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Dealing with Synthetics

Editorial

Oct 25, 2013 8:00 AM   By Avi Krawitz
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RAPAPORT... There is rising concern that synthetic lab-grown diamonds are filtering into the market mixed into parcels of natural diamonds. While the issue of synthetics is not new, it has become more prevalent in the past few years as technology has enabled a higher quality synthetic product to be made that more closely resembles a greater array of natural diamonds.

Therefore as production of synthetic diamonds has increased – as it continues to do – the risk of these diamonds entering the market undisclosed under the guise of natural diamonds has also risen. This has culminated in a slew of market rumors and media reports warning the trade to be vigilant in verifying their sources.

Last week, Rapaport Group issued the following trade alert: “Buyers beware. Persistent reports that large amounts of synthetic lab grown diamonds are being mixed with natural diamonds in parcels of melee and pointers. Know your supplier and insist phrase ‘natural, untreated diamonds’ be included on all invoices.”

As Rapaport Group has stated in the past, the industry should insist on full transparency of synthetic diamonds based on the three D’s. There should be sufficient detection, disclosure and documentation of synthetic diamonds.

The recent wave of concern has so far not been confirmed by concrete evidence of a high-volume case involving undisclosed synthetic diamonds. The last such occurrence that was widely reported was in May 2012 when the International Gemological Institute (IGI) said it received several hundred Chemical Vapor Deposition (CVD) synthetic diamonds at its labs in Antwerp and Mumbai to be certified as natural diamonds.

Roland Lorié, the co-CEO of IGI, told Rapaport News that there has not been a similar occurrence of so many goods caught at its labs at one time since last May. Rather, he reported that the volume of individual stones or pieces of jewelry being detected has increased. “Every week, we have a few stones or rings that come in as natural diamonds but are proven to be synthetic,” he explained. “So we’re not dealing with big quantities, but there have definitely been more occurrences.”

That’s not to say that the high-volume cases are not happening. As such, the biggest challenge remains in detecting those really small melee goods which are sold in parcels consisting of thousands of diamonds.

As it stands, there is no foolproof way to test these parcels. The current technology requires sample testing, and even then this is done on a tedious and expensive stone-by-stone basis, using the De Beers-developed DiamondView, DiamondSure, or DiamondPlus machines.

De Beers is working to simplify the process through its Automated Melee Screening Device (AMS). A De Beers spokesperson explained that the company has carried out successful internal testing of the AMS device and is now in the process of comprehensive field trials with a small number of sightholders that specialize in melee. These trials are expected to be completed in the near future and De Beers expects the AMS will be ready for more widespread deployment with sightholders in the first half of 2014. Such technology would be a welcome development as the legitimate synthetic market expands.

Certainly, the synthetic producing companies are betting on rapid growth. Mike McMahon, CEO of Scio Diamond Technology Corporation, said the producers simply cannot keep up with demand. While Scio Diamond currently produces 30,000 to 40,000 rough carats a year, McMahon stressed that the company could immediately fill demand for in excess of 1 million carats if needed.

To facilitate this growth, Scio Diamond last month signed a joint venture agreement with a U.S. and Israeli partner to locate a facility in China that will increase its overall production tenfold by the summer of 2014. “We’ve seen a rise in demand in the past 18 months as there has been a general acceptance that there will be a lab-grown diamond market,” he told Rapaport News.

In many ways, synthetics have a lot going for them above natural diamonds. They’re effectively being marketed as affordable, conflict-free, environmentally-friendly diamonds. That is a difficult argument to counter. It can be advocated that they lack the romance of being developed over thousands of years as do natural diamonds. They’re also limited in the qualities they can achieve, although this is rapidly changing as technology advances.

Jewelry designers are also seeing an opportunity in this space. “A lab-grown diamond is a diamond – optically, physically and chemically identical to its mined counterpart,” Reena Ahluwalia, of Reena Ahluwalia Design Inc., stressed to Rapaport News. “What I see as tremendous value for designers is that the diamond is origin-guaranteed, conflict and human-abuse free, ecologically and environmentally sustainable, and a triumph of human innovation. A great opportunity and price value as well.” Ahluwalia said she’s seen an increase in requests and inquiries about lab-grown diamonds in the past two years in her business.

Therefore, as they grow in popularity more companies from the traditional diamond industry are starting to dabble in polished lab-grown diamonds. Scio Diamond counts among its clients the largest diamond manufacturers based in all of the major centers including India, Belgium, Israel, Hong Kong and New York.

To verify its product, McMahon stressed that all of Scio Diamond’s invoices clearly state that the diamonds are lab-grown. There’s little more that it can do given that it deals only in the rough product. Ultimately, it is up to the diamond manufacturers to differentiate their lab-grown diamond inventory from their natural diamonds. The manufacturers are the ones sending the polished synthetic goods to the laboratories for certification and the responsibility lies with them to effectively disclose whether their diamonds are natural, or untreated, or in fact lab-grown.

Likewise, Gemesis, which is the largest distributor of polished lab-grown diamonds and diamond jewelry, bears this responsibility. The company was not available for an interview prior to press time, but states on its website, “Gemesis is committed to maintain supply chain integrity and providing knowledge of origin of its products. For origin certification and to distinguish its diamonds from those mined in nature, Gemesis insists that each of its lab-created polished diamonds over one-quarter carat in weight are laser inscribed with an identity name and number as part of the certification process.”

As stated earlier, the bigger challenge therefore lies in those smaller diamonds being mixed in melee parcels. These are goods that can neither be laser inscribed nor certified. 

Lorié explained that every stone entering an IGI lab – usually above 0.30 carats – is checked to verify that undisclosed diamonds are not an issue. The 0.05-carat to 0.29-carat goods, which are usually not submitted for certification, can also be checked easily. Rather, the real problem lies in goods smaller than 0.05-carat sizes. He added that while IGI has developed the necessary techniques for identifying them, the process is relatively expensive due to their small size. Furthermore, it is not very practical to submit every melee parcel to a lab, Lorié said.

Guilty manufacturers may be tempted to mix those goods in melee parcels to improve their margins, given that synthetics are sold and traded at significantly lower price points. McMahon estimates that a lab-grown 1-carat, G, SI diamond is priced at about a 25 percent to 35 percent discount to the earth-mined version. He adds that the gap is far greater for smaller goods in the melee category with differences reaching up to 60 percent in some cases.

That certainly does not excuse cheating the public by passing off lower cost goods as a higher priced product. With natural rough, diamond prices seem to be at a perpetual high, and since manufacturers are struggling to make decent margins, it is understandable that more diamond manufacturers would be looking to lab-grown synthetics, with the correct disclosures, to improve their margins. It’s an unfortunate reality that as more suppliers shift to legitimate synthetic goods, and as production increases, the risk grows that a greater volume of undisclosed products will enter the market.   

A bewildered natural diamond trade is therefore looking for guidance on how to deal with the issue. Ernie Blom, president of the World Federation of Diamond Bourses (WFDB), stressed that the umbrella body has a zero-tolerance policy. The bourses are well prepared to expel, name and shame someone if it is proven that they have sold synthetics as natural goods, he said, although they have yet to do so.

The International Diamond Manufacturers Association (IDMA) warned that such unscrupulous practice is a blatant breach of the trade’s principles and basic rules, and is detrimental to the trade’s reputation in the downstream market.

Lorié argued that the industry’s leadership needs to take immediate measures, such as requesting every seller to write on his invoice that his goods are of natural origin, before it really gets out of control. He predicted that it could reach unsettling levels within two to three years if it’s not dealt with properly today.

Most agree that the industry will face a deep reputational crisis across the pipeline if such guarantees are not provided. Just this week, IGI received four man-made stones out of 19 submitted by a large unnamed retail chain. There’s no doubt that if a diamond dealer cannot guarantee the authenticity of supply to his buyers, that lack of trust will spill over to consumers. Currently, there is insufficient detection, disclosure and documentation to prevent that from happening. Perpetrators should be named and the three D’s should be insisted upon if this crisis is to be averted.

The writer can be contacted at avi@diamonds.net.
 
Follow Avi on Twitter: @AviKrawitz

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.diamonds.net/weeklyreport/ or contact your local Rapaport office.


Copyright © 2013 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.

Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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Tags: Avi Krawitz, CVD diamonds, De Beers, diamonds, lab-grown diamonds, Rapaport, Scio Diamonds
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