The miner growing its own diamonds

What has happened?

De Beers, the world's biggest diamond company, announced at the end of May that it will start selling synthetic diamonds as jewellery for the first time. Such diamonds are chemically identical to natural ones and can only be distinguished with specialised spectroscopic equipment, but De Beers has long maintained that consumers prefer "real" diamonds that are billions of years old and formed deep within the earth to lab-grown varieties that can be cultured in a matter of weeks.Such artificial diamonds only account for about 2% of sales at the moment, but with some consumers still wary of mined diamonds due to environmental and ethical concerns not least the blood-diamond scandals that saw artisanal diamonds used to finance conflict in parts of Africa there are fears that cheaper synthetic diamonds could upend the $13bn rough-diamond market.

Why the change of heart?

De Beers might not have sold synthetic diamonds as jewellery before, but it has long produced cultured diamonds for industrial applications. Now it thinks that it can turn that expertise into a profitable side business, selling one-carat synthetic diamonds for as little as $800 (£597) under its Lightbox brand (a comparable natural diamond goes for about $8,000). De Beers' broader strategy here is to split the market and creating a sharp distinction in consumers' minds between "Real is Rare" mined diamonds and the cheaper artificial kind. It isn't often that the management of a firm launching a new product deems it "not special", "not real" and "not unique", but that is how De Beers chief executive Bruce Cleaver described artificial diamonds just last month. "They're all the same" and don't "deserve to be graded" for clarity and colour in the way that mined stones are, he told Bloomberg.

Why does this matter?

De Beers has played a pivotal role in creating the diamond industry. The firm was founded in South Africa in 1888 by business magnate and unapologetic imperialist Cecil Rhodes. Control and ownership passed to Ernest Oppenheimer the founder of miner Anglo American in the 1920s. Oppenheimer's son and successor, Harry, was a liberal critic of apartheid who nevertheless turned big profits under a system that kept down the wages of black workers. The Oppenheimer family sold off the last of its stake in De Beers to Anglo American in 2011 for $5.1bn. Today Anglo American owns 85% of De Beers, with the government of Botswana holding the remaining 15%. The business mined 33 million carats of diamonds last year, with operations in Canada, Botswana and Namibia as well as South Africa. But perhaps more important than its role in mining diamonds is the part it's played in influencing consumer tastes.

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What did it do?

In 1939 10% of American brides wore a diamond ring when they became engaged. Then De Beers launched a marketing campaign linking diamonds and marriage that was so successful that the notion has since become embedded in Western culture. "A Diamond is Forever"? That's not Ian Fleming's phrase, but a tagline written for De Beers by a copywriter called Mary Frances Gerety. The idea that a man should spend two months' salary on a diamond ring? That social rule was also the invention of a De Beers campaign. By the 1950s, 80% of US brides sported a diamond engagement ring.

And that accounts for high prices?

De Beers also managed supply to keep prices high. De Beers was originally founded with the aim of consolidating production at a time when oversupply had led to tumbling prices. Up until 1990 it enjoyed a virtual monopoly on diamond production, operating what The Atlantic magazine described back in 1982 as "the most successful cartel arrangement in the annals of modern commerce". Yet tougher anti-trust action by regulators and competition from Alrosa, the old Soviet diamond miner, meant that by 2001 the monopoly had been broken. Today De Beers accounts for only one-third of the diamond market, giving it less room for manoeuvre as the sector confronts new challenges. The industry is already worrying about data suggesting millennials are less interested than their forebears in splurging on a bit of engagement bling, or indeed getting engaged in the first place. Unlike most commodities, diamonds are what economists call a Veblen good high prices boost demand by reassuring consumers that they are getting something prestigious but now synthetic diamonds threaten to increase supply hugely, undermining the mystique of diamonds as a rare and valuable gemstone.

Are there reasons to be bullish?

Much depends on whether the all-important distinction between natural and lab-grown diamonds can be maintained. If it can, then falling global supplies of mined diamonds may support prices: there's no prospect of big new finds and consultancy Bain expects global production to peak next year before falling steadily. A growing Asian middle class may also compensate for any drop in Western demand. Optimists also say that millennials are buying more jewellery for themselves even as the power of the diamond engagement ring wanes.

Are diamonds a good store of value?

On the long view, diamond prices are far from holding forever. Special investment diamonds are a distinct class genuinely flawless natural stones are rare and thus more likely to hold their value over time. Yet as far as more ordinary retail is concerned, the average diamond ring is said to lose more than half of its value as soon as it's taken out of the jeweller's door, a fact most people don't appreciate because it is rare to try to resell an engagement ring.