Diamonds Are Forever… Maybe Not!

Photo by Edgar Soto on Unsplash 

A discount retailer or a world-famous jeweller, where would you buy your engagement ring if the only difference you could spot was the price tag? Recently, many everyday retailers, such as Zeeman in the Netherlands and Walmart in the US, have offered synthetic diamonds in jewellery at a marginal price compared to high-end jewellers. Only advanced testing can distinguish between lab-grown and natural gems, challenging the perceived status of diamonds. For decades, the infamous De Beers monopoly maintained the prices and prestige of diamonds through scarcity and timeless marketing. Recently, however, the rise of lab-grown gems threatens to upend this perception. How much shine is left for natural diamonds in the 21st century, and what path will the diamond market follow?

It is impossible to discuss the diamond industry without referencing De Beers, a company founded in 1888 that, until the early 2000s, held a monopolistic market share in the global diamond trade. The success of diamonds and De Beers is tightly intertwined: the company's ad agency, namely N.W. Ayer & Son popularised diamonds, portraying them as both scarce and desired. De Beers' master plan for creating demand for these stones began with several celebrities in the 1940s and 1950s, who wore diamond jewellery to special occasions and events. Soon after, the renowned slogan "Diamonds Are Forever" was created, tying the idea of permanence and love together with diamonds. Further implying that eternal love is associated with the durability and strength of diamonds. Not only De Beers succeed in love, but also in marketing diamonds as a rare and treasured commodity, making them synonymous with luxury. Brilliant marketing and the perception of rarity led countless partners to invest a significant portion of their yearly earnings in a ring.

While De Beers managed to create a market which many firms dream of achieving, its market power led to many controversies. To begin with, their monopoly, which at times controlled up to 90% of the diamond trade during the 20th century, enabled stockpiling and cartel-like practices that kept prices high. This monopoly power enabled De Beers to restrict supply and charge prices higher than those of its competitors. This pricing mechanism provided them with artificially high profits. Reducing access to diamonds resulted in a deadweight loss, as many consumers were left priced out of the market. Despite De Beers giving up its monopoly after piling up lawsuits and controversies, the diamond market remains an oligopoly that has maintained steady growth and inflated prices. Beyond pricing mechanisms, the diamond industry also heavily relies on consumer psychology. De Beers marketing campaigns established that owning a diamond signals exclusivity and status. Nevertheless, synthetic diamonds today offer an opportunity to break this oligopoly and correct this market failure by pricing diamonds at the competitive equilibrium price. 

Although synthetic diamonds have only recently made headlines, they have been around for over 70 years. The first synthetic diamond was created by General Electric (GE) in 1954 for industrial use. Over the following decades, synthetic diamonds have become indispensable in industrial applications. During this time period, De Beers did not fall behind; instead, it launched its own lab-grown division, called Element Six. By 1971, the first natural-like lab-grown diamond was successfully created, but the process was challenging to replicate and very expensive. Nevertheless, in recent years, synthetic diamonds have become widely available due to technological advancements and research, threatening to become a substitute for real diamonds in jewellery. Furthermore, the price and status of natural diamonds are facing a significant threat from this new emerging alternative.

Source: PriceScope

Companies such as De Beers initially produced synthetic diamonds for industrial use; however, rapid technical advancements led them into the jewellery market. In 2018, they launched Lightbox, a jewellery brand that openly advertised the use of lab-grown gems. De Beers' marketing tactics involved distinguishing synthetic diamonds from real diamonds by pricing them at a significantly lower rate. In recent years, Chinese companies have dominated this market, holding a 56% share of the man-made diamond market. Their increased global supply led to a steep price slump for synthetic diamonds, weakening Lightbox's business model. Cheaper, Chinese-made diamonds put De Beers in a difficult position, forcing them to shut down Lightbox earlier this year. While this shutdown was disguised as a commitment to natural diamonds for jewellery, it is clear that De Beers are under a lot of pressure. For the first time in history, the perceived luxury status of diamonds is threatened by the abundance of synthetic diamonds. Additionally, De Beers has reported losses of USD 189 million over the last two quarters, and the entire company has been put up for sale.

Source: GS Diamonds

With synthetic diamonds on the rise and natural diamond prices on the decline, the future of the hardest natural substance in the world is uncertain. As previously mentioned, De Beers and the diamond mining giants have successfully maintained the perceived value of diamonds for decades, despite wars, crises, controversies, and pandemics. Today, their threat is different, and it may be the biggest one yet: technological advancements. The Gemological Institute of America (GIA) has updated its diamond grading system to accommodate the rise of synthetic diamonds, which have become nearly indistinguishable to the naked eye and even to most jewellers using standard methods.

De Beers and the entire natural diamond industry have relied on scarcity as the backbone of high asking prices for diamonds. It seems inevitable that lab-grown diamonds will soon become identical to natural ones, meaning that diamonds might no longer be a scarce commodity. But where does this leave the high-end jewellery market? Recently, in the Netherlands, Zeeman sold a pendant for a necklace with a lab-grown diamond for just EUR 29.99, promoting it with the slogan "diamonds are for everyone." Their entire campaign also questioned what consumers actually pay for when they buy diamonds. Zeeman and other retailers worldwide are lowering the entry barriers, allowing more consumers to purchase synthetic diamond jewellery. This could be marked as a pivotal moment in the democratisation of glamour, where diamonds are no longer reserved only for the wealthy but are accessible to all. 

While supporters of inclusivity in luxury might welcome this change, it raises another paradox: when diamonds become accessible to everyone, do they still maintain the same cultural value? In the case of diamonds, it is essential to distinguish between monetary and perceived value, as these are two distinct concepts. Historically, natural diamonds have been considered a Veblen good, meaning that demand increased when price and exclusivity increased, furthermore amplified by the bandwagon effect created by several marketing campaigns by De Beers. So while the monetary value is already declining, it might take several years or decades to see the changes in cultural value.  

Currently, the diamond market is at a turning point, with two possible paths ahead, neither of which is favourable for diamond investments. Firstly, if synthetic diamonds truly become indistinguishable from natural diamonds, the two markets will merge. This unified market for all diamonds would bring the general price down to either the real market equilibrium, which has been inflated over the past 100 years, or to a new, lower equilibrium. Secondly, the divide between natural and synthetic will be transformed into two distinct product categories. Similar to the wine or fashion markets, the diamond market will have several tiers, catering to varying preferences and price ranges. Such development could lead to the synthetic diamond market growing, triggering a displacement effect. This could decrease the demand for natural diamonds, further decreasing their market price. 

The diamond industry has a fascinating and long history, tied to De Beers, which managed to build the status of luxury and prestige. While De Beers' accomplishments are very impressive, they could all be erased by synthetic diamonds. The recent innovations in this field have directly impacted the market price of diamonds, threatening the current established value and status of diamonds. Regardless of whether synthetic and natural diamonds become indistinguishable or remain two separate markets, natural diamonds are facing a significant threat. So, are diamonds really forever, or is the beginning of the end?