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Synthetic Diamonds: Legitimize, Don’t Ostracize

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Oct 15, 2015 8:45 AM   By Avi Krawitz
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RAPAPORT... Traders of mined diamonds are divided over how to best respond to the growth of their laboratory-grown counterparts. Last week, India’s Bharat Diamond Bourse (BDB) became the second exchange to ban trading of man-made diamonds, ignoring a section of the industry that prefers greater engagement with producers and jewelers of synthetic stones to ensure proper disclosure and transparency.

The World Federation of Diamond Bourses (WFDB) isn't opposed to trading in synthetic diamonds as long as they are fully disclosed, it said after BDB’s prohibition order. Production of gem-quality lab-grown diamonds will jump to 2 million carats by 2018 from 360,000 carats last year, according to a forecast from consultancy Frost & Sullivan.

Unlike mined or natural diamonds, there isn’t a structure within which their synthetic cousins can exist. Each bourse is left to set its own policy to govern the trade of lab-grown stones, as long as they remain within the regulations of the umbrella body WFDB. The Israel Diamond Exchange was the first to disallow trading of man-made gems on its floors in 2014.

Lack Understanding

The Indian exchange’s decision “is another sign that bourse leaders don’t understand that the best way to avoid unethical practices is to encourage traders to deal with full disclosure and transparency,” Thierry Silber, chief executive officer of Diamaz International, an Antwerp-based supplier of natural and lab-grown diamonds, wrote in an email to Rapaport News.

“Rather than banning the trade of lab-grown diamonds and forcing their trade into dark corners, industry leaders should support the establishment of a lab-grown diamond association, which would open the door to a legitimate product and make sure that it is sold transparently,” he said.

The biggest issue with lab-grown diamonds is non-disclosure. Roland Lorie, co-chief executive officer of International Gemological Institute (IGI), said IGI still encounters regular occurrences of non-disclosed small lab-grown diamonds mixed with natural stones at its grading labs – albeit in very small quantities.

The industry has long argued for four steps to safeguard the natural diamond market. Differentiate natural diamonds from their lab-grown counterparts, detect them when mixed with earth-mined stones, fully disclose them to traders and consumers and properly document their details. To combat non-disclosure, the Gemological Institute of America (GIA) has made its DiamondCheck machines available at global bourses, while De Beers and HRD Antwerp brought their respective melee screening devices to market.

Overlooking Threats

WFDB president Ernie Blom acknowledges there could be a market for synthetic gems. “We only insist that such stones are fully disclosed so that the trade and consumers know exactly what they are being offered,” he said. “This is critical to ensuring consumer confidence.”

However, the trade may be overlooking other aspects of the lab-grown threat. In particular, technological advances have enabled larger, better-quality diamonds to be developed, while production is forecasted to rise exponentially in the coming years.

The Frost & Sullivan research note released in 2014 predicted the supply of lab-grown diamonds will exceed the production of natural diamonds by about 25 percent by 2050. It will catapult to approximately 20 million carats in 2026 before reaching about 55 million carats a year around 2050.

“At a time when the earth-mined diamond supply is depleting every year, the emergence of grown diamonds is a security blanket for the industry,” the analysts wrote. “Grown diamonds cannot only fill the supply-demand gap for rough diamonds globally, but also expand the market to new application areas and new profile of consumers.”

Millennials Demand

While consumer awareness of lab-grown diamonds is still relatively low, demand for synthetic stones is expected to rise from millennials. Silber said the new generation is tech-savvy and being educated to be socially- and environmentally-conscious, which will eventually influence their buying habits.

Lab-grown diamonds, he argues, ticks all those boxes. They offer consumers an opportunity to embrace technology and avoid some of the negative associations with mining such as human rights abuses, conflict diamonds and environmental damage. Furthermore, in today’s economic environment, lab-grown diamonds offer an affordable alternative to natural gems, with commercial white goods selling at an approximate discount of 30 percent to 50 percent to their natural equivalents.

Effective marketing campaigns that stress the positive aspects of natural diamonds should help negate those perceptions and sustain the appeal of natural diamonds in the market. In fact, as Martin Rapaport, chairman of the Rapaport Group, argued in a December 2013 paper titled “Sinthetics,” lab-grown diamonds are good for the industry because the mining sector will be forced to differentiate its diamonds from synthetics through innovative marketing, promotion and advertising campaigns that explain why consumers should pay more for natural diamonds.

Entry Point

The traditional diamond trade needs to recognize lab-grown stones are a part of the market. After all, the industry stands to benefit from their growth as synthetics could serve as an effective and affordable entry point for younger consumers, who are eventually likely to upgrade to a natural, more expensive stone.

By banning the trade of synthetics, the industry is alienating a legitimate part of the business. Instead, they should institute measures to govern the lab-grown market and monitor its development. An association should be set up to oversee the trade in the same way as natural diamonds are supervised. Such a body should inevitably form part of the existing natural diamond industry structure, but it needs to be driven by lab-grown producers, dealers and jewelers.

Silber said such a body would attract all legitimate traders and would set rules and standards for the lab-grown market. The organization would also have the power to discipline members. Creating an organized and official structure would advance the implementation of the steps outlined above and ensure a more transparent trade. In so doing, it would safeguard consumer confidence in natural diamonds as the lab-grown market expands.
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Tags: Avi Krawitz, Bharat Diamond Bourse, De Beers, diamonds, GIA, IGI, Israel Diamond Exchange, Jewelry, Rapaport, Synthetic diamonds, WFDB
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