Swarovski Enters Synthetic Diamond Market

For years, clever diamantaires and jewellers have avoided messing in their backyard.

A large part of the value of diamonds is their perceived scarcity. Small diamonds are not scarce, and are found in very large quantities in most mines.

Most of what is exported from Botswana is still low−value melees (less than 0,2 carat), quite literally by the bakkie−load. It is only the big rocks – and here Namibia excels – which are scarce and have an ongoing and relatively stable market value.

You could be assured, until recently, that if you had what the industry calls a ‘special stone’ i.e. something worth more than N$7 million, it would hold its market value.

In the1950’s, scientists developed ways of producing diamonds in laboratories. General Electric and then De Beers (its industrial diamond manufacturing subsidiary is called Element 6) went to produce large volumes of cheap industrial diamonds.

They were joined by the Japanese giant Sumitomo in the 1970’s, and this happy triumvirate went on to totally collapse the global industrial diamond market. The figure below shows what happened to the price of industrial diamonds over a 50−year period. Given that the profit of mining industrial diamonds was never large, this was not ever going to affect the De Beers profit margin.

The big no−no was synthetic gem diamonds. If these entered the gem diamond market, this would collapse De Beers along with the economies of Namibia and Botswana. Most of the profits in diamonds are made in mining and retail. 

The middle of the diamond value chain is very competitive, as anyone still trying to cut and polish diamonds in Namibia or Botswana knows all too well.

Several weeks ago, the huge transnational jewellery retailer Swarovski announced that it was going into synthetic diamonds. For a company whose basic commercial credo is ‘affordable luxury’ and which manufactures pretty crystals and already sells cheap bling like zirconium, the entry into the synthetic diamond market should not be a surprise. The difference between cheap imitation diamonds like zirconium, which every thug wears in his ear, and synthetics is that any jeweller can tell by looking at the difference between zirconium and a diamond. 

Synthetics are often better quality than mined diamonds, and it is impossible to differentiate between the two without expensive equipment, which is also supplied by De Beers. In the past, the great worry for Namibia and Botswana was that synthetic diamonds were previously a threat from their illegal entry into the mined diamond market. This was done by some jewellers, who would sell customers synthetics disguised as mined diamonds.

There were also synthetics on sale through perfectly transparent channels on the web and through retailers who would market them as environmentally friendly, conflict and slave labour−free diamonds. But the risk from Swarovski is that this is the first large respectable retailer who has entered this market.

However, the bigger threat is not Swarovski entering the synthetic market, but where Swarovski is and where it is getting its synthetics from. After initial negotiations with De Beers failed, Swarovski decided to source synthetics from China.

The world’s biggest producer of diamonds by far is China, which produces an estimated 10 billion carats per annum without having one diamond mine. These are almost all low−value industrial diamonds. Total world production of mined diamonds peaked at around 170 million carats 10 years ago, and has been in decline ever since.

For decades, De Beers has firmly said that it will not enter the production of gem quality synthetics. Initially, this made complete commerce sense as why would De Beers undermine their own business model which rests on the profits of its diamond mines in Botswana, Namibia, South Africa and Canada? But recently, De Beers is sounding more like a case of Shakespeare’s “the wench doth protest too much”.

There are several reasons why we should no longer believe De Beers. First, despite the current glut in the market, there is now a long−term structural shortage of mined diamonds on the global market as few new mines are being developed, and following the 2008/9 recession, diamond prices ballooned.

Second, De Beers’ diamond marketing campaign in India and China has succeeded beyond all expectations and convinced middle−class women that diamonds are a must as a part of the engagement ritual. So, where are all these Asian women going to find diamonds? The answer must be synthetics.

Third, several years ago, Element 6 started issuing patents for gem quality diamonds that it has developed. Fourth, if Element 6 does not start marketing synthetic gem quality diamonds, then someone else will. And now, fifth, De Beers has failed in its negotiations with Swarovski to supply that company with the very gem quality diamonds that it has always said it would never do. Only the simple−minded would now believe De Beers’ assurances.

The alarm bells should be ringing in Windhoek and Gaborone that De Beers, despite its empty assurances, will almost certainly go down the synthetic gem path sooner rather than later. What can be done? First, the region’s diamacrats (diamond bureaucrats) should not trust De Beers, which has been the first instinct of those who run policy.

Second, they should work with the US to change the near−useless Kimberley Process certification to include polished diamonds to create an international system of regulation of the industry. Zimbabwe and South Africa have strongly opposed this because they believe, probably quite rightly, that the US would use an expanded Kimberley Process only to exert further control over African trade.

While US motivation may be less than honourable, it does not mean that the outcome is not in the interest of Namibia and Botswana.

Swarovski’s decision to go synthetic is another nail in our diamond coffin, but the company is not a high−end retailer, hence it is a small nail. When we start to see the top−end retailers like Tiffany go synthetic, then we know our exports and our economy are in imminent danger.

Unless we are able to offer the world a system of diamond trade which assures a clear differentiation between rare mined and common synthetic diamonds, then the value of our exports will diminish long before we run out of diamonds in Namibia and Botswana.