Morgan Stanley analysts warn that miners need to boost marketing to past–De Beers levels

Lab-grown diamonds could prove a “serious potential disruptor” to the established market and will likely hurt the price of melee, according to a new report from Morgan Stanley & Co. International research.

Still, 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.

On the other hand, the natural sector won’t likely emerge totally victorious either, as that would require a 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.

What is most likely, it suggests, is a mid-range scenario in which synthetics enlarge the overall size of the market and claim 15 percent of the small-stone sector and 7.5 percent of the large. That would dent prices for melee but not bigger stones. Still, even this scenario assumes greater marketing investment from the diamond miners, representing 5 percent of overall revenue.

Melee is at risk because of the possibility that Chinese manufacturers will start to mass-produce smaller diamonds, possibly without disclosing their source. It is also more expensive to detect melee compared to the stones’ value.

Any marketing must come from producers and affiliated governments, the report argues, since they have the most to lose.

“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.”

The mined industry does have one marked advantage, authors conclude: It has well-established distribution channels and a coherent message. By contrast, the lab-grown industry is still fragmented, with a hodgepodge of business models, marketing pitches, and nomenclature (from cultured to grown).

It is difficult to find accurate figures on synthetic production, it adds, but most believe it accounts for a range of about $75 million to $220 million in rough terms annually, about 1 percent of the overall market.

Rob Bates

JCK News Director