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Growth Phase For Lab-Grown; Natural Diamond Demand Will Drop: ABN Amro

Synthetic diamonds are now in a growth phase

ABN Amro Bank has said in its diamond sector outlook for 2019 that the year is one of great uncertainty and that lab-grown diamonds, spurred by the entry of De Beers into the segment, are in for a growth phase. This will lower demand for natural diamonds and push prices down. Diamond miners could, as a result, stop searching for new mines and speed up production from existing ones. The clear winner in all of this will be the consumer, the report says.

The report, written by the bank’s Coordinator for Foreign Exchange & Precious Metals Strategy Georgette Boele, comments, “The diamond industry has moved from a relatively stable environment to a highly uncertain environment. It notes that 2018 was the year that De Beers launched its lab-grown diamond jewellery and that 2019 and the years ahead will see lab-grown diamonds for jewellery entering the growth phase.”

According to the report, “For a long time, both diamond mining companies and most parties in the diamond supply chain strongly resisted the entry of lab-grown diamonds into the overall diamond industry. This was because there was no transparent use of lab-grown diamonds. There have been reports that they were mixed with natural diamonds or lab-grown diamonds were linked to a natural diamond report from a grading laboratory.”

The De Beers entry into the segment, however, is seen as as turning point. The report observes, “The launch of Lightbox Jewellery by De Beers therefore shocked the industry, and now all the bets are off. For us 2018 was the year that lab-grown diamonds got a place in the jewellery industry. We think that this was the first phase (introduction) in the product life cycle.”

It adds, “This has serious consequences for the actors in the diamond industry. Natural diamond buyers such as retailers, consumers and jewellery manufacturers) will likely de-stock and hold less inventory. This will result in lower demand for natural diamonds and weigh on prices. Miners will rethink their strategy in light of uncertainty about natural diamond demand, and questions about the value of a diamond.”

Production from existing mines could be speeded up

The report also outlines possible responses from diamond miners to the scenario. “The natural diamond miners will have some possible strategies to brace for the growth of lab-grown diamonds. First, they could speed up mining activity to cash in on their diamond reserves. In a few years from now it is highly uncertain if natural diamonds hold their value as always has been assumed. Some producers and/or countries have indicated that they will step up production in the future.”

It adds, “De Beers has announced that it expects output for 2018 to reach 35 to 36 million carats. This is the highest output since 2008. In 2019 there will probably be a fall in output because of some production challenges but the output for 2020 and 2021 is expected to surpass the level of 2018. Moreover, Angola has signalled that it will double production. It is unclear if the step-up in production has anything to do with the developments in lab-grown diamonds. However, ALROSA has indicated that it will hold back supply in 2019 to avoid flooding the market.”

The report then says, “Second, the miners could stop searching for new mines as the high exploration costs will unlikely be paid back by future income from natural diamonds. Moreover, in recent years more large and high quality diamonds been discovered. This has weighed on the prices of these diamonds. In addition, it is likely that the price of the smaller and less desirable diamonds will decline as they can’t compete with lab-grown diamonds. So these diamonds will lose their attractiveness. The reasonable quality and diamonds larger than 0.5 carat still have value.”

The report goes on to say, “Lab-grown diamond producers will probably focus on technology to become less energy dependent, or use more sustainable energy sources, to increase the product suite and lower prices for the lab-grown diamonds used in jewellery.”

It concludes, “Consumers will profit from the wider variety of diamonds at more attractive prices.”

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