Morgan Stanley: Synthetic (Melee) Diamonds Poised To Disrupt Natural Market

19/07/2016 19:01

Citing a Morgan Stanley & Co. International research report, JCK's Rob Bates writes that synthetic diamonds pose a threat to the diamond industry, in particular to the prices of small 'melee' diamonds, and could turn out to be, “a serious potential disruptor” to the established diamond market. "Still," writes Bates, "the Morgan Stanley analysts predict that lab-grown diamonds won’t totally triumph over naturals, at least in the near term, as this would require a 'massive investment in lab-grown capacity' and give diamond growers only a 'Pyrrhic victory,' since any growth in market share would be offset by decreased return on capital." The investment bank expects synthetic diamonds to take 15% share of the melee market and 7.5% share of the larger gems trade, causing prices in the mined melee market dropping 12% in value. Prices of natural large-sized diamonds will be unaffected, the analysts said. Melee is at risk because of the possibility that Chinese manufacturers will start to mass-produce smaller diamonds, possibly without disclosing their source, writes Bates.

The research estimated the size of the global synthetic market at $100 to $300 million at a wholesale polished level. At the rough level, it is valued at $75 million to $220 million, which constitutes just 1% of the global rough diamond market, though as mentioned, production is likely to rise. Countering this predicted surge will come at a steep cost to natural diamond miners and their relevant governments. Morgan Stanley analysts warn that miners need to, "boost marketing investment in the billions - representing 10 percent of overall rough revenue, more than De Beers used to shell out - and the development of screening technology that’s far more inexpensive than what is currently out there," writes Bates. “The midstream could theoretically switch raw materials and continue its operations seamlessly,” the report says. “Retailers could fairly simply start selling lab-grown diamond jewelry. Miners instead would see demand for their products fade.”

According to Rapaport News, "The Morgan Stanley analysts cautioned that ALROSA is 'more at risk' than De Beers to the growth in lab-grown diamonds since it has a higher proportional share of melee in its total production. They pointed out that both companies need to invest around $200 million each in marketing, or at least 5 percent of revenue, to combat the threat."