The diamond industry underwent much disruption these past few years transforming the business environment for natural diamond and lab grown diamond.
U.S Department of Commerce push for traceability to combat money laundering & terrorist funding was accelerated with Russia invasion of Ukraine in early 2022. This has led to a divided global markets between Russian and Rest of the World natural diamonds.
Alrosa sale in 1H-2023 was $1.9B; similar to 1H-2022. De Beers recorded a 21% decline to $2.8B versus $3.6B during the same periods. This imply Alrosa may have gain volume share while De Beers focused on margin. It could also partly explain the prolong price decline since Russia generally sells higher volume of small diamonds and Africa diamonds are generally of higher grade.
Lab Grown Diamond
Synthetic diamond was first introduced in the 1950s. It is produced mostly for industrial applications and China is the largest producer using HPHT process worldwide. In recent years, India is emerging as a major producers of gem quality LGD using CVD process.
U.S. Federal Trade Commission recognition of Lab Grown Diamond as gemstone in July 2018 coupled with post-Covid revenge spending in 2021 including supply squeeze & price surge on natural diamond in 2022 due to Alrosa sanction led to accelerated adoption of LGD in the U.S. domestic market.
The substantial growth in LGD between 2016 and mid-2023 was accompanied by sharp price erosion of more than 70%. In the first eight months of 2023, estimated LGD sales was $14.5B.
The significant price differential against natural diamond is likely to shift LGD towards fashion jewelry segment, benefiting retailers like Pandora or Swarovski. Pure LGD play could face immense pressure having to sell more LGD to maintain revenue in a cautious market.
LGD has created a second category of diamond supply. This is likely to reduce the bargaining power of natural diamond suppliers.
For the first eight months of 2023, India manufacturers had been acquiring rough diamond similar to 2022 trajectory. Cumulative volume started to soften from Sep-2023. Reasons behind this trend was:
anticipation of China post-Covid recovery
U.S. holiday seasons inventory replenishment
Lab Grown Diamond growth
Sightholders are obligated to purchase rough diamond in each of the Sight (sale) annually. De Beers do allow flexibility on percentage return over certain period. Failure to purchase could lead to a Sightholder membership being penalised. Hence trade bodies in India had to intervene with an import halt from 15-October to 15-December 2023 to broadly protect all Sightholders.
The following charts shows that the anticipated upturn was not sufficiently strong to draw down rough inventory. MoM polished export grew 10% in both August and September. In dollars, value increased 16% and 23% respectively. Manufacturers prices appear to have recovered earlier than Rapaport and IDEX index at the consumer level.
Wholesaler and Retail
Prolonged price decline last 18~20 months was one reason why wholesalers & retailers were hesitant and careful in restocking. Instead relying on memo trade.
Rapaport recent price data for selected categories of diamonds have turned positive. A sustained improvement could be a signal for natural diamonds restocking cycle.
Two Paths - Natural & LGD
Presently there are few public data on LGD. However to understand the midstream sector, it is important to consider natural & LGD in whole.
While natural diamond export is measurably weaker in 2023 vs 2022; when LGD is included in the analysis, the over picture may be less sobering than the media made it out to be.
Most factories in India already employ dual production lines for natural and lab grown diamonds. It is also noteworthy that trade bodies did not halt diamond seeds for LGD simply because the category is growing.
Competitive interaction between natural and LGD should benefit consumer, create new jewelry categories and stimulate volume growth.
Manufacturing consolidation is also an important theme going forward and benefiting large companies. This is driven by a fragmented industry of some 7,000 cut-polishing entities, business cycle, innovations like Meteorite (a worker managing 5 machines), Synova Davinci cut-polish at half the time and importantly traceability which will benefit Sarine Official Partners.
LGD Times interview with CEO David Block in Aug-2023 reinforced the company priorities going forward. Sarine key focus are:
In particular, the firm has clarified her position as a technology company that ... "We do not wish to see ourselves in the front. Nor do we want to be the next GIA. We believe that we want to strengthen and support our client's brand."
In a nutshell, De Beers, GIA, IGI, HRD are seen as potential collaboration partners.
In Oct-2023, Sarine achieved her first objective on Traceability with:
successful AutoScan Plus pilot on melee with Rubel & Menasche
collaboration with TRACR, linking De Beers registered diamonds to Sarine midstream system (where the firm is a dominant player)
delivery of first AutoScan Plus to StarGem
Sarine serviceable market have effectively doubled to 70% (less Alrosa) as a result of Trace-Sarine collaboration. This is an important strategic win. Clients wishing to register their rough diamonds will have to:
engage Sarine legitimate manufacturers or Official Partners
purchase legal Galaxy or Advisor Planning equipments
The company will also generate revenue from:
AutoScan Plus equipment sale
Usage fee for Galaxy or Advisor Planning system
Sale of Traceability Reports
With GIA joining TRACR in May-2023 and recent TRACR-Sarine collaboration; all the dots are now connected to Sarine Technologies. Together with SDJ Traceability, this is the only verifiable provenance system in the market today.
Sarine is a leader in this field. GIA though a few years behind, is a dominant player. IGI to my knowledge does not possess this capability.
Because Sarine is entering this segment with a 'blank sheet of paper', as a relatively new entrant; she is not burdened by legacy structures like GIA with almost 4,000 staff in 10 grading sites and IGI with staff spread across 30 grading sites.
By installing A.I. Grading suites at manufacturers, referred to as E-Grading, the company is fundamentally altering the value chain to improve productivity.
Opportunities arising from this strategy are:
generate A.I. Grading suites sales
generate income from use of grading for SORTING for a small fee (where about 100M stones are planned yearly)
generate income from grading lower price LGD
using subsidiary GCAL as a beachhead to generate Grading Report revenue and grow brand recognition
provide Grading service for clients like Maison Boucheron, K-UNO, QVC, Rocca, HB Antwerp, HB Botswana etc.
The strategy also open the door:
for GIA, IGI, HRD to employ E-Grading services at Sarine Official Partners premise
to create opportunity to set up E-Grading suites at major manufacturer-retailer like Chow Tai Fook and Tiffany & Co. etc.
Disruptive technology do take time to take roots; like time to produce & install grading suites and acquire customers. Once in place and when broadly accepted by major clients, the technology will fundamentally change the diamond grading landscape.
Note: A process was well discussed by Clayton Christensen "The Innovator's Dilemma".
Triple Technological Disruptions
LGD disruption to the diamond industry is still a work in progress. India and China are expanding supply. Falling prices have led WD Diamonds to file for chapter 7. New entity WD Advanced Materials and major U.S. LGD company Diamond Foundry are now focused in high-tech industrial applications.
In the jewelry sector, LightBox have determined that LGD Bridal segment is not viable and to focus on natural diamonds. LGD with low store of value is likely to shift towards fashion jewelry benefiting retailers like Pandora.
A.I. Grading & eGrading have already attracted early retail adopters. GCAL acquisition completed in May-2023 and installation of up to 50 eGrading suites at manufacturers in 2023 will hasten the pace of A.I. Grading adoption.
In addition, new applications like pre-grading beyond 4-C are helping manufacturers to better Sort & Price diamonds for sale and inventory management.
Tracr-Sarine collaboration and AutoScan Plus ability to scan melee parcels at high volume will fundamentally shape verifiable Traceability to the benefit of Official Partners manufacturers.