How cheaper are laboratory diamonds
DiamondsThis is how the diamond business is changing
Usually there is optimism in the mining indaba. When Africa's mining industry, one of the continent's most successful industries, meets for its annual meeting in Cape Town, eulogies are given, shoulders patted and deals made. In spring 2018, however, the representatives of the diamond business adopted a different tone. “We are experiencing cannibalism through synthetically produced diamonds,” says Phillip Barton, South Africa boss of the gemstone giant De Beers. "It's a challenge, a threat, not very big yet, but it's growing."
"Just a few years ago we didn't take the threat posed by cultured diamonds very seriously," says a Namibian trader. "And suddenly someone is producing a perfect five-carat!"
Diamond, in Greek adámas, means invincible. The hardest material found in nature is a mythical substance. Centuries-old legends surround the most precious of the stones, diamonds symbolize power, wealth, beauty, love - pretty much everything a person could desire.
Diamonds have been produced synthetically since the 1950s. For a long time, however, the results were only suitable for industrial purposes, for drilling tools or medical technology, not for jewels - they were not thick, not pure enough for that. For a few years now, however, the laboratories have been producing jewelery-quality diamonds, cheaply and in practically unlimited numbers.
What does that make of a good whose value has always been in its rarity? In a market that is already in a state of upheaval because new competitors are harassing the ex-monopoly De Beers? "I've been in the industry for 30 years," says De Beers' Phillip Barton, "and the change is breathtaking."
Capital has taken a close look at the global diamond industry - in South Africa, Israel, India and the Black Forest. And in doing so, we also tracked the leap in technology that at the end of this story will force the powerful De Beers group to change its strategy - even if its representatives still deny this at the industry meeting in Cape Town.
The largest of all holes
When Kimberley got electric street lights in 1882, there was only one other city in the world that already had them: Philadelphia. Today there is hardly anything left to suggest that the South African town was once a pioneer. Except for the hole. It is considered the largest that humans have ever dug by hand: The Big Hole, 17 acres in size, located in the heart of the city that grew around the mine. Miners have unearthed 14.5 million carats of rough diamonds here - one carat is 0.2 grams, making 2.9 tons. For decades the Kimberley Mine was the most important diamond mine in the world.
The 15-year-old farm boy Erasmus Jacobus found a glittering pebble while playing on the banks of the Orange River in 1866, which on closer inspection turned out to be a diamond. Soon prospectors were roaming the area. One of these groups had hired a cook who, because he was constantly drunk, got on everyone's nerves. To get rid of him for a few days, he was sent up an acacia-covered hill to search for diamonds in May 1871. When he came back there was a jingling in his pocket.
Diamonds are formed when high pressure and temperatures of around 1200 degrees condense carbon into crystals deep in the earth's mantle. They only come within human reach if a volcanic eruption hurls them to the surface. The hill on which the enthusiastic cook found what he was looking for was made of volcanic rock. It was on a farm owned by two Dutch settlers: the brothers Diederik and Johannes de Beer.
The known diamond deposits in India and Indonesia have been considered exhausted since the 18th century. The discovery in South Africa was the first in modern times to be exploited on an industrial scale. That happened immediately. Under pressure from the British colonial power, the de Beer brothers had to sell their land for a stick of cardboard. They packed their belongings and disappeared into the steppe. Only her name remained.
Within a short time, adventurers of all stripes poured in, staked 1,600 claims and began digging. The mound became a hole, the prospecting camp became Kimberley. Among the men of fortune was a British man who was barely 18 years old and who became immeasurably rich here: Cecil Rhodes, later Prime Minister of the Cape Colony and founder of two protectorates, which he immodestly named after himself - Southern and Northern Rhodesia, the present-day states of Zimbabwe and Zambia . Rhodes was considered an eccentric. Unlike many diggers, he did not squander his profits, but developed his business, for example by renting out pumps that miners could use to dry out their pits. Soon Rhodes bought the claims from less successful people and merged them. At the end of the 1880s, there was only one other major owner left.
Kimberley, 36 Stockdale Street. A brick building in which until a few years ago the South African De Beers headquarters was located. An employee enters the boardroom and throws a framed document on the conference table. So casual that you think: It can't possibly be the original. But it is. A check for £ 5,338,650. On July 18, 1889, Rhodes bought out his last rival, Barney Barnato, and took control of Kimberley's diamond fields. At the top of the check is the name of his company: De Beers Consolidated Mines.
Later new deposits were discovered, in other countries in Africa, in Canada, Australia, the Soviet Union. But Rhodes ’Kimberley coup gave De Beers an industry dominance that, despite all market shifts, should extend almost to the present day.
A diamond is forever
Tel Aviv's Diamond Exchange District is a high-security area. In front of the entrance there are even more armed security guards than usual on Israeli streets. Four glass towers rise above the sealed off complex. Inside is the Bursa, as the Israelis call their diamond exchange.
“The diamond craft is a kind of Jewish tradition,” says Sharon Gefen. The fashionably dressed woman has represented the stock market in public for 20 years, her fingers, earlobes and wrists always draped with sparkling stones.
Because Europe's Jews were not allowed to acquire land in the Middle Ages and were not allowed to work in many professions, they concentrated on trade. Diamonds were particularly attractive - for a sad reason. “They are something very valuable that you can always carry with you, even if you are fleeing pogroms,” explains Gefen.
When the British mandate abolished tariffs on rough diamonds in the 1930s, immigrant Jews began to build up the business in what was then Palestine. After Israel's independence, hundreds of thousands of new citizens poured into the country from 1948, many of whom found their place in the diamond industry. In addition to Antwerp, where a large Jewish community also dominated the business, Tel Aviv was soon considered to be the most important transshipment point.
On this day the annual diamond week begins. Gefen makes her way through the trading floor. Ultra-orthodox with beards and kippahs meet business people in expensive suits. Traders sit at cloth-covered tables, weigh stones, examine them under a magnifying glass, argue, sign. The value of a diamond is measured according to the four Cs: Color, Cut, Clarity, Carat - color, cut, purity, weight. Large stones are much rarer and therefore disproportionately more expensive than small ones. The same applies to rare colors such as canary yellow, blue or green. Otherwise it is hardly possible to formulate general rules - experts differentiate the stones into 10,000 categories.
One of the connoisseurs is Abraham Fluk and is the owner of a traditional family business: Yoshfe Diamonds, in business since 1942. At his company headquarters, Fluk keeps not one, but two treasures. A large Torah scroll and thick Talmudic volumes with golden characters lie in a huge office cupboard. Every day at half past two, his son Ori reads from it to the employees.
The other treasure is stored in a two-meter high safe: diamonds in all shapes and colors, black from Russia, brown from Canada, pink from Australia. A selection that can only be found among members of a very exclusive circle: the 78 so-called De Beers sightholders, to which Yoshfe Diamonds belongs.
Thanks to their market power, the South Africans were able to establish a unique trading system. The London Diamond Syndicate was formed as early as 1890. Under the leadership of the legendary Ernest Oppenheimer, emigrant from Hesse and chairman since 1929, De Beers turned this structure into the Central Selling Organization (CSO) - the notorious cartel.
This is how it worked: The CSO regularly invited people to so-called Sights in London. Only "Diamantaires" who were found to be worthy were admitted: the sightholders. Each was presented with a cardboard box with stones of various sizes, colors and quality, tailored to the needs of the customer: tiny for the Swiss watchmaker, large for the Parisian jeweler. A sightholder - this is still the case today - is allowed to examine the stones, but not to sort them out. De Beers sets the price, there is no negotiation, payment is made in cash. The sightholder takes the complete box or leaves it.
For a long time, up to 90 percent of the rough diamonds mined worldwide were sold through De Beers ’sales channel. Even when competitors opened up other deposits, the South Africans convinced them to give them the stones for marketing - sometimes with brutal methods. When, for example, what was then Zaire canceled its contract with the CSO in 1981 in order to sell its diamonds itself, De Beers flooded the market with its own stocks. The fall in prices forced Zaire, humiliated, to reintegrate into the cartel. Even the Soviet Union, with its huge mines in Yakutia, submitted to the turbo-capitalists from South Africa.
For a long time, diamonds were synonymous with De Beers. Therefore, the company did not advertise its own brand, but simply for diamonds themselves. In 1947, a copywriter for the New York agency N. W. Ayer came up with a sentence that the journal “Advertising Age” named the slogan of the century in 1999: A diamond is forever. A diamond is eternal. Like the perfect love that outlasts death. Four words created a mass market: It is said that eight out of ten engagements in the US today are sealed with a diamond ring.
For this to happen, the industry had to go through a change that you can see on the nameplates of the Tel Aviv Diamond Exchange. Next to Gross, Zvi or Cohen it says: Surata, Dhamandan, Annita. Indian names.
For large, valuable diamonds, Tel Aviv, Antwerp and New York are still the top addresses. But 90 percent of the stones are polished in India today. Yoshfe Diamonds also has a production facility there. "30 to 50 percent of the diamond price comes from the workload and personnel costs," says Abraham Fluk. "There is no avoiding production abroad."
The rise of the Indians
Even the beggars of Surat live on diamonds: they sweep the streets and sift through the garbage in search of mini-stones that careless traders drop. Located in the western Indian state of Gujarat, the city has six million inhabitants. An estimated 600,000 of them work in the roughly 7,000 grinding shops that imported rough diamonds worth $ 17 billion last year and sold cut stones for $ 25 billion all over the world.
Nobody could have dreamed of this even in the middle of the 20th century. Many parts of the city had neither sewers nor garbage disposal. “There was no accommodation, we worked, cooked and slept in the workshop,” says Laljibhai Patel. With 20 dollars in his pocket, he came to Surat in 1974 to learn how to cut diamonds. Today he is the President of Dharmanandan Diamonds, number two in the Indian market with 7,800 employees. His company car: a Maybach. His personal wealth: around $ 500 million.
From the 1960s onwards, the Indians pushed their way into the market. Grinder wages in Antwerp and Tel Aviv had risen, and it was becoming uneconomical to have very small stones worked there. Surat's entrepreneurs sensed their opportunity. They took the cheap goods from De Beers. "Back then, the Indian grinders were ridiculed for being backward," says Govindbhai Dholakia, also one of Surat's pioneers. "Nobody took us seriously."
A misjudgment. Not only were the Indians cheap, they were quick learners. “The arrival of the Indians changed the entire market,” says Martin Rapaport, editor of the standard work “Rapaport Diamond Report”. Previously reserved for wealthy elites, diamonds have become affordable for a much wider range of customers. Sales exploded, especially in the US.
The most talented Indian grinders soon rivaled the best in the world. They began to work larger stones, to get involved in the trade, and opened branches overseas. Whole clans merged to make the necessary investments. State-of-the-art technology found its way into Surat.
Professional production follows strict processes. A digital 3D model is created of each stone, in which impurities and inclusions are marked. Special software calculates possibilities to optimize the yield. Larger blanks are cut into parts by computer-controlled lasers and only then ground by hand. The abrasive: olive oil with diamond dust - because only the hardest material in the world can shrink the hardest material in the world.
In another respect, the West's lead has shrunk. In the past, Indians had to import lasers, polishing pads and scanners. Today they build many devices themselves. "We offer comparable quality at significantly lower prices," says Janak Mistry, CEO of the Lexus Group, which supplies grinding shops with hardware. “Fifteen years ago, local companies were still sending their most valuable stones to Antwerp,” says Mistry. “Today we cut the large rough diamonds ourselves.” He is currently having a 30-carat cut, market value around 2 million dollars.
There is no field in which the Indians do not attack. Why should they leave the lucrative trade to their western competitors? A diamond exchange is currently being built in Surat and will be the largest and most modern in the world when it opens in 2020.
But a good part of the business in Surat is still running according to the old custom. Smaller stones in particular are traded on the street. Tens of thousands of men crouch in the Hira Bazaar every afternoon. “In Surat, diamonds are traded like vegetables elsewhere,” jokes the trader Hitesh Desai. "Nobody asks for certificates in the bazaar."
Then comes the moral
For a long time hardly anyone in the industry cared about where a stone came from. Good for the monopoly De Beers, who cheerfully bought up the global production - no matter where and from whom. This business model came under pressure when a new factor suddenly appeared at the end of the millennium: morality.
In the 1990s, rebel groups devastated Liberia and Sierra Leone, financed by a war economy based on the exploitation of diamond deposits. Instead of glamor, the business was suddenly associated with child soldiers and forced labor - also thanks to the Hollywood film "Blood Diamond" with Leonardo DiCaprio. Certificates should help. In 2003, the UN-led Kimberley Process came into force to keep blood diamonds out of the world market.
The system does not work perfectly. As a monopoly, De Beers could not guarantee that there would not be a single blood diamond among all the stones it had bought - which is why the company ultimately decided to stop marketing third-party production.
At least that's how they portray it at De Beers. But the end of the monopoly era probably had other reasons. The power of the South Africans was crumbling anyway. The Russian sponsor Alrosa, who set up its own sales channel after the end of the Soviet Union, now sponsors around every third carat. The Australian company Rio Tinto also established sales. Mines in Canada followed. The result: De Beers ’market share in rough diamonds is now only 35 percent.
In order to compensate for the dwindling income, the group looked for new fields of activity - and finally opened up the most lucrative market. De Beers was locked out of the US for six decades after the South Africans refused to ship industrial diamonds to the US during World War II for fear of falling prices. The US Department of Justice countered with competition proceedings, with the result that the group could only operate on the American market through middlemen.
But with the end of the monopoly era, the time seemed to have come to turn a new page. De Beers pleaded guilty to price manipulation in an Ohio court in 2004 and agreed to pay a $ 10 million fine. It was the prerequisite for establishing the retail brands De Beers Jewelers and Forevermark in the largest diamond market in the world. De Beers was now a retailer.The South Africans had loosened their grip on one end of the value chain - and were now playing the whole gamut.
All of Gaul?
Obelix looks like a five-foot-tall metal egg. The system hums, bluish light penetrates from holes the size of confetti. “Microwave plasma discharge under low pressure,” explains Christoph Nebel. Many details follow about nitrogen, boron, methane and substrates, until the scientist says a sentence that even laypeople understand: "Diamond grows in there."
Obelix: the comic book hero who owes his superpowers to a chemical magic potion. The fact that the researchers at the Fraunhofer Institute for Applied Solid State Physics in Freiburg named their diamond reactor this is evidence of humor. The qualified electrical engineer Nebel, 62, with glasses and shaved skull, has been working on the synthesis of diamonds since 1994. He's here, if you will, the Miraculix.
There are two ways to grow diamonds. Either you simulate a volcano and press carbon together under pressure and heat. Or you can use the chemical process, like the Freiburg method. In recent years, research has succeeded in growing diamonds to a thickness of more than five millimeters, which is what makes the material interesting for jewelry manufacturers in the first place.
"Most of the manufacturing costs are due to the energy," explains Nebel. “The gases required are super cheap. The most expensive is the depreciation of the plant. ”The difference between laboratory and natural diamonds? Nothing but marketing, says Nebel. In terms of their properties, they are identical.
The industry knows that, of course. And it makes her jitter. The largest manufacturers joined forces in 2015 in the Diamond Producers Association. Your “Real is Rare” campaign is intended to hammer the consumer: only what has grown in the earth's mantle is a proof of love. Of course, that doesn't stop progress. New competitors emerge, such as IIA from Singapore or Diamond Foundry, a breeding laboratory from California in which Leonardo DiCaprio holds shares.
And De Beers? Made purchases from Element Six, a leading Oxford diamond manufacturer. In a surprising U-turn, the group plans to launch Lightbox, a new line of fashion jewelry with laboratory diamonds, this autumn. “Maybe not for eternity, but perfect for the here and now,” says the company. The pricing: $ 200 per quarter carat. Dirt cheap.
In recent years, explains a company spokesman for the change in strategy, laboratory stones have repeatedly come onto the market that were not clearly marked as such. That confused consumers and cost the industry trust. That's why it's better to go on the offensive. "We have decided that the best strategy for us is to join in and march ahead."
Paul Zimnisky, a leading market analyst, calls this decision "very, very significant". Because the natural deposits of high-quality diamonds are running out, their prices are likely to rise in the foreseeable future. At the same time, a diamond-hungry middle class is emerging in India and China who cannot yet afford the really expensive clunkers. “De Beers is multi-track,” says Zimnisky. The group pushes expensive natural diamonds - and feeds new consumer groups on the other side of the spectrum. In the end, the market could split into two segments - and De Beers would be ahead in both. It's a move that Cecil Rhodes and Ernest Oppenheimer would have liked.
The article was published in Capital 10/2018. Are you interested in capital? Click here to go to the subscription shop, where you can order the print edition. Our digital edition is available from iTunes and GooglePlay
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