Conventional wisdom has it that increased diamond recycling results in downward price pressure, owing to the theoretical increase in supply, diamond analyst Paul Zimnisky notes in a release published earlier this month.

However, he suggests that the contrary may be true, and, “in fact, a more prevalent diamond recycling market could . . . be the natural-diamond industry’s saving grace”.

Historically, because a more active recycling market would inevitably increase the amount of polished diamonds in the supply chain, the upstream and midstream diamond industries lacked the incentive to support the secondary market.

Zimnisky suggests that, given the current state of the diamond industry, this aversion must change.

He says that, as there is an increasing generation of consumers in the West that perceives diamonds as overpriced and ‘environmentally and socially unscrupulous’, an increased emphasis on diamond recycling could assist in addressing these concerns.

“The laboratory-created-diamond industry has . . . strategically positioned itself to attend to these issues, but the natural industry has the potential to provide an even more attractive product in this context,” he states.

Zimnisky comments that the laboratory-created-diamond industry would struggle to compete with a recycled diamond as a ‘green’ or ‘environmentally friendly’ product, as the latter’s energy, environmental or societal cost has already been realised.

Production

“A laboratory-created diamond does not involve excavation of earth, [but] the production process still requires a significant amount of energy and there is no guarantee that labour practices are ideal, especially in legacy high-pressure, high-temperature factories in the eastern world,” he notes.

Zimnisky opines that a more accessible, competitive and active resale market would increase secondary market liquidity for previously owned natural diamonds, which would in effect support the market price of all natural diamonds.

“Essentially, the only thing that sets a natural diamond apart from its laboratory-created counterpart is that a natural [diamond] is a nonrenewable resource. This is especially significant, given that a diamond is a luxury item,” says Zimnisky, pointing out that the inherently limited supply supports the economic value ascribed to natural diamonds’ innate rarity.

He says this value is apparent in the secondary market for natural diamonds and this is the reason that most prominent consumer-to-business (C2B) buyers of diamonds tend to buy only natural.

Ziminsky recalls that US-based C2B leaders do not buy laboratory-created diamonds. Smaller players have started “experimenting” with buying laboratory-created diamonds but have either decided to limit these purchases to smaller carat products and/or insist on buying at heavily discounted prices.

Zimnisky notes that, currently, the diamond resale market accounts for 1% to 3% of natural diamond supply on an yearly basis, or two-million to four-million carats of rough equivalent.

“It is estimated that this market is growing at 3% to 5% [yearly], or about 150 000 ct of rough equivalent a year. For context, natural diamond production is projected at 143-million carats of rough in 2019.”

Zimnisky adds that, notably, De Beers “quietly” entered the recycled diamond business in 2016, after a multimonth trial period.

“It would be in the natural-diamond industry’s favour to support and improve the resale price spread for consumers.” He adds that, ideally the industry should target a discount between the retail price of a natural diamond and the resale price – one that is less than the cost of an equivalent laboratory-created diamond.

“If a natural 1.25 ct, round, G-colour, VS1, Ideal-cut retailed for $8 600 and an equivalent laboratory-created retailed for $4 550, the optimal resale price for the natural diamond would be less than 47%.”

Price Appreciation

It would then, theoretically, make economic sense for the consumer to buy a natural diamond over a laboratory-created diamond – “excluding any cost of carry or price appreciation for the natural diamond over time, and assuming that the laboratory-created diamond has little to no resale value”.

Further, he notes that the price of laboratory-created diamonds could arguably “gravitate” towards the natural-diamond resale spread discount.

Zimnisky says that, while industry pushback is understandable, the benefits of a more prevalent diamond recycling industry arguably outweigh the potential costs.

“Miners could benefit from higher overall diamond prices supported by a more effective diamond recycling mechanism. Manufacturers could still find business in the recutting of recycled diamonds. “For wholesalers and other midstream participants . . . the business of dealing in recycled diamonds could pose a more attractive opportunity . . . as traditional margins continue to be squeezed,” he explains.

He says that the potential outcome of supporting a robust resale market would likely improve the perception of natural diamonds without actually resulting in a significant influx of new diamond supply to market.

“Most consumers would probably still be reluctant to sell their diamonds . . . even if the resale market was in fact more liquid. However, the simple notion of consumers knowing that they could sell their diamonds if they decided to would . . . accomplish the [stated] benefits to the industry,” he concludes.