Industry consultant Ben Janowski takes an in-depth look at the developments that led De Beers to enter into the laboratory-grown diamond jewelry sector, and what Lightbox may mean long-term for the mining giant. Published in full courtesy of Ben Janowski, who will be lecturing at the Antwerp Summer University program, "From Mine to Finger 2018: A deep dive into the world of diamonds."*
De Beers has announced the formation of a new company, Lightbox, which will be selling man-made diamonds (MMDs), mounted in earrings, pendants, and bracelets - no rings.
I will assume everyone has read the details and heard their rationale for claiming that this move will have little or no impact on the natural diamond business. Briefly, they will be selling MMDs in finished jewelry with total weights up to one carat, mounted in silver or gold, and with simple pricing - $800 per carat. There is no grading of the stones, which are white, yellow, blue or pink; the jewelry is meant for “moments”, not “milestones” (like weddings).
De Beers has arrived at this moment after a few decades of seeing their business transformed from a monopoly into a commercial venture facing all the pressures of a competitive market.
At the turn of the century, Rio Tinto, with their major mine at Argyle in Western Australia, went their own way, sensing that they would do much better by selling directly to cutters, especially Indian companies, than by contracting to sell productions through De Beers. Then came the EU, forcing Russia to cease selling their productions through De Beers. Then Botswana started to take a larger and larger share of the profits from their major mines. De Beers, in what seems like an appropriate response, liquidated most of their $5 billion stockpile, as its function as a market buffer was coming to an end.
De Beers initiated or supported a variety of actions aimed at maintaining their market position. That included Supplier of Choice; CSR; the Kimberley Process; beacon programs; the co-venture with LVMH to open De Beers stores (now fully owned by De Beers); and developing a brand, Forevermark. Beneficiation became the new buzzword in Africa, as De Beers was induced to yield more profits and control in Botswana, South Africa and Namibia. It would be fair to say that all these efforts, aimed at maintaining industry leadership, have met with mixed success.
All of this occurred during a period in which diamond prices became more volatile and many mines began to approach end of life. Major productions of diamonds are in decline, not only for De Beers but all producing nations, and it will continue that way in the future. Some mines have already closed; others will be closing almost annually.
None of this was lost on anyone in the industry, and De Beers, who has always planned well ahead, must have gone through continuing reevaluations of their position and what their future might be, or could be.
De Beers had been very successful over many years in nurturing their sightholders, with three main objectives in mind, aside from maintaining their monopoly. First, see to it that sightholders made money, but not too much. Second, get diamonds downstream with the lowest possible intermediate markups, partially by generating competition between the sightholders. And third, see to it that diamond supply stayed close to demand so prices could rise, achieved most of the time by controlling stock levels and mine productions. And, of course, all that would work as long as De Beers was a monopoly. Now, all of that is essentially out the window.
So, the thought process had to turn toward imagining the company’s business in the future. For one thing, very early on, start producing MMDs if mining did not have long-term viability and profitability. GE and Sumitomo had already been doing it for decades, and supplying industrial grades would keep De Beers in that business. And, unlike GE and Sumitomo, De Beers would also have the objective the acquiring of the skills to produce gem-quality diamonds. Selling diamonds for $800 a carat is much better than $1 a carat for industrial bort. It must have been clear that the historical core business, mining gem-quality diamonds, would hit a wall someday. That wall is now in view.
This led De Beers into a new four-part structure: Producing MMDs, owning retail stores, developing an international brand and manufacturing jewelry. And, of course, work the mines as long as they remain viable.
Those internal discussions must be continuing daily, as none of this comes easily. But the tilt is clear; the miners are steadily being edged out by the marketers. What better evidence is there of evolution from the old De Beers than the Oppenheimer family selling their interest and stepping away?
The decision to develop Lightbox is, by far, the most momentous move the company has made since the creation of the cartel, one that many observers in the industry have long been expecting. De Beers has the skills in the Element Six division to mass produce gem quality MMDs. So here is how I guess the decision process might have gone in developing a 10-point program:
This survey, which I have not seen, gave them what they wanted - an indication that the major impact will be on costume and Moissonite. Given a choice, will a consumer not pick MMDs over wannabe simulants like Moissonite or CZs? That’s an easy one.
The reality is that retail price points up to $1,000 are critical to all jewelry retailers. It represents the bulk of the traffic for all mass and mid-market retailers. The range is important for establishing relationships with consumers. This is not an underdeveloped range in the market, but a good deal of it has been taken over by silver, lower karat gold, and non-precious materials, especially with gold prices staying high. And diamonds have very much been in this range. So, I do not buy the claims based on this survey at all.
So far, De Beers cannot be faulted in what they have done. This is straightforward business planning for a company that is feeling the obsolescence of its business model.
The question remains, what else are they planning, and what will be the real impact on the industry?
It seems very unlikely that De Beers would be taking this direction, plunging into a product that has been attacked by many diamond people, just to pursue this very limited range of fashion jewelry. That would leave them a minor player in the future diamond business. Also, spending about $100 million to build a new factory in Oregon could not be justified to sell “moments” jewelry. Nobody can reasonably think that is their short or long-term objective.
I have long thought of MMDs as the logical product to fill what will be a growing hole in the supply of diamonds as mines expire, the earnings gap grows, and a large, new middle class rises in Asia. We already see retailers hastening to add MMDs to their selections, a trend that will accelerate as competitors feel obligated to follow suit. The timing of such a trend really booming is hard to predict, but it is approaching quickly.
If De Beers wants to position itself to be the key supplier when that trend matures, it cannot wait until it happens and then try to plunge into the market with MMDs. It needs to start now with this innocuous effort and work to establish its position well in advance. And clearly, it is willing to do so knowing that it will potentially create chaos and disrupt the natural diamond business. This is a calculated risk, but one that De Beers almost has to take if it will remain a factor in the business over the long term. And long term is what De Beers has always focused on.
No one should underestimate the effect that Lightbox will have. It is going to disrupt the natural business to a far greater degree than has already occurred. Lightbox has made MMDs a totally acceptable product. It will incentivize those already producing MMDs to ride this new coattail, increase production and pursue technological advancement. It will force many retailers to seriously consider carrying MMDs from Lightbox, and undoubtedly from many other companies.
It may also accelerate the decline in natural productions because MMDs, in the most popular sizes, will be far better quality than naturals and at far lower prices. Exploration and development of new diamond mines may slow considerably as companies will seek near assurance that the productions will have high value. Existing mines may become unprofitable, and some may alter their extraction processes in order to avoid the costs involved in producing low quality diamonds. The recycling of existing diamond stocks will boom further. Most importantly, there will be little reason for naturals and MMDs not to be mixed in the manufacture of popular jewelry and fully disclosed as such.
Many other aspects of this evolutionary and revolutionary moment occur to me, but these are perhaps subjects for future posts. To believe that De Beers will not expand the range of this line to include rings and more expensive products is foolish. The same is already true for many other manufacturers using MMDs - and De Beers will have to be there eventually if they are in fact going to be the top dog.
The attempts by various institutions in the industry to fight the expansion of MMDs, and even punish dealers who would dare to carry MMDs, is not only counterproductive but will also guarantee that the disruption to come will be even more painful than it needs to be.
Ben Janowski founded Janos Consultants in 1992 and has specialized in the gem and jewelry industry for over a quarter century.
*The summer school course will take place from 27 August until 7 September 2018, a collaborative effort between the University of Antwerp and the Antwerp World Diamond Centre.
Image: Courtesy of TheHustle.com