A Diamond Market No Longer Controlled By De Beers
kitco.com
kitco.com
As many people with an expensive luxury brand can tell you (whether it's a handbag or a car) nice things are often nice way beyond what they really are or what they tangibly provide. (And there is nothing wrong about that..)
Let's call it "the mother test". In other words if you gave a luxury car to your mother and she didn't know it was a Porsche Panamera Turbo how much pleasure would she derive out of it over a Toyota Avalon or a Cadillac CTS (relative to the price differential)?
Put another way if a woman gets a kick out of a Coach handbag how would she feel if the handbag was a very good (licensed) replica of the Coach instead of the real thing?
How many people with expensive Chef's kitchens derive pleasure out of them and actually don't even cook that much? And would rather have a kick ass Chef's oven rather than a GE oven? Just because the marketing has convinced them of value?
My point is simply they are happy spending the money and getting what they are getting and there is nothing wrong or deceptive about that practice.
You're not just paying for the badge (though you are paying for that too)
That said, I own a sports car despite being aware of this because I love driving it. It's much more enjoyable than an econobox even if that guy beats me to work owing to lane choice.
People are being fooled into thinking 'things' will make them happy. But the return is deceptively low aka they are being deceived.
* Transport
* Comfort
* Speed/Power/HP
And the diamond only provides features:
* Shining
* Weight/Karat
http://web.archive.org/web/20120923200747/http://www.overtco...
The decline in market share can't be understated on its effect on the diamond industry - DeBeers market share has gone from 90% to 40% in the past 10 years, and as a result, their pricing power has disappeared.
Before, DeBeers had a take it or leave it price - sight holders essentially had a choice to accept the price DeBeers offered, or basically go out business. Now, any company who wants to buy rough diamonds has the ability. Whereas most people here have commented that the prices of diamonds should decrease, on the contrary, prices have increased. More people have access to the diamonds - demand has exploded.
The decline in market power of DeBeers has been an exciting time in the industry.
If be happy to answer any questions - it's a fascinating industry.
Could that just be an effect of an already conditioned market? If I were to sell diamonds from my own mine, and they were moving at the prices De Beers set on their product, why wouldn't I keep my price high?
In all seriousness, do not confuse the price of a rough diamond with the price of a polished diamond at a retail store - there's likely a 100% markup. If you were to trade in used rough diamonds, you'd find the price close to freshly mined rough diamonds (though the profit margin for the cutters/polishers is tiny).
http://blog.priceonomics.com/post/45768546804/diamonds-are-b...
For example, I want to beat my competitor. So why I don't I dump diamonds on the market at some ridiculous price and eliminate De Beers virtually overnight? Once I've cornered the market and have a monopoly, I can start to jack up the price again saying whatever I feel like (there's a new diamond shortage) and charge whatever people are willing to pay, which would hopefully be eventually close to what the market was paying before or even higher.
Or I might sell my diamonds at a price higher than De Beers and make some marketing claim that my Diamonds are only of the highest and rarest quality for <insert reason> and if I do a good job and am lucky get people to move up to my price. Or I might certify my Diamonds with a 100% money back guarantee within 1 year of purchase or some nonsense (betting that most people won't sell back their Diamonds that soon after purchase, but using that guarantee to justify the higher price) or whatever.
I can keep my prices at De Beers' high price or do whatever I want. The Market merely informs me of what will sell, defining the envelope of how I can manage my business to stay in business.
Two more points:
a) Considering a chat app pulled in billions of capital, it's not like there isn't billions of capital available. Now that I have such capital in hand, it sounds like I'm pretty well situated to make this a practical idea.
b) Why mine? Why not just grow? The diamonds are of better quality. Why can't I be the SpaceX of diamonds, start from first principles and build my own diamond growing tools, start mass producing 1-2 carat diamonds and dump them on the market. Set up regional diamond growing facilities each turning out thousands of diamonds a day, 24 hours a day. They'll be virtually indistinguishable from data centers, just huge warehouse like buildings next to readily available power substations. Since I have billions of startup capital, this is pretty feasible. Not only will I be mass producing diamonds, I'll be mass producing the diamond growing equipment, driving my per unit price down significantly.
Better yet, my diamonds will be of a higher quality than anything De Beers can dig out of the ground.
http://www.crunchbase.com/organization/whatsapp
EDIT: number was slightly off
There's also plenty of companies outside of the internet app space that raise staggering amounts of money comparatively.
Mining is no different. Unless I'm independently wealthy, I'll likely need investors to execute on just about any business idea.
Ultimately any real goods business requires capital to get off the ground. I'm not going to just start digging a hole in my garage and bootstrap a diamond mine that will disrupt De Beers.
Are you just being purposely obtuse?
I don't really see how your first point follows at all. The capital required to fund the first 1.5 years of WhatsApp's existence was a mere 250K. Getting it to a $14B company took only $58M in outside investment. Do you really think investing in a diamond mining company would resemble that profile at all?
If you really can't see the difference between the investment risk in a mining operation to challenge a 90% marketshare conglomerate, vs an investment risk in a 50 person internet startup, I don't think there's a point in debating any further.
So by this logic, anything that's not a high risk, high gain investment vehicle isn't worth the time? Better not tell the entire non-VC investment market that.
> If you really can't see the difference between the investment risk in a mining operation to challenge a 90% marketshare conglomerate, vs an investment risk in a 50 person internet startup, I don't think there's a point in debating any further.
De Beer's doesn't own 90% of the market anymore. They're vulnerable on two fronts, manufactured diamonds and diamond mines they don't own, both providing product at a lower price than they've traditionally commanded as a market monopoly.
More importantly, how exactly do you think new mines and new mining companies (of virtually any kind) form exactly? According to you, they're virtually impossible and we shouldn't ever see them. But we see them all the time. Mines are investments just like anything else.
But look, if you're going to just keep inflating perfectly normal business barriers that affect any kind of business into reasons why somebody shouldn't get specifically into the diamond business, then it's you who probably shouldn't get into the diamond business.
Somebody else with investment capital to burn sourcing product and building a market, like every other business in history, shouldn't let you get in the way.
Read the article. De Beers didn't lose market share to a new mining start up, they lost it because political issues caused certain partners to leave the cartel (especially the Russian and Australian mines).
It was only when the cartel was severely weakened that the newer Canadian mines were able to opt to sell their diamonds independently, at which point De Beers had already fallen to 50%. Even these mines are not startups: the Diavik mine is majority owned by Rio Tinto.
>>> But look, if you're going to just keep inflating perfectly normal business barriers that affect any kind of business into reasons why somebody shouldn't get specifically into the diamond business, then it's you who probably shouldn't get into the diamond business.
My point is that the barriers are harder for diamond mining than for other businesses, like chat apps in 2011. Dismissing the barriers for a highly capital intensive and risky industry with a small number of major players seems reckless and makes it hard to take your points seriously.
>>> Somebody else with investment capital to burn sourcing product and building a market, like every other business in history, shouldn't let you get in the way.
Nobody is standing in your way. Go build your diamond company. You don't need the permission of Hacker News.
Since the fixed costs and barriers to entry are so high, you would take on a ton of debt or issue shares just to get to this point. Your creditors and investors would demand that you start turning a profit. So you would have to sell at market price or higher.
Then you need to look at other barriers to dumping your product: Do any of the buyers have contracts with DeBeers that lock them in for the near term? Are there legal restrictions or trade agreements to prohibit you from dumping? Does DeBeers offer additional services or terms that keep merchants locked in beyond the price? etc...
Then, of course, you need to sustain the low prices long enough to drive DeBeers out of business, all while assuming DeBeers doesn't just match your prices and drive you out first.
Things like this are not done on the front page of HN very often, if ever.
Pricing myself into the market doesn't mean I have to lose money. It just means I have to undercut my competitors.
There's lots of reasons not to do this but I'm starting to think that there's a lot of people on HN who don't know how pricing strategies work.
Overcome that barrier to execute on your chosen business strategy is how the world works. If you can't overcome the barrier then you can't execute. Simple as that.
Either you can raise capital and build up an inventory of diamonds or not. This isn't rocket surgery.
One more time:
You asked: "Why didn't anyone just enter the market and undercut De Beers?". The answer for a long time was: "Barriers to entry, and low probability of success given the risks involved".
This has nothing to do with not understanding pricing strategy. I don't know what you are arguing about anymore.
Do everyone a favor and if you are considering buying a diamond as an engagement ring, have a chat with your significant other and see how they feel about lab created diamonds. They are cheaper and much higher quality and leave everyone happier all round.
Diamonds are cheap and easy to appraise, and with laser etching easy to identify. I buy all my ice with AGL certs off eBay.
There are more degrees of freedom than with something like gold coins, so diamonds aren't fungible. It adds complexity but I don't think it hurts resale that badly.
If the resale market were so much cheaper, that's where everyone would buy their stones, right?
"De Beers liquidated their stock pile from 2000 to 2004, resulting in a modest decline in diamond prices as the liquidation supply more than offset new demand coming out of Asia"
Here's an FT article on the subject: http://www.ft.com/intl/cms/s/0/c8b7e3de-cf33-11e0-b6d4-00144...
There is no reason to believe that the price of diamonds at the time De Beers lost control was not at approximately what the market could bear, especially now that they have liquidated their supply-controlling stockpile. Growing demand from developing countries and speculative pressures that would not have existed before could certainly account for increasing diamond prices.
Essentially, if you bought through De Beers then you had a 'conflict free' diamond, with a diamond from anyone else then you were taking your chances. Although the KPCS had noble intentions it also was a means of controlling the market.
Maybe that is why we had concern about 'conflict diamonds' in the first place - De Beers needed a new way of controlling the market and it ties in with a lot of the narrative presented here.
De Beers used the film Blood Diamond with DiCaprio as a positive marketing tool (they bought advertising with it -- 'De Beers presents...'). It popularized the notion of 'conflict diamonds' and then they calm the fears of their customers with the certification mechanism. More importantly, it creates legal opening for countries to ban the trade in non-certified diamonds.
Ah, found it: KPCS only covers diamonds traded for weapons, it doesn't cover slave/child labor, environmental abuse, or any other crimes committed during mining for DeBeers diamonds.
http://en.m.wikipedia.org/wiki/Kimberley_Process_Certificati...
I remember following this as an amateur geologist but never heard anything more after the diary entry found here...
http://www.classroomatsea.net/JC007/diary/diary_12-04.html
I assumed this would have a significant effect on the supply since they indicated that they got over 150 carats simply by dragging a bucket across the sea floor.
> But before that, as the First of April passed into the Second, and then to the Third, our delight turned from scientific wonder, to greed, and finally to suspicion concerning the amazingly prolific haul of gems from the abyss.
This is especially interesting considering Tiffiany's earning reports this week which showed a substantial part of their post recessions profits is now in the low end consumer goods.
Not only through market control. Diamonds are sort of rare in themselves too.
I recall reading a decade ago the only flaw with the man-made gems was that they were, indeed, flawless.
The Wired article about synthetic diamonds from 2003 was full of hype and misconceptions. Most all synthetic diamonds grown today are not flawless, and that is not by design. However, in the last couple years lab-grown white diamonds have become much more available in normal jewelry-quality ranges: http://d.neadiamonds.com/lab-created-diamonds/White-Diamonds
^ Disclosure: I'm an owner of D.NEA and have been selling jewelry-quality synthetic diamonds for many years.
I also believe that is the article I was referring to... IIRC the 'white' conundrum was the big impediment to mass production... much like the recent breakthrough in LED tech's progression to white light.
Edit: Great site! Very informative... http://d.neadiamonds.com/white-diamond
If the correlation holds, we can expect to see a lot more teal at Target.
One very interesting bit in the article somebody's mentioned about De Beers story is that artificial diamonds are already cheaper than natural ones, and virtually undistinguishable. De Beer's response has been to produce machines than can distinguish natural diamonds from artificial ones.
My conclusion is that people who wants diamonds want simply something expensive, as status symbol. They don't want a shiny rock at the most reasonable price, otherwise, it wouldn't be a status symbol anymore.
If prices would fell, the perception of diamonds would change drastically, and I don't think that the industry (cartel or not) is going to allow that.
Gemesis and other companies were successful in driving down the cost of capital equipment for making diamonds by the older high pressure, high temperature process. Chemical vapor deposition of high quality diamonds is well established and doesn't cost much at all.
Market pricing for aesthetic applications of diamonds continues to be only loosely related to cost of production. I think this will continue until the Maker movement decides it would be cool to have diamond doorknobs, at which point the price will drop to something more closely related to the cost of arranging sp3 bonds between carbon atoms under metastable conditions - i.e., not much.
edited for a typo
The capital equipment for HPHT and CVD are both still quite expensive. It is possible to find some used BARS presses for reasonable prices, but you will be hard-pressed to make a large colorless diamond with one of those machines, even if you know the right "recipe" to use. Gemesis has many of these BARS presses and they have only been able to produce orange yellows and to treat CVD material with them.
CVD does grow more crystals per machine cycle, but also has much higher labor, power and support costs than the latest generation of HPHT machines. CVD diamonds also typically grow as a brownish or grayish color and have to be HPHT-treated (different process than HPHT-growing, but can be done in the same machines) at additional cost to whiten them, healing defects in the crystal lattice.
The cost to grow a rough white diamond is generally comparable with the cost to mine one from the ground. From there, the cutting, grading, logistics and jewelry all cost essentially the same.
Lab-grown diamonds are a raw good, more similar to steel, than they are an assembled good, like a TV or laptop. There will certainly be more improvements along the way, but diamond synthesis only occurs under certain conditions defined by nature. Changing the crystalline structure of carbon is a bit more involved than heating up some filament for a 3D printer.
I agree re the current high capital cost of CVD diamond synthesis equipment, but I'm pretty certain it need not remain so. For example, in microwave plasma assisted diamond CVD, significant slices of the cost pie are in the microwave power source and the deposition chamber. The former tends not to take advantage of 2.45 GHz consumer sources and is, I think, overpriced in $/Watt compared to what it could be with some additional electronic design work. The latter suffers because diamond microwave CVD chambers tend to be one-offs. Building them in hundreds or thousands would allow lower cost manufacturing technologies to be used.
Power costs are an issue, but there are ways of extending the lifetime of atomic hydrogen, which is a key cost determinant of CVD diamond. Labor costs will be reducible to the extent that CVD processes can be automated, which I regard as largely a matter of getting reproducible processes in hand. When you have a predictable process, you can automate it.
I concur it will be awhile before my Replicator 2 can spit out a diamond filament. But I think the current manufacturing cost of diamonds is far higher than what it might be. The missing link is somebody willing to fund the volume manufacturing process development.
Right, until recently, it's been a hard to fake McGuffin. A small, highly portable thing you can point at to demonstrate wealth (or the appearance of wealth).
The sooner we can get rid of the diamond lobby the sooner we can use diamond for actually useful applications.
Copper is about 4 W/(cm*K).
Imagine all of the applications for a transparent material stronger than steel! We're a way off yet, but it's feasible.
Nonsense! With no utility, De Beers' monopoly is the only reason why these objects have value.
On the gem side, the vast majority of people wearing diamonds would tell you they have utility.
On the industrial side, diamond is a fascinating material with physical properties at the extremes, e.g. hardness, thermal conductivity, electrical conductivity, etc etc. It is vital in many applications where there is simply no other material which could fulfil the physical requirements.
Fashions change, yet people believe that diamonds have permanent value ('is forever'). In contrast to bullion, this is relatively recent development with little ties to traditional banking practices.
>>On the industrial side, diamond is a fascinating material
These can be made on demand, and cutting diamonds cost something like $1 per carat. Nobody is raging against the crystal lattice.
No, actually diamonds (and other gems) have had artistic/cultural/symbolic value for as long as civilizations have existed. I.e. the "crown jewels", the "hope diamond" and more: http://en.wikipedia.org/wiki/List_of_diamonds
They simply do wonders with light and are aesthetically pleasing when well cut. Not to mention they are incredibly hard to destroy.
Yes and no. Also the ability to make diamond is pretty recent with a lot of the fundamental research having been funded by De Beers.
http://www.theatlantic.com/magazine/archive/1982/02/have-you...
http://en.wikipedia.org/wiki/Jean_Baudrillard#The_object_val...
Where is this price data coming from? Is there now a market where you can buy e.g. diamond futures contracts?
Debeers plans to raise costs 5% ever yearn for at least next 10 years to hit profit targets. So they must be doing good if now majority of market undercuts them literally.