How the diamond industry lost its sparkle

0:00Eleanor Olcott: What happens next in the story of money? Nuveen has spent over 125 years helping clients answer this question. By investing in the growth of businesses, real estate, infrastructure and natural capital, we continue to deepen our expertise across income and alternatives so investors can confidently write the next chapter of their own portfolio stories. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. Earlier this summer, my colleague Eleanor Olcott traveled to a city in the central Chinese province of Hernan.

0:38Eleanor Olcott: We're in one of the jewelry markets in Zhengzhou. This is a building dedicated to jewelry sales. This market's name in English translates to more gold, more silver. But as Eleanor walks around this eight-story building, diamonds are the main thing catching her eye. Stall after stall glitters with them. You can see here there's lots of women trying on the shiny diamond earrings, which to the naked eye, they look exactly the same as their natural counterpart. These earrings she's talking about here aren't made with natural diamonds. You know, the kind dug out from the earth. These are created in a lab.

1:23Eleanor Olcott: And recently, their popularity has exploded. We've spoken to a couple of the shopkeepers who have been here for two to three years and say that people are becoming more and more accustomed to the concept of lab-grown diamonds.

1:48Eleanor Olcott: The shopkeeper's telling Eleanor that there used to be a lot of natural diamond stores in this market. But many had to close because of bad sales. Or they had to switch to selling these synthetic lab-grown stones instead.

2:06Eleanor Olcott: It was so clear that there was just like an abundant supply of diamonds. You know, you'd ask the sellers to have a look at the diamonds and they just bring out this like tray after tray after tray, just all jiggling with glistening stones. And it's a very different experience to going to these more traditional diamond retailers where they're all, you know, each diamond is carefully packaged in a box and they're presented really as this kind of rare commodity. These lab-grown diamonds have been great news for customers hunting for an affordable rock. They're cheaper and chemically identical to the real thing.

2:43Eleanor Olcott: But for diamond mining companies like De Beers, my colleague Leslie Hook tells me they're an existential threat.

2:50Leslie Hook: The scale of disruption to the natural diamond business is almost impossible to overstate. Almost overnight, these new chemically identical, physically identical stones arrive, and they're just a fraction of the price. And one of the big questions facing the industry is what does that mean for the companies that mine and sell natural diamonds? What does that mean for companies like De Beers?

3:15Eleanor Olcott: De Beers is one of the largest diamond mining companies in the world. And what happens to it next will be part of a very public test. Its owner has put it up for sale. And how that all plays out could say a lot about just how much lab-grown gems have damaged the natural stone industry.

3:36Leslie Hook: Everyone's waiting to see who's going to buy beers, how much will they pay, how much value is still remaining in the diamond sector, which for the past century has mined diamonds, polished them, set them into jewelry, sold them in engagement rings. Does that model of taking stones that come out of the ground and selling them in stores, is that still viable?

4:02Eleanor Olcott: I'm Michaela Tendera from the Financial Times. Today on Behind the Money. Lab-grown stones coming out of China are dramatically transforming the natural diamond industry. And as one of the leading producers, De Beers, heads for a potential sale, what's the future of this sector going to look like? And could Taylor Swift help save it?

4:34Eleanor Olcott: The epicenter of synthetic diamond production is in Hernan. That's the province Eleanor, who's the FT's China technology correspondent, took us to at the beginning of the episode. She says that the country's involvement in the industry goes all the way back to the 1960s. That's when trade relations broke down between China and the Soviet Union during the Cold War. At the time, China was importing the majority of its diamonds from the Soviet Union. And so during this period of tension, Moscow stopped exporting these diamonds, and China, lacking those reserves of natural diamonds, needed to basically build out its own capacity.

5:19Eleanor Olcott: Leslie Hook is the FT's natural resources editor. And she's been reporting on this with Eleanor. She says that the kind of stones China needed back then aren't really what you'd slot into a pair of earrings or a bracelet today.

5:32Leslie Hook: Diamonds can be really, really useful in a lot of industrial applications because they are so hard. They can be used in things like drill bits for drilling oil wells deep underground. They can be used for all kinds of grinding and specialized abrasives because they're one of the world's hardest substances, the applications in industry are quite widespread.

5:56Eleanor Olcott: So to get more diamonds, China starts growing them in labs. The industry, it was really servicing the industrial clients. So it was producing fairly low-quality, low-grade diamonds just for industrial purposes. These industrial-grade diamonds dominated China's synthetic stone production for years. That is, until about a decade ago. And so then what changed exactly going from these diamonds used for industrial purposes to being able to end up in a necklace or an engagement ring?

6:31Leslie Hook: Well, the technology evolved and the ability to make jewelry-grade synthetic diamonds became more accessible and cheaper over time as the machines to produce these became more affordable.

6:48Eleanor Olcott: Technological advances allowed Chinese companies to create aesthetic diamonds fit for making jewelry. When Eleanor visited Hernan, she got the chance to see that technology up close.

7:06Eleanor Olcott: Here, she's visiting the diamond factory of a company called Jare Fu. Excuse the bit of construction noise in the background. Jare Fu was founded by this very charismatic founder called Feng Tanjun, who we met at the factory. He was a former aerospace materials engineer. So again, here you see the connection that this industry has to the kind of industrial industry that really spawned it. He has set up a series of manufacturing sites creating lab-grown diamonds using the so-called high-pressure, high-temperature method. It's like a sauna in here. There's just row after row of these spaceship-looking machines, which are growing the diamonds inside.

8:01Eleanor Olcott: The company's founder, Feng Sanjun, shows Eleanor these spaceship-like machines. They're about 5 meters by 5 meters in size. And inside, something pretty spectacular happens.

8:19Eleanor Olcott: Each one simulates the Earth's immense pressure and high temperatures that form natural diamonds underground. After the diamonds are grown in the large machine, Feng tells her that they need some refining and cleaning.

8:40Oh, I'll take a picture.

8:44Eleanor Olcott: That's so cool.

8:48Eleanor Olcott: And then the graphite. Okay. He's just pulled out a big brown block where you can see the diamonds embedded inside and they will go into various machineries to get purified. Feng tells her that all the equipment's made in China. Chinese equipment's much cheaper than getting it from elsewhere. These sorts of advantages have allowed Fung and other manufacturers like him to undercut the natural stone competition. The biggest difference here is time. The method that Fung uses in order to grow his diamonds is basically trying to mimic the way that the Earth grows diamonds with high pressure and high temperature environments, but just do it in a much, much shorter time.

9:32Eleanor Olcott: So it can take Earth more than a billion years to form a diamond, and fun can do this in the space of a week. The space of a week versus a billion years. That's a massive difference. I asked Leslie about how that plays into the price of a lab-grown diamond compared to a natural stone.

9:53Leslie Hook: Well, the retail cost of a three-carat flawless diamond, which is kind of a larger size, like slightly larger than the average engagement ring, is around$57 ,000 in the U.S. And that compares to just$3 ,800 for the same size of a synthetic stone.

10:12Eleanor Olcott: That wild price difference is thanks to a few things. We've talked about China's huge manufacturing advantages on the show before. Things, you know, like cheaper labor. Another key one for diamond production specifically is cheaper electricity costs, since producing diamonds takes a whole lot of power. China's efficiency in this space is hitting natural diamond producers hard.

10:35Leslie Hook: We've seen that synthetic diamonds have really captured market share from natural diamonds. And surveys suggest that over half of engagement rings in the U.S. are already using synthetic stones. and diamond mining companies are really hurting. Some of them are revisiting their strategies. Smaller ones are going bankrupt. And there's been a big impact already on revenues. If you look at De Beers, for example, their revenue last year was just half of what it was in 2022.

11:08Eleanor Olcott: It's not only De Beers being affected by this. Companies like Russia's Alrosa, which is the world's largest producer of diamonds by volume, as well as miner Rio Tinto, they've both seen similar declines in their diamond businesses. And there are countries that are affected by China's domination of the sector. Take, for example, Botswana.

11:30Leslie Hook: Botswana relies on diamonds for between a quarter and a third of its GDP. And we've seen the government really stretched financially because of this downturn. We've seen an impact on hospitals, on social services. and in fact the downturn in diamond revenues for Botswana has become a real challenge for the government there.

11:54Eleanor Olcott: The natural diamond industry has weathered centuries of trade wars, actual wars, depressions, and pandemics. And they've made it out on the other side. But it's these synthetic diamonds that are giving the companies and countries reliant on the industry its biggest challenge to date. So how will this affect the upcoming sale of De Beers? We'll get into that next.

12:23Eleanor Olcott: The future of fixed income investing will continue to blur the lines between public and private markets. Nuveen's credit platform was built to navigate this shifting landscape, channeling capital toward the businesses, infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. As we heard from Leslie and Eleanor, synthetic diamonds are cannibalizing the natural diamond market.

13:01Eleanor Olcott: But we are likely to get a more clear understanding of the extent of that cannibalization as De Beers enters the sale process.

13:10Leslie Hook: De Beers has been put up for sale by its owner Anglo-American as part of a broader corporate restructuring happening at Anglo. And this sale has become kind of a litmus test for what is the future of natural diamonds going to be? Is there a future for natural diamonds?

13:27Eleanor Olcott: Anglo currently values De Beers at$4.9 billion on its books.

13:32Leslie Hook: But people that are close to the process, bankers and companies that are thinking about bidding say they'll be lucky to get one or two billion at this point because the natural diamond market has been so decimated by the arrival of competition from synthetic stones.

13:48Eleanor Olcott: While the impact of lab-grown stones will play a significant role in the sale, it's not the only thing threatening how much De Beers goes for.

13:56Leslie Hook: One is a sort of mismatch in supply and demand after the pandemic. So there was a sort of temporary boom in weddings had been postponed because of the pandemic. But then after that boom, we saw a real decline. So there was just a little bit of a kind of roller coaster in terms of demand patterns there that the mine supply didn't match. And right now, De Beers is sitting on about$2 billion worth of diamond inventory. Because demand has been so poor, it's really just kept hold of a lot of inventory to avoid flooding the market. Got it.

14:35Eleanor Olcott: So just kind of your classic case of too much supply, not enough demand. Yeah, exactly. Anglo-American is trying to sell De Beers by the first quarter of next year.

14:47Leslie Hook: They've had a first round of non-binding bids come in. They're around nine or 10 offers in that package. And interestingly, Botswana itself is in the running to buy De Beers since De Beers' biggest diamond mines are located in Botswana. And Botswana already owns 15 percent of the company. They say they want to increase that stake as part of the sale process. And the next couple of months we'll be finding out what the new ownership of De Beers looks like.

15:15Eleanor Olcott: And what happens if these bids don't work out?

15:19Leslie Hook: Well, Anglo has said that if it doesn't find a buyer for De Beers, then it will go to IPO and De Beers will become a publicly listed company. So Anglo is pursuing both the sale and the IPO process, hoping that a sale will work out, but the IPO is sort of plan B, if you will. There aren't any publicly listed diamond companies of De Beers scale on the market. So it would be pretty hard to know what sort of valuations De Beers might get if it went through a public listing process. I think Anglo feels that a sale process will allow it to maximize value and also allow for Botswana to decide what sort of role it's going to play in the future of De Beers.

16:06Leslie Hook: So the sale process is definitely plan A at the moment.

16:09Eleanor Olcott: And Leslie, why would you say that this sale matters for the diamond industry writ large?

16:15Leslie Hook: De Beers has always had a huge influence on the rest of the diamond industry. And they've often set the agenda in terms of marketing, in terms of the ad campaigns, but also in terms of some of the technology that they've developed to assess and grade diamonds. I think the rest of the industry is really waiting to see, you know, who ends up owning De Beers and what their vision is, not just for the company, but for the industry as a whole.

16:44Eleanor Olcott: No matter how that sale goes, De Beers and other natural diamond companies will still have to contend with these two huge issues. The expanding popularity of synthetic stones and the slump in demand that we mentioned. Leslie, what are natural diamond producers doing to combat these challenges? I mean, have De Beers or the other diamond companies tried making their own synthetic diamonds to compete with the ones coming out of China?

17:16Leslie Hook: De Beers does make synthetic diamonds itself today, but only for industrial uses like drill bits or lasers. So these are highly specialized industrial diamonds. Now, a few years ago, they did launch a synthetic diamond jewelry company called Lightbox. And the purpose of Lightbox was kind of to try and make the point that lab-grown diamonds are different than natural diamonds. And the strategy was to flood the market with low-priced synthetic diamonds just to illustrate how different these markets are. De Beers feels like that sort of ran its course. They proved its point. But once they'd done that, they didn't need to stay in that business.

17:59Leslie Hook: And Lightbox was shut down earlier this year. A lot of market analysts think that the flood of very cheap synthetic stones from places like Henan also contributed to the fact that it just didn't make sense to keep Lightbox going.

18:13Eleanor Olcott: The other thing that De Beers and other diamond companies are investing in right now is advertising. It's certainly worked for them in the past. That phrase, diamonds are forever, well, that was a De Beers ad campaign.

18:28Leslie Hook: De Beers has been the leader in advertising and marketing diamonds. That has been a key part of the business model. Now, over the past decade, they actually had reduced their advertising spend. And then that changed about a year ago when they launched what they call category marketing campaigns. And these are campaigns that just focus on natural diamonds. Might not even have the word De Beers, but it's all about a natural diamond that comes from the earth and trying to persuade consumers that that is better. And one of those campaigns is called Worth the Wait. Love.

19:07Eleanor Olcott: It starts with self-worth. Because to find someone worthy of us, we must first be worthy ourselves. In this particular ad, there are clips of young, happy couples going on dates, holding hands, laughing together, interspersed with shots of volcano eruptions and close-ups of diamonds and diamond rings. The diamond you choose should match your journey, match the patience you took to find each other, and match the resilience that formed the essence of your cores. And that is a natural diamond. Because just like your journey, a natural diamond is worth the wait.

19:53Leslie Hook: So advertisements like this are really trying to convey the value of the diamond and the value of the lengthy journey that the diamond makes as it's created and the journey of the relationship, the journey of love. one of the slogans, marketing slogans in the past was that an engagement ring should cost one or two months salary. And that idea that this is a huge milestone investment and that the diamond has a relationship to the love is one that is still really present in this messaging.

20:27Eleanor Olcott: So Leslie, how do you think this ad campaign compares to the Diamonds Are Forever slogan?

20:33Leslie Hook: One of the things that's striking about these ads is that they're really trying to appeal to younger consumers. And a lot of the people featured in these ads are definitely the younger generation. And I think that, you know, at present, buyers of diamonds may be older, but you really see that there's a real focus on younger diamond consumers here. As to how it compares with the slogan, diamonds are forever, I think that's a timeless slogan that there's a reason that we're still talking about it today. And this conversation, it's such a powerful catchphrase.

21:07Eleanor Olcott: Now, I want to know more about what you both think the natural diamond industry might look like, say, you know, five to 10 years down the line. Eleanor? I don't think lab-grown diamonds mean the total end of the natural diamond industry. In fact, the two can go hand in hand, right? You know, if you've got the resources available to you, it's not an either-or, it's maybe a both, right? Like maybe you get a really nice natural diamond for your engagement ring, but oh, you know, because the prices have come down so far, I can also buy myself diamond earrings or those diamond tennis necklace, which is kind of just stuffed with diamonds and only the absolute super rich would have been able to afford those back in the day.

21:49Eleanor Olcott: but now it's, you know, maybe a couple thousand dollars instead of several tens of thousands of dollars. So I think there has been a democratizing impact from the kind of growth of the lab-grown diamond industry. And this was really, really clear in Zhengzhou at that jewelry market. The seller said that a growing customer base of his are just single women, you know, who are just buying it for themselves because now they can afford to do it because they're so much cheaper, right? Like you can justify these purchases when it's a few thousand dollars rather than a few tens of thousands of dollars.

22:29Eleanor Olcott: Well, Leslie, what do you think? What might the natural diamond industry look like, you know, several years from now?

22:35Leslie Hook: Well, I think we don't quite know yet. And that's one reason why it's so fun to cover this as a beat is because everyone's trying to find out the answer to that question. I think one possibility is that the natural diamond market still exists, but it's just smaller and it's more upscale. It's really only for those very high-end customers who want to spend on a more expensive natural stone.

23:02Eleanor Olcott: Speaking of high-end customers, I gotta ask, Taylor Swift?

23:08Leslie Hook: Yes, we should talk about Taylor Swift. Yeah. Right.

23:13Eleanor Olcott: So she got engaged recently. And for those who somehow missed this news, she posted a picture on Instagram wearing a massive diamond ring. And, you know, it's not the first time that something Taylor Swift has done has led to some sort of economic impact. So could that happen here? What's the diamond industry's take on this?

23:36Leslie Hook: Well, her ring is a natural diamond ring estimated to cost six or even seven figures. It is a huge eight to 10 carat vintage stone. We don't exactly know the providence of this diamond, but definitely having Taylor Swift's endorsement, a big plus for the natural diamond industry.

23:57Eleanor Olcott: Behind the Money is hosted by me, Michaela Tendera. This episode was produced by me and Safia Ethman, with help from Claire Williamson. Fact-checking by Simon Greaves. Special thanks to Dan Stewart. Sound design and mixing by Sam Giovinco. Original music is by Hannes Brown. Topher Forges is the FT's acting co-head of audio. Thanks for listening. See you next week.

24:28Eleanor Olcott: The future of fixed income investing will continue to blur the lines between public and private markets. Nuveen's credit platform was built to navigate this shifting landscape, channeling capital toward the businesses, infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible.