Anglo American last week announced its plans to sell off De Beers. Barring the unlikely outcome that another major buys it, than would signal the end of the era of large diversified miners operating diamond mines.
Rio Tinto will remain the only miner with a toe in those waters, but with the Argyll mine in Western Australia closed, and Diavik in Canada coming to the end of its life, diamonds will be of dwindling importance without further investment, something that the company is unlikely to do while prices remain low.
The reason for scepticism is easy to see. Diamond demand is looking exceptionally sluggish in the short term, thanks to slow Chinese buying, but the longer term is even more concerning. Synthetic diamonds, man-made stones that are chemically identical to mined diamonds, are now significantly more affordable. For perhaps the first time in history, there is a real existential threat to diamond mining as a commercial activity.
If the industry is to survive, a fundamental shift in perspective is needed. Rather than being treated as a dirty secret, mining will need to be moved into the spotlight. The answer could be vertical integration, with retailers and jewellers taking a stake directly in the mining industry, marking diamonds like single-origin coffee, rather than like Nescafe.
Veblen goods
Industrial diamonds actually make up the bulk of the stones mined and sold, but due to the lower prices they command they are only a narrow sliver of the industry’s revenues. Diamonds could, theoretically, be an investment, but the steep mark-ups that are normal in the industry make them an unappealing one, even at times when prices are trending up. The viability of diamond mining therefore rests almost entirely on the consumer market.
A jewellery-grade diamond is the ultimate luxury item. It has no utility, and unlike gold it does not even represent a particularly good store of value. It is the closest the real world has to a pure Veblen good, meaning that its desirability increases in proportion to its cost, without reference to other values. Big, high-quality stones are valuable because they are desirable, and desirable because they are valuable.
In such a market, it is no wonder that synthetic diamonds hit like a tonne of bricks. Consumers can buy a stone that is bigger and clearer, for less money. These cheaper stones directly sap the luxurious aura of mined stones, undermining the market as a whole.
The problem is that currently, jewellers have no real incentive to steer buyers away from these synthetic stones. The low wholesale price of lab grown means jewellers can enjoy just as big, if not bigger profit margins compared to mined stones, despite the lower sticker price.
But jewellers could come to regret this decision in the longer term, if cheap and cheerful synthetics tarnishes the image of diamonds overall.
The commodity cycle
De Beers laid the foundation of present day consumer diamond demand, when it ruthlessly pushed a confected tradition of using diamonds in engagement rings, cumulating in its legendary 1948 slogan “a diamond is forever”. For most of the 20th century, De Beers enjoyed a near monopoly of diamond supply chains. This allowed the company to exert tight control over diamond availability, combined with stewardship of branding and marketing that supported consumer demand.
The breaking of the De Beers monopoly, thanks to increased supply from Canadian and Australian mines, and then the rise of output from Russia’s Alrosa, drove a commodification of the diamond market. Prices began to rise and fall in the same cyclical pattern that characterises other commodity markets.
This price volatility is a necessary, and to a degree desirable feature for some commodity markets. Higher copper prices unlock new supply, lower copper prices spur fresh demand. But diamond demand is, to a significant degree, not price controlled. People do not rush to get engaged because diamond prices are low, or take their stones back to the jeweller when prices peak. Lower prices mean lower revenues, with very little benefit to long term demand trends.
Verticalization could help break that cycle. If retailers were to focus their advertising on specific mines, with specific stories, those products would be be more resilient in the face of competing supply, whether from new mines or from synthetics.
See no evil, hear no evil
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