Rapaport Magazine

Why Lab-Grown Cutters Struggle to Find Rough

Many traditional diamond manufacturers want to get their hands on synthetic material, but contrary to popular belief, consistent supply is hard to obtain.

By Joshua Freedman

They may not admit it, but almost every major Indian diamond manufacturer has tried producing, cutting or trading lab-grown goods. Often setting up distinct entities that deal in the category, they have entered the market over the past two to three years in search of better margins.

This appears to have proven a sound strategy. Companies are still reporting better profits on lab-grown than on mined stones — even though margins for the former declined on both the midstream and retail levels last year, according to a recent Bain & Company report titled “The Global Diamond Industry 2020-21.”

Still, one obstacle has made operating in the synthetics sector hard: The difficulty of obtaining a consistent rough supply.

“Rough in lab-grown right now is the most challenging thing to get,” says Marty Hurwitz, CEO of MVI Marketing, which advises several companies on how to get into the sector.

Many established manufacturers, especially De Beers sightholders and Alrosa contract clients, are used to buying large volumes of rough on a regular basis. This enables them to offer polished to customers via fixed supply programs. However, “in order to do [these] programs, you need scalable quantities of rough, and you need consistent supply, repeatable supply of the same qualities,” Hurwitz explains. “And very few growers are skilled enough to provide that.”

Brains needed

Hurwitz rejects the “common misunderstanding” that lab-grown producers can just churn out whatever goods they want en masse. Only the market leaders — such as Maryland-based WD Lab Grown Diamonds, on whose board Hurwitz sits, and Israel’s Lusix — can do this with high-quality results, he asserts.

“There’s a real shortage of human scientists that have experience in growing diamonds,” the executive explains. “There’s plenty of capital to put up machinery. The human intellectual powers [are what’s] in short supply.”

Still, consistency is possible if production runs are substantial enough, says Naman Parikh, founder and owner of New York-based grower Fenix Diamonds, which supplies synthetic polished. Parikh is from the same family that owns India-based sightholder Mahendra Brothers, though the two companies are legally separate.

“If you’re looking at the output from one machine, five machines, 10 machines, you may get a variable result,” he states. “But when you have a much larger quantity being manufactured…you will start to see trends and patterns. You might get more [stones of] 7 carats one month than you had previously, but most of the time, it remains within the range. The rough sizes are pretty similar across a big production.”

Production runs happen every few weeks. That said, there aren’t enough goods at present for producers to hold periodic trading sessions like the contract sales that take place in the natural industry.

“Most of the prime growers have sold out for the rest of this year and are already taking orders [for] 2022,” Hurwitz points out. “Nobody is presenting product every six weeks to a group of customers.”

Pricing: A complex picture

These procurement difficulties have lifted demand for lab-grown rough, supporting prices, Hurwitz continues.

Pricing is a controversial topic in the lab-grown market. At the end of 2020, a 1-carat, G-color, VS-clarity polished synthetic stone was 80% cheaper at wholesale than the equivalent natural diamond, according to the Bain report. For comparison, the discount was 45% at the end of 2017, the report said.

However, the situation is more complex than that, Hurwitz argues. The price declines are in the lower-quality goods, most of which come from India-based growers that produce them using chemical vapor deposition (CVD), he says. Much of this material comes out of the reactor looking brownish, and requires post-growth treatment.

In contrast, larger and higher-quality goods — as well as those that don’t need post-growth treatment — have maintained their price levels, Hurwitz states. (Whether untreated — or “as-grown” — stones deserve a premium is another debate in the trade.)

“In order to grow bigger sizes that yield, say, 2-carat-and-above polished with as-grown, you have to be really good at the science and have really good scientists, because the longer you grow, the more things can go wrong,” stresses Hurwitz. Many firms stop the growth process short to avoid these problems, and then improve the color at a later stage. “That is the bulk of the product coming out of India. And most of that is 1-carat polished goods [with] G, H, I color. That’s very viable product in commercial markets, and that’s what’s been heavily discounted.”

The right goods

The realities of the synthetics industry have left some of the traditional manufacturers disappointed, says Ben Hakman, a consultant on lab-grown diamonds at New York-based Diamond DNA Solutions. Natural-diamond cutters entered the market because their customers wanted the goods, “but they don’t understand the lab-grown business,” he claims.

Many tried to maximize yield — as they do in natural — by manufacturing emerald, radiant, Asscher and princess cuts in polished sizes above 3 carats, Hakman explains, but most of the consumer demand is for 1- to 2.99-carat stones in all shapes. “And not knowing the market is what’s causing prices to drop, because…everybody’s got the wrong inventory.”

There are a few ways of buying synthetic rough. One is signing up for supply in advance, according to Hakman. Customers will give CVD growers the measurements they require, as producers can design the diamond seeds to help determine the outcome. Because of the strong demand, the purchasers will also leave deposits, he adds. Another option is leasing one or more reactors and gaining the rights to all the goods that come out of it, though the machines themselves stay with the owners.

Bigger future

The CVD rough market is still small. Most growers have enough demand that they don’t need to offload any rough, says Parikh; rather, they process it all and sell the polished, usually outsourcing the manufacturing to specialists in India, as Fenix does. Much of the rough is grown in India as well, though some goods come from reactors in China via Hong Kong.

CVD synthetics are simpler and faster to cut than natural stones, Parikh adds, and have a lower risk of damage. “You never need to worry about different shapes or models in the rough. The CVD rough is all cubic in form. Not only that, it is all type IIa, the highest quality of material, and so there is far less tension compared to mined diamonds.”

Rough diamonds grown via the High Pressure-High Temperature (HPHT) process, meanwhile, have more of a market. Most of these goods come from producers in China that supply the material to polishers, market participants said.

“In the future, as [CVD] production continues to ramp up, that is when I believe rough sales will start to develop and become a much larger component of the overall business,” predicts Parikh. “It’s like a baby today, and everyone is just starting to explore different channels and opportunities. There’s no market standard. [It’s not like] when you see a De Beers box of 5 to 10 carats and you know what to expect in terms of the quality and pricing. There’s nothing like that yet in lab.”

Article from the Rapaport Magazine - September 2021. To subscribe click here.

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