synthetic, may it happen that it will self-stifle due to the competition resulting in uncontrolled production and leading to a fatal drop in diamond prices?
Here it is possible to draw a certain parallel with the fate of the market of translation services in which - before the advent of the Internet - prices were formed locally and were different in each country, but with the advent of the Internet, they plummeted since translation jobs started to go where they were done cheaper, but worse. This, in turn, gave impetus to the development of the market for high-quality translation services enjoying high demand. Quality always comes back. People cannot live without quality. Yes, it is possible that at first there will be a kind of devaluation in the lab-grown diamond market - actually, it has already taken place - but sooner or later a solid market will emerge, a market for high-quality goods, which will be attended by connoisseurs willing to pay for quality.
What will happen to big mining companies such as De Beers or ALROSA in this time frame? They will have problems. They will have to change the structure of production abandoning the extraction of small-size diamonds.
The lab-grown diamond market will be 80% targeted at the mass consumer, while 20% of this market will be occupied by high-design products. My dream is to establish myself in this part of the market. I think that we are gradually moving towards this.
Vladimir Malakhov, Rough&Polished
