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Avi Krawitz

The Problem with Grading Lab-Grown Diamonds

Editorial / Opinion:

Graders at an IGI laboratory. (Credit: IGI).


Should lab-grown diamonds (LGDs) be graded in the same manner as natural diamonds?

 

The prospectus filed in August by the International Gemological Institute (IGI) ahead of its proposed initial public offering (IPO) reignited a debate regarding whether LGDs should be graded or not.

 

IGI gained 61% of its certification revenue from its lab-grown service in the first quarter of 2024, up from 54% in the full year 2023, 43% in 2022 and 36% in 2021.

Source: IGI prospectus. Based on data published in Indian rupee and converted to US dollars at a constant rate of $1=INR 83.79 as recorded on September 30.

 

It’s a growing business, even as LGD prices fell sharply – down 37% between 2020 and 2023, according to IGI. Others have far steeper estimates.

 

Meanwhile, (rough) production of lab grown almost doubled through the same period to an estimated 11 million carats in 2023, said the prospectus, which was published by Morgan Stanley. IGI expects production to grow to 25 to 30 million (rough) carats in the next five years.  

 

The company sees that as an opportunity for its grading business since LGDs are more likely to be certified given they’re generally produced in larger sizes.

 

As a result, IGI expects LGD’s to lead the growth in certification by volume over the next five years. While the generation of grading reports for natural diamonds is expected to rise by an estimated 3% through 2028, IGI projects LGD certification will increase by some 25%.


That recalls our initial question that has been somewhat forgotten within the trade: Do lab-grown diamonds require certification? Do they serve the same function as a grading report for natural diamonds?

 

An even more pressing follow-up question is whether grading reports play a role in differentiating the two products, or perhaps they create an equivalence between them.

 

Learning from Lightbox

 

De Beers famously did not disclose the color, clarity and cut specifications of its LGD offering when it launched the Lightbox brand in 2018.

 

The company argued that as a technology-driven product, it required quality assurance documentation rather than a grading report. For the same reason, De Beers felt it was unnecessary to disclose post-growth treatment of its LGDs as it was all part of the growing process of a technology item.


Those decisions were seen as another way to differentiate lab grown from natural diamonds, which De Beers claimed was its intention. It preferred to rely on the quality standards set by the International Organization for Standardization (ISO) to assure consumers they were buying a good product.

 

That gradually changed and in 2020 Lightbox introduced general color and clarity grade ranges for its collections, based on the Gemological Institute of America’s (GIA) model at the time.

 

While Lightbox didn’t – and doesn’t today – issue official grading certificates with its products, its rationale for disclosing color, clarity and cut grade was that customers wanted clarification regarding the quality of what was being sold, then CEO Steve Coe explained. It subsequently began disclosing post-growth treatments in late 2021.

 

Perhaps these were the moments De Beers lost, or gave up on, its effort to disrupt the disruptor. It should have stuck to its guns.

Lab-grown diamond seeds ready for the growth process. (Lightbox).

 

De Beers should have reverted to its initial argument, with a hypothetical statement that could have emphasized that:

 

“As a technology-driven, man-made product, lab-grown diamonds are governed by different parameters to natural diamonds. The two products are not the same and their value is determined by different considerations. They are governed by different quality assurance procedures. We are confident that the measures provided by the International Organization for Standardization (ISO) – or other third-party product assurance providers – are sufficient to guarantee consumers they are buying the best-quality product in Lightbox.”

 

Of course, De Beers’ public relations would have (could have) produced a far more polished spin than that. The quality assurance would also explain the nature of the product being man-made, synthetic or lab grown and why that is different to natural.


It was an opportunity for De Beers to re-emphasize its initial argument and strategy, to instill in the consumer mindset that LGDs and natural diamonds are simply not the same. They’re governed by different rules and market forces.  

 

The intention here is not to pick on De Beers. Beyond the contentious decision to venture into lab grown in the first place, there’s a lot to be said about its effort to disrupt and set the rules of the market. Still, the Lightbox journey provides a good illustration and background on the issue of grading lab-grown diamonds.

 

In its latest move, the brand announced in May it is working with the GIA to verify the quality of its supply using a random sampling process; a move which “supports purchase confidence and allows us to continue our mission of providing clarity, transparency and value to our customers,” current Lightbox CEO Antoine Borde said.

 

Under the arrangement, GIA verifies that the color and clarity of the Lightbox diamonds are consistent with the ranges specified by Lightbox. “This is a batch verification service which is significantly different from grading services for individual diamonds,” a GIA spokesperson stressed.

 

GIA is currently only working with Lightbox in this manner, the spokesperson confirmed.

 

The way forward

 

In contrast, IGI is expanding its in-factory model.

 

It began setting up laboratories for the grading of LGDs at customer’s factories in 2021, the prospectus explains, as first reported by Rob Bates, of JCK Online. As of March 31, the company had 12 such in-house labs in India and one in the United States. These facilities are equipped by the factories themselves and staffed with IGI gemologists and employees of its customers, who are trained on certain basic steps of the certification process, IGI reported.

 

“Through our in-factory laboratory set-ups, we are able to perform certification services in a dedicated laboratory within the factories of select high volume laboratory-grown diamond growers,” the company stressed. “This arrangement improves the efficiency of the certification process and enables our gemologists to handle a greater volume of cases.”

 

The move also raises IGI’s exposure to potential fraud, as it acknowledged in the prospectus. It recognized that as certification is conducted on the premises of its customers, the company may have less oversight over third parties who have access to those locations.

 

“While we conduct quality checks and periodic calibration of our gemologists to reassess and adjust their grading techniques, such measures may not be effective in preventing all instances of grading errors or fraud by gemologists or third parties,” it added.

 

While that may ring some alarm bells, it appears to be IGI’s preferred method for grading LGD’s moving forward.

 

It makes sense given that it’s a way to reduce fees while LGD prices continue to decline. Otherwise, the charge for grading accounts for an increasingly larger portion of the LGD production cost. The in-factory model also mitigates concerns about having to handle higher volumes of low-priced goods, considering that LGD production continues to rise.   

 

A value determiner

 

There is concern this may set a precedent for grading natural diamonds in such a manner. Others have set up capabilities for in-factory grading of natural diamonds by using artificial intelligence (AI) and cloud software. Sarine Technologies was the first to advocate this, using its automation machines for color and clarity grading. But it maintains full control of the process, whereas IGI is enabling third-party gemologists or graders, or, worse yet, employees of its customers.

 

It’s a slippery slope and the stakes are much higher when it comes to natural diamonds, as one industry player stressed. For its part, IGI did not express any intention to apply the model to natural diamonds.

 

But its approach to LGDs does hit a nerve in the debate surrounding lab-grown diamonds; a topic in which IGI has been central player from the beginning.

 

IGI “pioneered” the grading of lab grown as far back as 2005, while the GIA began its service in 2007. By doing so, using the same parameters, the same look and feel, and language as reports for natural diamonds, the two companies created an equivalency between the two products.

 

In 2019, the GIA stopped referring to its LGD certs as grading reports, renaming the product from the ‘GIA Synthetic Diamond Grading Report’ to the ‘GIA Laboratory-Grown Diamond Report.’ It dropped “synthetics” to align with the Federal Trade Commission (FTC) ruling on the use of that term, but did not explain why it dropped the term “grading” from the name. One assumes it was some recognition that they are in fact not grading reports in the traditional sense. Its worth noting too that the GIA LGDRs are digital only.


IGI also does not use the term “grading” in its ‘Laboratory Grown Diamond Reports.’ Then again, neither does it do so for its natural reports.  

 

Meanwhile, the GIA announced a year later that it was shifting to report specific 4Cs color and clarity grades for LGDs, rather than using descriptive terms and grade ranges.

 

“Reporting the color and clarity grades of laboratory-grown diamonds using GIA’s universally recognized 4Cs system will provide more precision for the trade, and will educate consumers,” Tom Moses, GIA executive vice president and chief laboratory and research officer, said at the time.

  

However, therein lies the problem. What exactly are consumers being educated when it comes to LGDs?


To the consumer’s mind, and within the trade, the 4Cs are determining factors of value. The LGD 4Cs reports fuel a similar mindset even though the product is driven by a different market dynamic. As a result, LGD prices are still quoted according to the Rapaport benchmark, even as they sell at 97% to 99% below the Rap List.

 

That may be to the detriment of the lab grown industry. Perhaps it would elevate the value of LGDs if they weren’t so tied to the List and the 4Cs – as De Beers tried to do with its linear pricing model for Lightbox.

 

Consistent outcomes

 

Another argument against grading LGDs is that technological improvements have empowered lab-grown growers to control the outcome of their production. That’s already happening and they typically skew toward better colors and clarities.

 

GIA researchers noted recently that since 2021 most submissions to its labs of large LGDs are colorless, falling in the D to F color range. The highest proportion of stones grown using the chemical vapor deposition (CVD) method are E-color while among LGDs grown via the high-pressure, high-temperature (HPHT) process, D-color represents the largest share.

 

In naturals, colorless or near colorless account for just 1% of submissions, while the highest proportion fall in the F to G range.

 

“Laboratory-grown diamonds that are colorless to near-colorless share many gemological and physical properties with their natural counterparts, which presents a challenge for independent gemologists and appraisers in distinguishing these gems from natural diamonds,” the GIA said in a paper titled ‘Laboratory-Grown Diamonds: An Update on Identification and Products Evaluated at GIA,’ published in the summer 2024 issue of Gems & Gemology. “Consequently, gemologists have needed to invest in powerful analytical testing equipment or depend on gemological laboratories for accurate identification.”

 

That doesn’t inspire too much confidence in the IGI in-factory system. Admittedly, it may reiterate the need for robust gemological assessments of LGDs, although the challenge is more about identifying that the colorless goods are LGD or natural, rather than the grade itself.

 

The ability to control the outcome of the growing process is seen as an advantage for the lab-grown industry since it can offer cleaner diamonds on a consistent basis. But it also diminishes the uniqueness of each stone on offer. Without the inclusions and subtleties of color, they lose their character and personality.

 

Still, the more consistent and controlled the outcome, the less there is a need for 4Cs grading services.  

 

Lower stakes

 

IGI perhaps unwittingly highlighted these arguments in its prospectus ahead of the proposed initial public offering.

 

The company is planning to expand the program for LGDs to strengthen its position in the lab-grown grading market.

 

“The model helps cement our relationship with these customers, entrench us within the facilities of our customers, improve operational efficiencies, and make it challenging to replace us,” management said in the prospectus.

 

It can do so because the stakes are lower when grading lab grown, which begs additional questions (again):  Does the grade of an LGD matter when it comes to value? What assurances of quality are diamantaires, jewelers and consumers seeking when it comes to LGDs? Are those assurances the same as those inherent in a natural diamond grading report? And as growing technology improves, will there be a meaningful quality range within LDG production to warrant such reports?

 

IGI’s move to set up in-factory grading for lab-grown diamonds gives some insight to these questions. It is effectively outsourcing its grading activity to its customers, while providing some degree of oversight, because the grade is a quality control mechanism rather than a determinant of value.  

 

That is not necessarily problematic. Most quality assurance agencies operate in that manner, setting the standards which companies adhere to. Agencies such as ISO verify that those standards are met via random audits, and the company can present that verification as a third-party stamp-of-approval to consumers, as one industry observer explained.

 

False equivalence

 

However, it’s not as simple for LGDs. These goods are being presented with the same quality nomenclature as natural diamonds. That implies the same meaning as diamonds that have undergone far greater assessment and for which the 4Cs do influence the determination of value.

 

Such equivalence leads to confusion and misconception among consumers.

 

A D-color natural diamond that was assessed by an expert grader at IGI or the GIA is not the same as a D-color LGD simply verified to have met the lab’s standards.

 

Consumers are being presented with reports that appear to represent the same thing for two different products. The grading report of a natural diamond underpins its rarity and value. Those issued for LGDs are a quality control mechanism at best.

 

The industry therefore needs to change its approach to LGD reports, if they are required at all. New language should be developed to not only differentiate the two products but to distinguish between their respective documentations.

 

If LGD certificates are being requested by consumers, as De Beers, the GIA and IGI claim, new language should be developed to distinguish them from natural diamond reports. Doing so will help the industry bifurcate the two types of diamond categories and avoid confusion and fraud among consumers.

 

Its not clear who might lead that effort.

 

De Beers tried, but did not stay the course. The GIA has steadily set itself in the opposite direction by aligning its LGD reports with its natural diamond reports.

 

And it is highly unlikely that IGI will take the initiative, judging by its prospectus. IGI’s whole value proposition is betting on the growth of the lab grown segment, and its leadership position therein.

 

In that case, investors must ask: as lab-grown diamond prices continue to decline, and the product is expected to bifurcate further from natural diamonds, what will be the role of LGD grading reports in the long term? What are the foundations of such a business model that IGI is touting?

 

LGD reports need to be recognized simply as a quality assurance mechanism. As such, they require a complete makeover, especially in how those quality parameters are presented. As it stands, IGI and the industry at large, is misrepresenting what the 4Cs truly represent.


IGI did not respond to my request for comment.

 

 

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