The Diamond Cartel Panics

A lab-created diamond in New York on May 7, 2015. Timothy A. Clary/AFP via Getty Images

Commentary

Something strange has been happening in the diamond market in recent years. In an inflationary period where other “store of value” commodities such as gold and silver have been appreciating in value, diamond prices have been in free fall. Since peaking in March 2022, an index of diamond prices has declined by over 40 percent. Over the same three-year period, gold and silver prices have risen by 42 percent and 25 percent, respectively.

What explains the relatively sudden and fairly dramatic drop in diamond prices? Is it demand? Do women no longer see diamonds as “a girl’s best friend”?

The drop in diamond prices does not appear to be part of a normal demand cycle of highs and lows, one which eventually reverts to an upward trend. Rather than a cyclical decline, the three-year plunge in diamond prices may reflect the beginning of a long-term, secular decline. If so, this epoch marks the end of a 100-year-long, marketing-driven bubble in diamond prices. The answer as to why this may be the case lies in the supply chain, not in a shift in demand.

Nicky Oppenheimer, the deputy chairman of diamond conglomerate De Beers, once told a group of journalists: “A gemstone is the ultimate luxury product. It has no material use. Men and women desire to have diamonds not for what [the diamonds] can do but for what they desire.” De Beers was successful in creating its own demand with the mid-20th-century marketing campaign and slogan “Diamonds are forever.” De Beers’ efforts made diamonds the epitomic symbol of romantic love and marital commitment. The market for diamond engagement rings exploded, and prices followed suit.

This was quite a feat for De Beers. Among gemstones, diamonds are the least rare. Approximately 135 million carats are produced each year. Nearly five billion carats have been mined from the earth since the dawn of history. Only seven countries, four of them in Africa, along with Australia, Canada, and Russia, account for close to 95 percent of global production. Russia and Botswana are by far the largest, accounting for over half of the total. Only four companies, De Beers (South Africa), Alrosa (Russia), BHP Billiton (Australia) and Rio Tinto (Brazil), control two-thirds of the market. To this day, De Beers itself still controls 35 percent.

De Beers formed the Central Selling Organization (CSO) in 1934 to manage and regulate the global supply of diamonds. The CSO bought diamonds from mines worldwide, pooled them, and then sold them to a select group of buyers at prices determined by De Beers. The CSO enabled De Beers to restrict the global supply, stockpiling diamonds in periods of low demand and releasing them as demand grew. The CSO acted as a price-fixing cartel to maintain stable prices at higher levels than the market would have otherwise tolerated. Outside of the CSO, De Beers would buy up rival mines and negotiate exclusive purchasing agreements with competitors, wielding both monopoly and monopsony power.

De Beers’ stranglehold on the industry began to loosen by the end of the 20th century. Large new diamond mines were discovered in Canada, Australia, and Russia, countries outside of De Beers’ perimeter of control. Increased regulatory scrutiny, including effective anti-trust enforcement actions in the United States and Europe, forced De Beers to change its practices. Still, in an industry with only four major competitors, cartel-like behavior continued.

The real challenge to the diamond cartel has arisen only recently with the perfection of lab-grown diamonds.

While synthetic diamonds have existed since the 1950s, the technology wasn’t advanced enough to challenge the high-end of the market for natural diamonds. That is no longer the case. Advances in technology have made manmade diamonds nearly indistinguishable from natural diamonds in terms of chemical, physical, and optical properties, including hardness, color, and clarity. Modern lab-grown diamonds are essentially perfect, free from inclusions and other defects naturally occurring in mined diamonds.

Price is a significant consideration in the shift to manmade diamonds. A lab-grown diamond can cost less than one-tenth of its naturally formed and mined equivalent. A lab-grown diamond that is identical to a high-quality five carat natural diamond that might cost a consumer $250,000 at retail can be bought for $20,000. The lab-grown diamond comes with a Gemological Institute of America certificate and the diamond itself is indistinguishable, even by most gemologists, from a mined diamond.

Public awareness of “blood diamonds,” i.e., diamonds mined in conflict zones, led to an attempt to certify diamond sourcing. This effort proved flawed as the supply chain was easily compromised. Growing consumer appreciation of the horrifying labor conditions often present in mining diamonds, as well as environmental concerns, also plays a factor in the shift in demand for lab-grown diamonds.

Anyone involved in the traditional diamond trade has nothing good to say about manmade diamonds. But that is not surprising. Their livelihoods are at stake, and industry participants, from the humblest of neighborhood jewelers to the global luxury houses, are doing the best they can to maintain the illusion for as long as possible. Market prices, however, are telling them that the public no longer buys into the narrative.

Trends in the diamond market should give pause to anyone considering buying a natural diamond, whether as an investment or a symbol of love and commitment. While the diamond may still last forever, its value may not.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.