Diamonds are forever?

The diamond market is undergoing a huge structural shift. The world’s leading diamond business, De Beer’s major shareholder Anglo American has put its 85% stake in the company up for sale as its revenues and profits fall. De Beer’s diamond revenues have fallen 18% this year. 

De Beers sees falling demand in the US and China as reasons for its difficulties, but there may be a more existential threat to DE Beer’s in the form of laboratory-made stones. Synthetic diamonds have been around for decades but have never had the ‘beautiful look’ of mined diamonds and have an industrial use as cutting tools in manufacturing businesses. 

The new laboratory-made diamonds are different.  These synthetic diamonds are optically, chemically, thermally, and physically identical to mined diamonds. Laboratory-grown diamonds are made using Chemical Vapor Deposition technology that produces a rough diamond that can be cut into a final polished version identical to a mined diamond. The big difference is the price.

​​​​​ Laboratory-made diamonds are currently 40-50% cheaper than mined diamonds. The example in the picture is for two 1.50-carat diamond Solitaire Rings. The mined ring on the right is priced at $11,100 ​​​​​​​and the laboratory-made ring on the left is priced at $5,900.

The emergence of significantly cheaper Laboratory-made diamonds is a huge threat to mined diamond producers such as De Beers. Will consumers be prepared to pay a significantly higher price for the same good just because they know it has been mined? Can a company like De Beer’s market its product as genuine diamonds against its synthetic competitor?

Unlike mined diamonds where the scarce nature of the product limits supply in terms of where it can be found and mined, the supply of laboratory-made diamonds is not constrained in the same way and can be increased much more easily. This could mean the price of diamonds could fall further and push mined diamonds to the periphery of the diamond market. This kind of structural change in the diamond market could lead to business failure and unemployment. A decline in the mined diamond market could also have macroeconomic implications for Botswana which is the world's largest producer of mined diamonds

Historically, one of the things that have made diamonds so attractive and valuable is their scarcity. If laboratory-made diamonds significantly reduce this scarcity will the allure of owning a diamond ring or necklace be taken away and the good becomes just another ‘pretty stone’?

Some possible questions to discuss with a class

1. What factors determine the demand for diamonds?

2. How might a fall in the price of laboratory-made diamonds affect the market for mined diamonds in the short run and the long run?

3. Could changes in the diamond market lead to structural unemployment?

4. How could changes in the diamond market affect Botswana's economy?

5. Discuss the importance of scarcity in affecting the demand for diamonds.