Rise of Synthetic Diamonds is Inevitable & Limited

Whenever synthetics are mentioned, identification and disclosure always seem to be the first topic of conversation. The implications of mixing synthetic with natural stones continue to be discussed at length by the industry even though there is technology capable of distinguishing between the two.

The challenge is that at the moment, the technology is cost prohibitive for many industry players. However, as this technology progresses, it will become more affordable and available; it's just a matter of time before distinguishing between synthetic and natural becomes a non-issue.

An interesting proxy for the synthetic diamond market is the precious gem market: rubies, emeralds, and sapphires. The synthetic market for these gems matured years ago and is now larger than the natural equivalent, which has been stymied by trade restrictions and other challenges resulting in contracted supply and higher prices. In recent years, the synthetic production of these gems has increased, and the product has been accepted by the downstream jewelry industry. The result has been a favorable price differential for synthetics relative to natural and a robust distribution channel led by the largest national retailers.

At the moment, the diamond industry is reversed: a relatively healthy mining industry, albeit a downward sloping supply trend since production peaked in the mid-2000's, and a relatively nonexistent synthetic retail distribution channel. 

Even though synthetic diamond technology has existed for almost 65 years, it wasn't until recently that 1-carat-plus engagement ring-quality colorless synthetics were available. For example, in early 2013, Gemesis, now known as Pure Grown Diamonds, produced a 1.29 carat E color, VVS2, emerald-cut diamond which the company claimed at the time was the world's largest whitest, lab-created diamond. Traditionally, the synthetic diamond industry has focused production on smaller gem and industrial-quality product, with the latter catering to over 99% of global industrial diamond demand.

However, even with the recent progress, the technology to produce larger gem-quality diamonds has not yet advanced to the point where the industry can afford to significantly undercut the price of a natural equivalent. While synthetic rubies, emeralds, and sapphires can sell at as much as a 90% discount or more to a natural equivalent, higher-quality synthetic diamonds only trade at a discount of around 2-20% 

There is a lot of room for that margin to widen. As synthetic diamond production technology continues to advance, I see incrementally higher output and lower prices as inevitable — the key word being "incremental," as the industry's high barriers to entry, due to high capital investment and R&D costs, will limit the pace of quality advancements and capacity growth rates.

Right now, demand for synthetic gem diamonds is being driven almost exclusively by the environmentally and ethically conscious customer and to a lesser extent the millennial that sees "futurology" appeal in synthetics; these customers are buying online. I see the largest potential for the industry coming from the indifferent diamond customer that can be persuaded by a lower relative price if access to product is convenient enough.