It’s Time To Regulate, And Rename, Lab-Grown Stones

It’s time to shine the spotlight on an issue that has the potential to devalue the prized possessions of people all around the world, and harm the livelihoods of millions of workers in Africa and other developing regions, says diamantaireEhud Arye Laniado. That issue is undisclosed, gem-quality lab-grown diamonds, and the risk that they will penetrate into the natural diamond pipeline.

Although gem-quality lab-grown stones are still produced in relatively small numbers commanding an estimated annual sales worth $0.5 billion a year versus $23 billion for natural diamonds[1], steady advances in technology are making their mass-production increasingly possible. This, in turn, makes the threat of significant leakage into the natural diamond pipeline increasingly serious – unless governments, international bodies, and the industry take decisive action to require that lab-grown stones are declared and tracked from origin.

Why, readers might ask, should the public and industry players worry about protecting the natural diamond pipeline? There is, after all, an argument being made that lab-grown stones can and should replace natural diamonds[2]. Not only are lab-produced stones are indistinguishable from the real thing by all but the most sophisticated equipment. They are also – or so the argument goes – environmentally cleaner, and they raise none of the socio-political issues involved in operating mines in developing countries. And, because they can be mass produced in limitless quantities, they will make “diamonds” affordable to a much larger public.

Yet this argument misses a fundamental point: natural and lab-grown stones are completely different creations, with completely different purposes and markets. A natural diamond is the rarest and purest piece of nature: no two stones are alike and each one is typically between 1 and 3 billion years old. By contrast, lab-grown stones can be endlessly reproduced by technology, at speed and scale. While natural diamonds are uniquely prized both for jewelry and as long-term stores of value, lab-grown stones have no intrinsic value and are an alternative material for jewelry manufacturing.

So, just as there is a place in the jewelry market for lab-grown stones, there is an enduring place for natural diamonds – which have the dual purpose of providing unique and rare jewelry, and a potential timeless store of value.

The uniqueness of each natural diamond is a powerful driver of the economics of rarity. Indeed, in recent years natural diamonds have not only maintained their value but have increased in price. Diamonds weighing 5 carats or more have gained 10%-30% in value since 2009 (with peaks of more than 60% during that time), while those weighing between 1 and 3 carats have gained 5%-20%[3] during the period (with peaks of more than 100%). Very rare colored diamonds are gaining value even faster – with prices rising 10%-20% year-on-year over the same period[4]

These economics of rarity are underpinned both by the rapid growth in affluent consumer markets (particularly in China) and declining supply as several major diamond mines approach end-of-life.

As McKinsey & Company concluded in a recent report on the future of diamonds: “Our analysis suggests that even under the most pessimistic demand scenario and the most aggressive supply s scenario, the fundamentals [of diamonds] will likely be positive, with demand outpacing supply growth.”[5]

The economics of rarity can also be observed in range of other fields, from art to antiques to vintage wines and cars. For example, a Picasso, sold for $160 million in New York, recently became the most expensive painting ever sold on auction; a flawless, factory-produced copy of the same painting is worth $100.

The economics of rarity reflect the fact that in a world where so much is instantly replicable (and rapidly disposable), there is a yearning for the original, the once-off, the timeless – and from Shanghai to Dubai, there is a wealthy consuming class, growing in size and sophistication, that is willing to pay for unique items of luxury. Just as importantly, there is growing recognition of the investment value of rare and once-item items.

But here is the problem. In the absence of clear, consistent and well-enforced regulation – be it by intergovernmental bodies, national governments, or the natural and lab-grown diamond industries themselves – there is every temptation for unscrupulous operators to pass off lab-grown stones as the real thing. There is thus a real threat of penetration of undeclared lab-made stones into the natural diamond pipeline.

Of course, counterfeiting exists in many other industries, from art to wine to food to luxury goods. In most cases, however, there is a robust set of legal measures in place to label a product for what it is, and to protect the rights of consumers and producers alike. Yet, while shipments of rough natural diamonds must be accompanied by a government-validated Kimberley Process Certificate attesting its origin, weight and value – a requirement that has virtually eliminated trade in “conflict diamonds”– there is no robust set of legal measures to combat undisclosed lab-grown stones.

This lack of regulation could have dramatic consequences for consumer confidence in diamonds. For example, undisclosed lab-grown stones could become the new “conflict diamonds” if they penetrate the pipeline and are passed off as rough natural diamonds. The difference in price between natural and lab-grown stones might be used for a wide range of potentially illicit purposes.

It is time to act. Governments, multilateral organizations, producers and retailers need to act in concert to define and enforce a clear set of rules about lab-grown stones. In particular:

• Lab-grown stones should require certification from the manufacturing lab all the way to the jeweler, as is already the case with natural diamonds. This would make lab-grown stones fully declared, and easy to track

• The use of the word diamond should be reserved exclusively for natural diamonds, as an enforceable trademark. Just as New World sparkling wines made using the same technique as champagne are not champagne – and may not be labelled as such – only true, natural diamonds should be allowed to carry the diamond trademark.

• Clear penalties should be put in place to prevent undeclared lab-grown stones being passed off as natural diamonds.

• Separate international customs codes should be set for lab-grown stones, to prevent confusion in value and improve international monitoring.

Achieving a clear, credible and enforceable distinction between natural diamonds and lab-made stones might not be easy, but the effort is important for every good-faith participant in both industries.

For producers of lab-grown stones, certification will enable them to market their product more clearly to a technology-ready, cost-conscious consumer base – without the risk of their reputations being sullied by association with apparent fraudulent practices.

For the millions of existing and future owners of natural diamonds, such regulation will protect what are often among their most important long-term stores of value. If such regulation is not enacted, many individual purchasers choosing diamonds for emotional and potential store of value purposes could be misled into buying lab-grown stones. As a result, they would be likely to suffer both emotional upset and financial loss.

Preventing the leakage of lab-grown stones into the natural diamond pipeline will also safeguard the sustainability of the diamond industry, which employs millions of people directly and indirectly worldwide, most of them in remote areas of developing countries. The large-scale penetration of lab-grown stones being passed off as natural diamonds would trigger a loss of confidence in the natural diamond industry – affecting the entire value chain, from producers right through to end users. Lawsuits, and financial losses would be the order of the day.

If no steps will be taken at a regulatory level, the industry will have to incur considerable expense to try to protect itself and prevent this outcome – when in reality the issue cannot be solved without the intervention of regulatory bodies, as was the case with conflict diamonds.

Last but not least, the required changes will safeguard the well-regulated diamond mining industry that is the mainstay of the economies of several African countries. In Botswana, for example, it accounts for 33% of GDP – and infiltration of unregulated lab-grown stones into world diamond markets would be devastating for the country’s employment, development and social services .

The natural diamond is a magnificent creation of nature. Each natural diamond will always be unique and impossible to reproduce – making it something especially cherished and valued by people in many different cultures, backed up by the economics of rarity. Lab-grown stones are testament to human ingenuity and the advance of technology, and they have an important market that will no doubt continue to grow. It is time for this industry to distinguish its product and protect its reputation, acting boldly to prevent misrepresentation.

Disclaimer: The views expressed here are solely those of the author in his private capacity. None of the information made available here shall constitute in any manner an offer or invitation or promotion to buy or to sell diamonds. No one should act upon any opinion or information in this website (including with respect to diamonds values) without consulting a professional qualified adviser.