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Tuesday, 22 July 2014

Synthetic Diamonds and the Kimberly Process: Fighting the last war

  Roman Grynberg
For a decade now the world has been engaged in what has been seen as a battle against blood diamonds perceived as funding wars in countries like Sierra Leone and DRC. The Kimberley process is one unique but flawed example of an attempt at global governance co-operation by producers and consumers to stamp out blood diamonds.

This is done through a certification process that identifies and labels where diamonds are sourced from. That the Kimberley process even succeeded in being established is attributable to it being in most stakeholders’ interests.

No-one in the diamond business needed these stones – sold as symbols of love – being associated with war and bloodshed. Moreover, the blessing of the World Trade Organization and the UN to restrict the trade of blood diamonds did much to help achieve what the De Beers cartel could no longer do in the 1990’s – maintain a global monopoly on the trade through stockpiling and controlling supply, combined with exceptional marketing. Unfortunately not all went to plan as the Kimberley process did not come with a system of traceability.

The Kimberley Makeover
The Kimberley process is named after the town in South Africa where in the 1860’s Cecil Rhodes, who owned De Beers and was the first of the great African war lords, made his millions in diamonds and went on to use those funds for the pillage of Zimbabwe. Kimberley, a name that should go down in infamy as the first source of blood diamonds in Africa, has with a rare marketing brilliance, rebranded itself and has become synonymous with good governance in the diamond industry.

For NGOs like Global Witness, which were among the original drivers of the war on blood diamonds, however, the multiple sins of the diamond industry went well beyond the funding of Africa’s wars. The abuses of human rights at Zimbabwe’s alluvial diamond fields in Marange as well as the use of child labour in cutting in India were all issues that needed to be addressed.

But many of the 54 participant countries in the Kimberley process resisted an expansion of its mandate beyond the narrow confines of conflict diamonds. Like many international organisations, the Kimberley Process relies on consensus, and many of the participants, who profit from a system without real traceability, opposed its extension to human rights issues in the extraction and polishing processes.

However, some participants in the Kimberley process like the US, as well as NGOs like Global Witness (which withdrew from the Kimberly process in 2011), pushed for fundamental reform. The Kimberley certificates, which allow trade in parcels of rough diamonds, are issued by governments and are in some, but not all, cases simply not credible. Because there is no system of traceability of rough and polished diamonds, some certificates cannot be trusted.

Synthetics – real diamonds but not real value
The De Beers marketing campaign – built on the slogan A Diamond is Forever - has not yet run out of steam. Increasing number of people entering the urban upper middle classes in places like China and India are driving up diamond demand for ceremonies such as engagements. Real diamonds remain rare and supply has not kept pace, bringing into focus the growing markets for synthetic diamonds.

Synthetic, as opposed to imitation diamonds, were first developed in the early 1950s. At first, they were only used for the production of industrial diamonds. Up until the late 1990s the technology to create these synthetics was dominated by three companies: De Beers in Europe (Element 6), General Electric in the US and then Sumitomo in Japan. The three flooded the industrial diamond market with millions of carats and the price in the US and EU collapsed over a period of three decades.

At present, the technology for making these near perfect copies of mined diamonds, which are virtually undetectable to the naked eye, is no longer dominated by the traditional producers. The big players on the diamond block are no longer Botswana or Russia. China, with no diamond mines to speak of, has entered the market and is now the world’s biggest producer of diamonds, selling what the US Geological Survey estimates to be between 6-10 billion carats of diamonds for largely, but not exclusively, industrial uses. Total world production of mined diamonds in 2012 was only about 128 million carats.

In most countries, gem diamond traders and retailers are supposed to inform buyers whether the goods they are buying are mined or synthetic. However, an increasing number of these synthetics are entering the gem market without being detected despite the best efforts of De Beers to brand some of its own diamonds, and develop machines that can, at a price, detect synthetics. De Beers is also working with agencies such as the Gemmological Institute of America to issue certificates to differentiate mined from synthetic diamonds. But with the smallest of diamonds below 0.2 carats, the cost of detection of an individual synthetic diamond is so high relative to their price that significant penetration of synthetics into the mined diamond value chain has already occurred. Unless the whole diamond value chain can be controlled, and this is only possible with a system of traceability, then diamonds almost certainly have no future as a store of value. Soon we may all discover that diamonds are not forever.

The biggest threat to diamonds is no longer blood diamonds or the effect of Marange or child labour exploitation in Surat, India, but synthetics, which compete primarily with the smaller range of mined stones. Unfortunately most mined diamonds are very small – about 80-90% of stones are less than half carats. If the market for these stones collapses, the profits from the entire mined diamond sector will collapse with it, as well as the stock market funds for further diamond exploration.

There is, however, at least a partial confluence of interests once again. It is in virtually everyone’s interest in the diamond industry, even the synthetic producers, not to allow the value of gem quality diamonds to follow the trajectory of industrial diamonds. Extending the mandate of the Kimberley Process beyond only that of rough diamonds will enable the   industry to control the supply of diamonds, both rough and polished. This was recommended in a draft report late last year on the Kimberley process by Harvard. Extending the Kimberley process to polished diamonds will require a system of traceability which those in the low-profit middle of the diamond value chain will find difficult to afford.

The mined diamond industry is living on borrowed time and unless it is able to show developed country consumers that the products they are buying are both ethical and mined and hence rare, the industry’s demise seems only a matter of time (as already happened with industrial diamonds two decades ago). Only a truly global process that offers traceability of rough and polished diamonds all along the value chain will give the NGOs and the US the control that they seek over human rights in mining. By extension, this same system will give the industry the instrument it needs for diamonds to survive as a store of value. Seeking global consensus from individuals that profit from illicit trade and with countries that will not agree to heightened standards will only delay the process of establishing a global diamond standards body. But time is not on the industry’s side.

# These are the views of Professor Roman Grynberg and not necessarily those of SAIIA or any institution with which he may be affiliated.