Why lab diamonds are sparkling during a crisis

India dominates the diamond business globally. Nine out of 10 diamonds used in the world are processed in the country, mostly in Surat. Gujarat’s second largest city is home to over 7,000 mostly medium and small and a few large units, which employ over 800,000 skilled workers who cut and polish diamonds. In 2022-23, India exported processed diamonds worth $23.73 billion. But with no diamond reserves to mine, the industry imports all of its rough diamond needs. In 2022-23, India’s rough diamond imports were to the tune of $17.37 billion.

 

It is here that lab-grown diamonds offer a great opportunity. “By becoming a major producer of these diamonds, India can substantially reduce its rough diamond imports, add more value in processing diamonds and dominate the market more effectively," says Sanket Mukesh Bhai Patel, director, Greenlab Diamonds LLP, the firm that made the 7.5 carat diamond presented to the US first lady.

It also falls perfectly into the government’s Aatmanirbhar Bharat policy. In her recent Union Budget speech, finance minister Nirmala Sitharaman announced a grant to set up an India centre for lab-grown diamonds at IIT-Madras, at a cost of ₹243 crore. The government also eliminated customs duty on the seeds needed to produce lab-grown diamonds. It was earlier 5%.

Are these measures enough for India to dominate the lab-grown diamond space? Perhaps not. China has already grabbed 50% of the market while India has just 9%. The Chinese government, spotting the opportunity, has backed its industry to the hilt with subsidies and invested huge amounts to create capacity. The Chinese have been dumping cheap and inferior lab-grown diamonds priced lower than their cost of production in global markets. In order to counter the Chinese, India needs to build capacity quickly and have an enabling policy environment to capture a larger share of the market.

The crisis

Diamond prices are in a free fall as demand for the precious stone has crashed in the US, the biggest market in the world. Diamonds and jewellery are the last thing on the minds of consumers there, amid the battle with high inflation. A slowing Chinese economy adds further strain on demand. At less than $5,000 levels per carat on average, natural diamond prices are at 2004 levels. In a report, Edahn Golan, chief executive officer (CEO) of Edahn Golan Diamond Research, has said that natural diamond prices have fallen by 59% in the last three years. With consumers beginning to like lab-grown diamonds, he expects prices to fall by another 40%. This has meant that those buying the precious stone for investment purposes have stopped doing so. De Beers, the largest diamond player in the world, has been forced to cut prices of rough diamonds by more than 40%. Its first-half performance in 2023 has consequently taken a beating, with profits plunging 60% to $347 million.

This crisis has hit the Indian diamond sector very hard. Exports have dropped 30%. In the April-August period this year, diamond exports stood at just $7.03 billion as against $10.08 billion in the same period last year. “The US accounts for 70% of India’s exports. We face poor demand once every few years for two or three months but this time, the crisis has been on for far too long," says Dinesh Bhai Navadia, past president, Surat Diamond Association.

The diamond units in Surat have cut back on production. They work fewer hours in a day and fewer days in a week. Workers have been given longer holidays this summer. All this has meant lower income for the workers, who are paid on a ‘per carat’ basis.

Media reports have said that some workers have been driven to committing suicide on account of this fall in demand. “Things are not that bad. While it is true that income has reduced, workers are not out of work or in deep financial distress as is being made out," says Balubhai Vekariya, president, Ratna Kalakar Vikas Sangh, an employee union for diamond workers. A cross section of workers that Mint spoke to, in multiple diamond units in and around Surat, agreed with Vekariya.

Increasing appeal

Fortunately, the crisis that has gripped the global diamond industry has created tailwinds, catalysing the growth of lab-grown diamonds, with consumers coming to perceive them as the perfect substitute.

To be sure, the fall in natural diamond prices has also seen the price of lab-grown diamonds plummet. Three years ago, lab-grown diamonds were selling at a 30% discount to diamonds that were mined. Today, the discount has risen rather sharply to 80%. A polished lab-grown diamond is available for as little as $225 per carat today. At these price levels, they are appealing to a whole lot of consumers. The share of lab-grown diamonds in overall diamond sales globally has risen to 9.3% this year compared to 2.4% in 2020. The trend is visible in Indian exports, too. According to Gem and Jewellery Export Promotion Council data, the share of polished lab-grown diamond exports in India’s overall diamond exports in June 2023 stood at 9% as against 1% a few years ago.

Domestic demand for lab-grown rough diamonds has risen sharply, too. “Our domestic sales of rough lab-grown diamonds are four times what they were a year earlier," says Greenlab’s Sanket Patel. The reason is that the biggest buyer, the US, does not want anything to do with Russian diamonds. “Russian roughs accounted for almost 30% of our imports. Post the Ukraine war, buyers in the US are insisting on a declaration that the exported diamond is not of Russian origin," explains Navadia.

Surat’s diamond processors have shifted to lab-grown diamonds to meet their rough diamond needs. Today, imports of Russian roughs are just 1% of India’s needs. “But for lab-grown diamonds, the crisis in the industry would have been severe and workers would have been badly impacted," says Vekariya.

Domestic processors giving up their obsession for natural diamonds, and moving to lab-grown diamonds is a good sign as demand from the US is increasing sharply. “A consumer revolution is on in the US, with increased awareness that lab-grown diamonds have the same properties and quality in terms of colour and clarity as a natural diamond — without the environmental and social downside. More importantly, they are a lot cheaper than natural diamonds," says Ravi Dholakiya of Radhe Shyam Diamonds LLP, a medium-sized diamond processor in Surat. He plans to get into the lab-grown diamond space soon—first as a processor and then as a producer. And why not? Diamond experts predict that in a decade, demand for lab-grown diamonds would reach $55.6 billion from $22.3 billion in 2021.

The China factor

For India to grab a significant chunk of this demand, a concerted strategy is needed. Firstly, it needs to create capacity. There are very few players like Greenlab Diamonds manufacturing lab-grown diamonds at scale in the country. Greenlab Diamonds, which is located at a diamond park in Ichchhapore, on the outskirts of Surat, has more than 1,300 reactors to produce lab-grown diamonds. Each reactor costs around ₹1 crore. It is estimated that there are 8,000 reactors in India. “We need to create a much larger capacity if we are to dominate the market," says Greenlab’s Patel.

Patel points to what China has done. “Once they realized that there is demand, they invested large sums of money and created capacity. “The Chinese government offered a 15% lifetime electricity subsidy (producing lab-grown diamonds is energy intensive) and a further 13% export subsidy," he says.

Indian players say they do not want a power subsidy. They prefer export relief and measures to support production of green diamonds (where only renewable power is used to produce the diamond). Considering that lab-grown diamonds will improve India’s self-sufficiency, they see it as a fit case for a production-linked incentive scheme.

China, having created capacity, is flooding the market. “They are selling their diamond roughs below their cost of production to grab the market—for as little as $40 per carat—and are a fit case for levying anti-dumping duty," he adds. Indian diamond processors, attracted by the low prices, are importing in a big way.

CVD vs HPHT

What riles Sanket and a few other lab-growing diamond manufacturers in India is that Chinese diamonds are of inferior quality. Chinese players use high-pressure high-temperature (HPHT) technology to produce lab-grown diamonds. This technology, developed by the Chinese military (to produce diamond dust, which is used in warheads), involves pure carbon being passed through a metal tube and subjected to high temperature and pressure to produce diamonds.

Indian producers, on the other hand, prefer chemical vapour deposition (CVD) technology. Here, a slice of an already-formed lab-grown diamond is placed in a chamber and subjected to carbon rich gas (a combination of hydrogen, methane and nitrogen). In about 20 days, the carbon gas ionizes and sticks to the diamond slice, leading it to grow in size and form a new diamond material. “We are completely self-reliant when it comes to CVD technology," says Dholakiya. Over time, this technology has been able to deliver diamonds that are better than HPHT technology and match natural diamonds in colour and clarity, he adds.

“HPHT diamonds are being increasingly shunned by jewellers in the US. The reason is that they contain metallic impurities. Also, in the Mohs scale (which measures the hardness of a mineral on a score of 1 to 10, with 10 being the hardest) HPHT diamonds score 9.75 on 10. CVD diamonds score 10 on 10," claims Sanket. Some experts also point out that HPHT diamonds tend to become dull over time as they lose colour and shine.

Local lab-grown diamond players want a concerted effort by the government and the industry to promote CVD diamonds and create awareness both within India and abroad about the shortcomings of HPHT diamonds. “When we have better technology, we should talk about it," says Patel.

Existential threat?

Even as India wakes up to the potential that lab-grown diamonds offer, a debate is on globally about how the diamond market will shape up, going forward. Some, such as Martin Rapaport, a sought-after diamond expert, refuse to accept lab-grown diamonds. He calls them “synthetic" and “fraudulent". He accuses those dealing with lab-grown diamonds of “trading short term unsustainable profits for the reputation of diamonds as a store of value". Critics bash him for not changing with time.

Paul Rowley, head of De Beers’ diamond trading business, has been quoted in the media admitting that “there has been a little bit of cannibalization (of natural diamonds by lab-grown diamonds). I don’t think we should deny that. We see the real issue as a macroeconomic issue". That comment from someone in DeBeers means that lab-grown diamonds are an existential threat to natural diamonds and cannot be dismissed as mere hype anymore.

In the meantime, industry players in India warn that time is fast running out. Says Dholakiya, “If India has to make it big in the lab-grown diamond space, we need to act now. China is getting aggressive by the day."