In today's Finshots we talk about lab-grown diamonds and India's place in the burgeoning industry
The Story
There’s a problem with natural diamonds.
It’s not easy to mine them. Digging a single carat means releasing close to 160 kilograms of greenhouse gases (GHGs) into the atmosphere. You have to move approximately 250 tonnes of earth. It leaves gaping holes on the earth’s surface and it does irreversible damage to the ecology. And then you have to contend with the ethical dilemma of blood diamonds i.e. diamonds mined in areas controlled by illegitimate/terrorist organizations that often use child labour. These diamonds find their way into the retail market and the proceeds are diverted to finance insurgencies, coups and terror activities.
There is a lot wrong with natural diamonds.
But people still continue to buy them anyway. After a lacklustre 2020, rough diamond sales exploded in 2021. As one Bain report notes — “Revenue increased 62% in the diamond mining segment, 55% for cutting and polishing, and 29% for diamond jewelry retail — all rising above pre-pandemic levels.”
People had a lot of spare cash lying around. They couldn’t spend it on travel. So they bought a few diamonds.
It’s quite simple really.
But there is another interesting trend emerging — Lab Grown Diamonds. And India is a major player here. Between FY20 and FY22 Indian exports of natural cut and polished diamonds witnessed a growth of 30%. But exports of polished Lab Grown Diamonds soared 211%.
Now before we understand why this is happening, we need a quick primer on lab-grown diamonds.
Lab-grown diamonds are made in labs. That much should be obvious by just looking at the name. However, despite being man-made, they are remarkably similar to the natural product i.e. they are produced in similar conditions.
Take for instance, the Chemical Vapour Deposition process. You take a single crystal diamond in a very thin slice (a seed) and put it in a special chamber operating at an extremely high temperature. Then you fill it with a carbon-rich gas and slowly, the carbon will bond and build on the seed to create a diamond.
And they’re unblemished. In fact, you have to look for blemishes if you want to tell a real diamond apart from a lab-grown diamond. Natural diamonds have small imperfections. Lab-grown diamonds don’t have those. And so you could argue that they’re a better alternative.
Also, Lab-grown diamonds are environmentally friendly. For instance, mined diamonds consume twice the energy, almost 7 times the water, generate about 4,400 times the mineral waste and wait for it… emit 1.5 billion times the amount of GHGs when compared to Lab-Grown Diamonds.
And despite the apparent benefits, they’re still not considered effective replacements. Lab-grown diamonds are treated as a distinct vertical and they are seen as a great starting point for someone who intends to get into diamonds. But eventually, people want the real thing.
However, the industry is growing and India is emerging as a leader, within the export domain. Currently, India contributes around 15% to the global production of lab-grown diamonds. And we also have a cost advantage. Considering our location and the availability of skilled labour, you can snap up a 1.51-carat lab-grown diamond (VVS clarity and e-color grade) at $3800. Whereas you’d have to spend $7000- $8500 for a similar lab grown diamond in the US or Australia.
And the government is also getting in on the act. The State Bank of India has already formalised a policy to fund manufacturing units dabbling in lab-grown diamonds and the government is planning to extend production-linked incentives to certain manufacturers as well. They’ve also permitted 100% foreign direct investment (FDI) in the sector under the automatic route. Meaning foreign investors can set up manufacturing units without explicit government approval. They’ve also slashed the GST Rate from 18% to 5%.
So the government is really doubling down on this business.
Unfortunately, it’s not easy to have a consistent run if you're a manufacturer.
Growing diamonds in a lab is hard work. It requires expensive machinery, highly skilled talent, a lot of patience and the ability to experiment and learn. You have to get the right quality, size and colour to make a dent here. And while manufacturers may find initial success growing smaller diamonds, they struggle to ramp up the operation. It’s still a work in progress.
However, the hope is that with the added push from the government and the rising global demand for lab-grown diamonds, India will soon become a major player in the market.
Until then…
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