Lab-made diamonds for less: Why De Beers’ plan worries rivals

While De Beers says its strategy will eliminate customer confusion over man-made diamonds and their natural counterparts, some producers are crying foul. The lab-grown industry has filed a complaint with the U.S. Federal Trade Commission, accusing De Beers of price dumping and predatory pricing.

“De Beers aren’t stupid,” said Chatham Chief Executive Officer Tom Chatham, who filed the complaint. “They know how to grow diamonds, but this equipment is not cheap. They are selling below cost.”

De Beers CEO Bruce Cleaver has said he expects its lab-made gems to be profitable, while adding that it’s not going to be a big business for the company.

Diamond History
Diamonds grown in labs have the same physical characteristics and chemical makeup as mined stones. They’re made from a carbon seed placed in a microwave chamber and superheated into a glowing plasma ball. The process creates particles that crystallize into diamonds in weeks. The technology is so advanced that experts need a machine to distinguish between synthesized and mined gems.

While De Beers has never sold man-made diamonds for jewelry before, it’s good at making them. The company’s Element Six unit is one of the world’s leading producers of synthetic diamonds, which are mostly used for industrial purposes. It has also been producing gem-quality stones for years to help it tell the difference between natural and man-made types.

So far, De Beers’s strategy seems to be working. The premium natural diamonds command has widened since the company’s May announcement, with the 1-carat and half-carat stones it’s going to be producing suffering the biggest prices declines, according to industry analyst Paul Zimnisky. The discount on a half-carat man-made stone has ballooned to 38 percent from 24 percent, Zimnisky’s data shows.

“There’s no question that the announcement has caused people to question whether the margins people are currently making are sustainable,” said De Beers’s Cleaver. “I certainly wouldn’t expect the premiums to be at anything like the current prices.”

While De Beers has said it isn’t trying to disrupt existing lab-diamond producers, who have a small, but growing, share of the market, the company has a history of using price as a weapon. When Zaire — now the Democratic Republic of Congo — decided to sell its stones independently of De Beers in the 1980s, the company dumped huge amounts of similar stones onto the market, crashing the price. Within two years, the African nation had returned to the De Beers fold.

The latest move also holds risks for De Beers. By offering lab-grown diamonds at such a steep discount, the company may erode demand for the industry’s lower-quality products that sell for less than $200 at retailers like Walmart Inc. The five-year slide in prices for this sort of diamond — which make up about 80 percent of supply, but only 20 percent of profits — has continued since the announcement.