Natural and Lab-made: A Tale of Economic Diversion

The long history of diamonds, which we have covered here over the past few weeks, has been the exclusive story of natural diamonds – nature’s beautiful creation. However, what about those diamonds not created by nature? And more importantly, what about their value? And does it endure over time?

How diamonds are born

Natural diamonds were formed deep below the earth’s surface in the mantle – a layer of molten rock between the crust and core – at depths of 125-200 km, and at times as deep as 400 km, under extreme conditions. 

Subjected to intense pressure of 50 kilobars – fifty thousand times the pressure we experience on the earth’s surface – and at temperatures of up to 1,300°C, the molecular structure of carbon changes, as the pressure and heat crush it into a new, compressed lattice structure. This protracted, distant and extreme process produced diamonds. 

These natural diamonds were then carried to the surface in violent volcanic eruptions inside a substance called kimberlite, a greenish rock, inside which they then cooled. These eruptions thrust diamonds to the surface at great speeds, preventing their crystalline structure from disintegrating into graphite.

According to geologists, this kind of volcanic eruption, in which materials are carried from the mantle to the planet’s surface, has not occurred since being recognized by scientists for what they are.

Lab-made goods are created

In the 1950s, scientists in Russia and the US were able to imitate the natural diamond-creation process in a lab, with a method known as high pressure, high temperature (HPHT). 

HPHT subjects graphite, another form of pure carbon, to intense pressure and heat, as suggested by the name. The graphite is squeezed in an HPHT machine while being zapped by intense electrical currents. This method produces a lab-made diamond within a few days. 

Another process developed over the years was Chemical Vapor Deposition (CVD). Here, without the use of extreme pressure or heat, a piece of diamond is placed into a depressurizing chamber with natural gases that are then energized, typically with a microwave beam. 

As the gas is heated to almost 2,000°C, the gases are broken down by the energetic beam and discharge carbon atoms on the diamond in the chamber. These tiny particles stick, growing into a thin sheet of diamond within hours.

There are several additional technologies that create lab-made goods, however none are as widely used as HPHT and CVD. This is mainly because other methods are yet to produce good enough results or prove commercially viable.

When first developed, lab-made goods were intended for industrial use. Even if the idea to use them for jewelry was entertained, the clarity of lab-made goods was so low that they did not qualify as gem-quality. 

Lab-made goods arrive on the gem scene

The years pass, and technology steams ahead. A series of scientific breakthroughs saw yesteryear’s lab-grown goods reach superior qualities. As a matter of fact, labs stumbled on a process that led to gem-quality goods – in fancy colors, mainly yellow and pink. 

These advancements propelled lab-made goods into the public eye and serious efforts to market them began in earnest in the early 2000s. 

Diverging economies

Mother nature left no clear signposts to indicate the whereabouts of natural diamonds, a fact that makes finding them a very difficult and costly process. Mining companies have spent billions of dollars over the years on attempts to find natural diamonds. Out of the 10,000 known kimberlitic pipes around the world, only 1,000 are diamantiferous. Of those 1,000, only 100 are economically viable to mine.

However, in order to find these 100 viable resources, this 1%, the other 99% must also be found, tested, explored and abandoned – with the huge capital outlay abandoned with it. Of the 100 economically viable resources, only 30 kimberlites are presently active diamond mines, many of which are already past their prime. 

These mines have high labor costs and energy expenditures, in addition to machinery purchases and maintenance expenses. The high overhead of running a diamond mine on a day-to-day basis compounds the outlays of exploration. 

Ultimately only 20% of the total production from these 30 mines results in polished diamonds fit for jewelry, a factor which further drives up the value of natural diamonds. 

The cost structure of lab-grown goods is quite different. Exploration costs are replaced with research & development (R&D). Manufacturing in the elements is replaced with lab conditions. Energy costs are far fewer, labor is relatively small and the “hit or miss” related to R&D is a smaller expense than that of exploration. Overhead costs are therefore much lower. 

The costs associated with the steps that follow production – polishing and jewelry setting – are similar for the two products. 

When the final tally is in, white lab-made goods are priced some 10%-20% (and at times even 30%) lower than comparable natural diamonds. The difference in price between lab-made and natural fancy color diamonds can be even greater.

What do the differences in price and origin mean?

I’m among those in the diamond trade who feel that lab-made goods have a rightful place in the consumer market. They fit well for price conscious consumers who want natural diamonds, but may be unable to afford them. When well made, lab-grown goods can make for beautiful gems and can adorn any jewelry item. 

However, economically, the differences between the two are huge. For that reason they should be distinguished from each other and  marketed exclusively to avoid any confusion among their different potential customers. 

The main difference between natural diamonds and lab-made goods stems from their origin and the associated costs with their formation. This is obviously reflected in their prices and requires lab-grown goods to be clearly identified and marked to avoid confusion. Given that the two products might appear similar on the outside, clear marking is vital to safeguard consumer confidence. This ensures the customer that s/he is paying the correct price for the purchased product, and that s/he has not been mistaken, or even worse, misled. 

The issue of origin plays an important role in setting value. In light of R&D and lab fabrication, lab-made goods are a very technology oriented product. As such, technological advances played a big role in creating them and advancing them from industrial products to gem-quality goods. 

Technology will continue to play a key role in the development of lab-grown, beginning with their size. Current-day technology can create sheets (good for hi-tech purposes) and crystals that weigh only a few carats, resulting in smaller polished goods, rarely larger than a single carat. 

Technological advances will likely continue to push the envelope and regularly challenge the size limit, resulting in larger items over time. 

A matter of value

There are two additional aspects which distinguish lab-grown goods from natural diamonds. One is technology, which applies across all industries, including lab-grown goods. The further technology advances, the further manufacturing costs and over all costs decrease. This is driven mainly by a desire to improve margins, and results in lower prices for consumer. 

The second aspect is characterized by the shortage in natural diamonds over time – referred to as scarcity. Unlike natural diamonds, lab-grown goods are manufactured – from start to finish – in a fabrication plant. They can be produced at any time, in any quantities, and at almost any quality to satisfy consumer demand. The result is that once this goal is met, prices of lab-grown goods should decline given the possibility of there never being any shortage. 

Scarcity is a result of the duration of time it takes for a natural diamond to be created. As explained in the opening of this article, diamonds are created over a period of millions of years and were pushed to the earth’s surface thousands of years ago at the very least. 

The diamond and water paradox

These two aspects, the costs associated with sourcing natural diamonds and the shortage in their availability, increase their price and value over time. This opposite link between shortage and value is also known as the diamond and water paradox. The paradox examines an interesting question: why are we willing to pay more for a diamond than for water, even though water is essential for our survival and diamonds are used for adornment?

According to the 18th century Scottish philosopher, Adam Smith, the word “value” has two different meanings. Sometimes it expresses the utility of an object, and sometimes the power of purchasing other goods, which the possession of that object conveys. He calls the first "value in use," and the other, "value in exchange." 

According to Smith: “the things which have the greatest value in use have frequently little or no value in exchange; on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any use-value; but a very great quantity of other goods may frequently be had in exchange for it.”

Smith’s attempt at solving the paradox was followed by the mainstream economic theory of marginalism, which seeks to explain the discrepancy in the value of goods by reference to their marginal utility.

Given that there is an abundant supply of water, the marginal utility of water is low as every additional unit of water that becomes available can be applied to less urgent uses.

On the other hand, there is a much lower supply of diamonds, such that the usefulness of one additional diamond is greater than the usefulness of one additional glass of water given its near unlimited supply.

Diamond consumers are therefore willing to pay more – and diamond sellers to ask more – for one diamond than for a glass of water.

Collectively, these theories stipulate that water may be essential to our existence, and we would be willing to pay a fortune to drink water if we risk death of dehydration in the middle of the desert. However, we are willing to spend a lot less on a bottle of water when we are in the heart of the city and water is everywhere. Furthermore, we not only pay less the more available water becomes, but also the more available it becomes to others. All of a sudden, water is not that unique, essential or rare. 

From our standpoint, diamonds are a finite resource. No more diamonds will be created in our life time. They are a rare resource. 

Of the 20% natural diamond production fit for jewelry, only 40% are polished diamonds weighing one carat or more, and only 50% of those are high-end luxury quality polished diamonds.

The rarity of natural diamonds is beyond question. And this rarity is a very important characteristic of natural diamonds. Following the economic theory quoted above, lab-made goods are like water – plentiful and accessible to all – whereas natural diamonds are, well diamonds, and they carry a huge value of exchange. 

Therefore, while both natural diamonds and lab-made goods are fit for jewelry and adornment, lab-made are designed to depreciate over time. Only one of the two is potentially fit for long-term value preservation. 

The views expressed here are solely those of the author in his private capacity. None of the information made available here shall constitute in any manner an offer or invitation or promotion to buy or to sell diamonds. No one should act upon any opinion or information in this website (including with respect to diamonds values) without consulting a professional qualified adviser.