Diamond Recycling and Synthetic Diamonds: Making the Impossible Possible

Living in time of ecological crisis, the benefits of recycling become more evident. Speaking about recycling, first what comes to one’s mind is plastic, used paper, metallic things and any other things you are surrounded with, but diamonds are the last you will think about, won’t you? “Recycled diamond” sounds like an oxymoron because in a way it excludes the slogan once offered by De Beers “Diamonds are Forever”. However, this is getting real. So if you what to find out more about diamond recycling as well as synthetic diamonds and demand for them, you should better read the article below:

Clean 1+ carat colorless synthetics are hitting the market for the first time, and with a consistent stream of recycled polished making their way back into the market, the dynamics of diamond supply may forever be changed.

Unprecedented Gem-Quality Synthetics

Last month, a 1.29 carat colorless “E” synthetic with almost no inclusions (the largest of its kind in history) hit the polished diamond market.  While synthetics have been produced since the 1950s, the technology has been primarily used to supply the market with industrial grade stones, not gem-quality diamonds.

In 1954, General Electric successfully implemented a super high-pressure, high-temperature (HPHT) technology that was capable of producing a diamond in a laboratory that was chemically identical to that of a natural one. The process involved exposing carbon and graphite to extreme pressure and temperature, mimicking the natural diamond creation process. More than 50 years later, versions of this process are still used to supply 98% of the world’s industrial grade diamonds. The downside of HPHT is that most of the diamonds produced are in shades of yellow and brown because of the presence of nitrogen in the manufacturing process.  There have been successful attempts creating colorless diamonds using HPHT, however the cost of doing so renders the method uneconomic.  More significant to the jewelry market is the use of HPHT to upgrade or “treat” natural stones improving the color and clarity.

About a decade ago Chemical Vapor Deposition (CVD) diamonds began to appear in the gem diamond market.  The CVD method can produce diamonds in a lower pressure environment than HPHT, using a gas such as methane and a substrate to grow diamonds. Diamond composition can be controlled to create a single crystal form allowing the production of very clean colorless diamonds over a carat in size much more economically than HPHT.

While HPHT has the advantage of using fewer ingredients and producing more diamonds more quickly, making the process most suitable for producing industrial grade diamonds, CVD is more suitable for manufacturing higher quality diamonds because the process permits more refined control over the chemical properties.

The record breaking 1.29 carat stone mentioned above was created using CVD, and is currently on the market for $7,633, about 38% cheaper than a natural equivalent which can currently be found on the market for around $10,500.

The impact that clean, colorless gem-quality synthetics will have on the jewelry market will greatly depend on consumer demand for non-natural diamonds, as synthetics currently only account for approximately 2% of supply (See Figure 1.1).  As a proxy, synthetic gem-quality rubies and sapphires have been produced in labs for more than 100 years, but their availability has not reduced the demand for natural stones, as the premium for natural over synthetic has held over the years.  It will take substantial shifts in marketing campaigns and consumer attitudes for synthetic diamonds to pose a significant threat to natural diamonds in the jewelry market.

Figure 1.1

Source: Bain & Co., Tacy LTD, Paul Zimnisky analysis

On a De Beers conference call in November 2012, when asked if the company is concerned about the impact of synthetics on their natural gem business, an executive said “so, while there may be a business for [lab-growth diamonds], we don’t see that it is a cannibalizing business of ours on the basis that we maintain the dream and the emotion and the symbolism and the luxury and the value associated with the natural diamond.” On the same call De Beers went on to express the importance of disclosure of synthetics to alleviate customer concern of being sold a synthetic when paying for the price of a natural. Technology has recently been developed capable of distinguishing synthetic from natural diamonds in a way that is financially and technically within the reach of jewelers.  In addition, there is an inherent incentive for jewelers to use proper disclosure when selling synthetics, as it would be fatal for a jeweler to be caught selling an undisclosed synthetic as a natural.

Synthetic gem-quality diamonds will most likely have a greater impact on technology than jewelry. There is unquestionable pent up demand for more affordable flawless diamonds in the semiconductor industry. Since diamonds have a higher thermal conductivity than any other material, diamond microprocessors can run at speeds that would cause ordinary silicon chips to melt. Flawless synthetics are demanded in other high-tech applications as well, including infrared radiation transmission and high-sensitivity sensors. Up until now, diamond use in high tech industries has been limited because the cost has been prohibitive, but expect new lower price points to unleash years of pent up demand.

Recycling/Re-Selling of Polished

Also impacting global diamond supply is the recycling of polished diamonds, which is by no means a new phenomenon but rarely talked about, and could account for 5%-10% of current market supply (See Figure 1.1).

Even at the high end of current estimates, recycling of diamonds relative to supply has been minimal compared to the recycling of other hard assets such as gold.  This is primarily because it traditionally has been difficult for consumers to sell-back diamonds.  Thanks to De Beers, historically the diamond market has been a one-sided market.  De Beers’ “A Diamond is Forever” campaign successfully convinced diamond buyers that you don’t sell something that is forever, you pass it down to the next generation.  Without consumers selling back their diamonds, there is no price discovery, and thus no fair market for diamonds, which allowed De Beers to set prices to their liking.

Despite the liquidity constraints of selling-back diamonds, there have always been instances in which diamonds have been resold.  For example, a diamond engagement ring sold regardless of price in an attempt to erase a memory after a divorce, or the desperate pawning of a gold ring with diamonds to payoff a debt (See Figure 1.2).   But sales such as these historically have not occurred frequently enough to significantly impact the market.

Figure 1.2

Note: Melee is a term for very small diamonds usually used to embellish larger diamonds.

However, in recent years, as high-quality rough is becoming more difficult to find, and more expensive to produce, the industry is seeing historic levels of recycling as high diamond prices rival the sentimental value of consumers jewelry.  In addition to higher prices, the availability of diamond pricing information available to the public on the internet is also leading to more consumers willing to sell-back.  As an anecdote, I surveyed some independent jewelers in New York’s diamond district, and it is was not difficult to find a jeweler willing to buy a diamond at a 15%-20% discount from the price that they would sell a similar stone.  It appears as if people are ‘hitting this bid’ as quite a few of the stores disclosed that up to 25% of their current inventory is recycled.

It’s worth noting that investment in diamonds is becoming increasingly popular, especially in Asia, as high-net-worth individuals are buying the rarest high quality diamonds and storing them away in safe boxes. These diamonds are temporarily taken off of the market as they are held in anticipation of price appreciation, and eventually ‘recycled.’  The investment community for diamonds is still very small though, estimated to represent less than 1% of current diamond demand (for comparative purposes, gold investment represents 40%-50% of current gold demand).

Its difficult to precisely quantify the overall impact that recycling currently has on the market given that most buy-backs take place in non-transparent environments such as independent or “street” jewelers, and pawn shops.  Most mainstream jewelers still do not buy-back.  In addition, a lot of recycled diamonds are recut by jewelers converting old shapes into more fashionable designs, making tracking recycled diamonds that much more difficult.

This information is taken from http://www.resourceinvestor.com/2013/05/22/the-impact-of-synthetics-and-recycling-on-the-diam?ref=hp&t=commodities&page=3

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