Anglo American last week announced its plans to sell off De Beers. Barring the unlikely outcome that another major buys it, than would signal the end of the era of large diversified miners operating diamond mines.

Rio Tinto will remain the only miner with a toe in those waters, but with the Argyll mine in Western Australia closed, and Diavik in Canada coming to the end of its life, diamonds will be of dwindling importance without further investment, something that the company is unlikely to do while prices remain low.

The reason for scepticism is easy to see. Diamond demand is looking exceptionally sluggish in the short term, thanks to slow Chinese buying, but the longer term is even more concerning. Synthetic diamonds, man-made stones that are chemically identical to mined diamonds, are now significantly more affordable. For perhaps the first time in history, there is a real existential threat to diamond mining as a commercial activity.

If the industry is to survive, a fundamental shift in perspective is needed. Rather than being treated as a dirty secret, mining will need to be moved into the spotlight. The answer could be vertical integration, with retailers and jewellers taking a stake directly in the mining industry, marking diamonds like single-origin coffee, rather than like Nescafe.

Veblen goods

Industrial diamonds actually make up the bulk of the stones mined and sold, but due to the lower prices they command they are only a narrow sliver of the industry's revenues. Diamonds could, theoretically, be an investment, but the steep mark-ups that are normal in the industry make them an unappealing one, even at times when prices are trending up. The viability of diamond mining therefore rests almost entirely on the consumer market.

A jewellery-grade diamond is the ultimate luxury item. It has no utility, and unlike gold it does not even represent a particularly good store of value. It is the closest the real world has to a pure Veblen good, meaning that its desirability increases in proportion to its cost, without reference to other values. Big, high-quality stones are valuable because they are desirable, and desirable because they are valuable.

In such a market, it is no wonder that synthetic diamonds hit like a tonne of bricks. Consumers can buy a stone that is bigger and clearer, for less money. These cheaper stones directly sap the luxurious aura of mined stones, undermining the market as a whole.

The problem is that currently, jewellers have no real incentive to steer buyers away from these synthetic stones. The low wholesale price of lab grown means jewellers can enjoy just as big, if not bigger profit margins compared to mined stones, despite the lower sticker price.

But jewellers could come to regret this decision in the longer term, if cheap and cheerful synthetics tarnishes the image of diamonds overall.

The commodity cycle

De Beers laid the foundation of present day consumer diamond demand, when it ruthlessly pushed a confected tradition of using diamonds in engagement rings, cumulating in its legendary 1948 slogan "a diamond is forever". For most of the 20^th century, De Beers enjoyed a near monopoly of diamond supply chains. This allowed the company to exert tight control over diamond availability, combined with stewardship of branding and marketing that supported consumer demand.

The breaking of the De Beers monopoly, thanks to increased supply from Canadian and Australian mines, and then the rise of output from Russia's Alrosa, drove a commodification of the diamond market. Prices began to rise and fall in the same cyclical pattern that characterises other commodity markets.

This price volatility is a necessary, and to a degree desirable feature for some commodity markets. Higher copper prices unlock new supply, lower copper prices spur fresh demand. But diamond demand is, to a significant degree, not price controlled. People do not rush to get engaged because diamond prices are low, or take their stones back to the jeweller when prices peak. Lower prices mean lower revenues, with very little benefit to long term demand trends.

Verticalization could help break that cycle. If retailers were to focus their advertising on specific mines, with specific stories, those products would be be more resilient in the face of competing supply, whether from new mines or from synthetics.

See no evil, hear no evil

Vertical integration of the industry could also help solve diamond's image problem.

Miners have never been good at talking to the general public. This is largely a deliberate choice.

Consumers, at least in the global north, prefer not to think about the fact that the goods they buy are made out of materials that are hacked out of the ground, in remote corners of the globe. Whenever this fact is brought up, it is almost always presented as a negative. The average European or North American has a vague idea that their smartphone may contain tantalum or cobalt, even if they do not know those metals by name, and an even vaguer idea that this is a bad thing. Rather than try and convince them otherwise, miners and manufacturers have preferred to keep a low profile, and trust in the general public's willingness to let they stay out of sight, and out of mind.

This see-no-evil approach makes sense for miners producing essential and irreplaceable commodities, but it presents a real problem for the diamond industry, whose products are neither essential nor irreplaceable.

Consumers still remember the term "blood diamond," more than two decades after the implementation of the Kimberly process designed to filter those stones out. Although it would be naïve to think that artisanal, illegal, and conflict diamonds have been completely eliminated, the chance of the average consumer encountering them is much lower

Single-origin diamonds would avoid this suspicion. Retailers would have a direct stake in the supply chain, incentivising them to brag about the social and economic benefits of diamond mines. These sort of initiatives have already been implemented by premium brands, but they could become the norm, rather than the exception.

This would also offer a solution to one of the most pressing issues, how to keep Russian stones out of European and North American markets. Vertical integration would give retailers access to steady and reliable sources of stones, of guaranteed origin.

If synthetics are the biggest risk for diamonds, growing consumer knowledge is also an underrated factor. For most of its history, the diamond market has relied on the fact that the end users know very little about how stones are priced, allowing a hefty profit margin for retailers.

The retail markup for gold is rarely more than 5%, and when purchased in bulk, could be much lower. Diamonds, meanwhile, can be much less, with a confused or ill-informed buyer liable to face a markup of over 100% against wholesale prices when purchasing a natural stone from a high-street jeweller. This is very good business for jewellers in the short term, but it presents a real problem for the industry in the long term. Diamonds, unlike gold, are a very poor store of value when bought at retail.

The size of the retail markup for mined stones prevents diamond miners from hammering home one of the biggest flaws of synthetic diamonds: they have essentially no resale value. Educating consumers about the massive mark-ups retailers impose on synthetic stones could be a useful move, but increased pricing transparency for all diamonds will also require admitting to the premium paid for mined stones.

Verticalization of the industry could be the answer. If retailers held a direct stake in mines, they could then capture more margin from the entire value chain, and reduce the mark-up between wholesale and retail. A fairer price for diamonds at the consumer level would allow the industry to once again tout the utility of diamonds as a long-term store of value, potentially supporting demand, and prices, all along the value chain.

Stewarding the industry

It would be a mistake to believe that because the value of diamonds is cultural and aesthetic, that means it is ephemeral.

The legendary investor Warren Buffet once dismissed gold as in investment, saying that it was neither useful, nor productive. But several thousand years of human history suggests that usefulness and productivity are not the only determiners of value.

Diamonds, like gold, have been around longer than money. Diamond mining as an industry was already well established in India in 500BC. It seems unlikely that demand will evaporate in our lifetimes.

But in recent decades diamond miners have not been careful stewards of the industry. An industry that has no time for branding, constantly pushes to increase volumes, and treats its products fungible commodities, is not a natural fit in the luxury goods space. A move upstream by retailers could be just what the diamond needs to secure wobbling consumer demand.