I often wrote about the rarity of diamonds and its role in diamond valuation, speaking of the economy of rarity associated with diamonds sourced from the most secured vault in the world – deep down in the belly of the planet.
Today, all gem quality diamonds are used in jewelry, which raises the question: has a product that is so hard to find and extract exhausted its potential as a jewelry component? I don’t think so.
If we consider the annual run of mine diamond output (all diamonds - all sizes, shapes and colors, including industrial, near-gem and gem quality diamonds) then, in terms of carats and value, diamonds are a rarity. Of the full run of mine diamond output, gem quality can be divided in two segments: 2-carat polished diamonds, representing ~40% of the $22B global demand in wholesale value (~$8.8B); and rough that yields diamonds weighing 1-carat or less, worth ~$13.2B.
Today, all gem- and near-gem quality polished diamonds are used exclusively for jewelry. That does not have to be the case. I feel that a two-carat or more polished diamond weighing of SI quality / J color and better is such a rare product that using it in jewelry alone does not fully exhaust its economic potential.
The rarity of diamonds, especially due to the rarity economy, can be harnessed as part of an investment strategy for capital preservation. I think diamond industry entrepreneurs must consider this option in depth and begin to change traditional perceptions, adapt and adopt new concepts.
The price of manufacturing a component
Currently, the diamond industry is limited to servicing the jewelry industry. To provide a product whose cost is low enough to generate a profit in the jewelry retail sector, the diamond manufacturing sector – one that provides a rare product – is constantly looking for low labor cost locations and slightly better tax regimes. This does not go hand in hand with transforming a rare product from Mother Nature into a beautiful and rare gem.
The search for lower wages and tax breaks led diamond manufacturing from Europe to Israel and then India where the majority of diamonds (in terms of volume and value) are polished today. This migration caused diamond centers around the world to lose tens of thousands of jobs and the disappearance of knowledge accumulated over generations.
Huge diamond manufacturing factories were built to churn out full run of mine production for the jewelry industry. To feed these enormous rough diamond gobbling factories, there is constant and fierce competition to buy rough. This drives up the cost of rough diamonds and drives down manufacturing profitability. The result is a self-sustaining snowball effect - the increase in prices of rough diamonds pushes up demand, resulting in larger purchases and excess manufacturing and, in turn, an oversupply of polished diamonds sold for less - further impairing profitability rates.
If only 30% of the run of mine value ($6.6B) would serve for investing, then labor wages, manufacturing costs or tax breaks would not play an important role and polishing large diamonds would then be left in countries such as the US, Europe, and Israel.
The upside of having an additional outlet
Now let’s consider a diamond-manufacturing sector in a market where 30% of the rough diamond supply, by value, is manufactured for purposes other than jewelry. In this instance, polishing facilities will operate without the constant pressure of sourcing rough diamonds, inter alia for capital preservation purposes. Under the proper conditions, manufacturing of these goods could return to Antwerp, Tel Aviv and New York City.
Diverting some of the manufacturing back to other centers will free up manufacturing capacity at large processing plants. To fill the void, these plants could add lab-grown to their roster, polishing them in separate lines and supplying the new product to the jewelry industry as well.
Such a revolutionary change would reduce the tireless race for rough diamonds and therefore have a positive impact on profitability, while keeping the lower manufacturing cost centers operating at full capacity and providing work to the higher cost centers that are focused on higher-end technology.
And before you get up in arms about the natural diamond manufacturing sector entering the lab-grown industry, allegedly helping synthetic diamonds, let’s not kid ourselves that they are not here to stay as a jewelry component and there is absolutely nothing we can do to stop it. If they are here anyway, we might as well find a way to benefit from them and maybe have some sort of control over how they are brought to the market. After all, somebody will polish them, so why not the existing diamond polishers.
Separating part of the natural diamonds for investment purposes would enable a distinction between natural diamonds and lab grown, highlighting the lack rarity of lab grown, which cannot be used as an investment vehicle identical to natural diamonds.
Another process that may happen as an off-shoot of designating natural diamonds as a tool for capital preservation and possible investment is the re-attraction of key diamond financing banks to the veteran European, Israeli and American centers. The uncompromising transparency in sourcing rough diamonds - full disclosure on their characteristics, detailed data on their value, information on where they were polished, who was the manufacturer and when they were sold, all requirements of a regulated sector - will turn the tide of banks refraining from financing the sector.
The traditional diamond centers had and still have a unique knowledge set that can be put to great use to benefit all. Their biggest shortcoming was the difficulty in reducing their cost per carat in polishing diamonds. The cost per carat in manufacturing larger and higher value diamonds, such as those I’m suggesting to earmark for wealth preservation, is less significant. They are a relatively smaller component of the total cost of the polished diamond. This makes these traditional centers ideal for polishing such diamonds.
The centers also have important diamond sorting skill sets. They specialize in the use and development of high-tech tools to aid in converting rough diamonds into polished, such as the Sarine detection and valuation devices, the Dialit polishing robots and many more.
The European and American diamond centers are conveniently close to banks, financial institutions and financial markets that are interested in alternative investment venues that ultimately benefits us all. It would make for an efficient use of these characteristics to develop this dearly needed venue and at the same time help elevate some of the worst issues plaguing the industry today.
The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser.
Diamond industrialist Ehud Arye Laniado is a man passionate about diamonds. From his early 20s in Africa and later in Belgium honing his expertise in forecasting the value of polished diamonds by examining rough diamonds by hand, till today four decades later, as chairman of his international diamond businesses spanning mining, exploration, rough and polished diamond valuation, trading, manufacturing, retail and consultancy services, Laniado has mastered both the miniscule details of evaluating and pricing individual rough diamonds and the entire structure of the diamond industry. Today, his global operations are at the forefront of the industry, recognised in diamond capitals from Mumbai to Tel Aviv and Hong Kong to New York.