The document discusses the rise of synthetic diamonds and its impact on the natural diamond industry. It makes the following key points: - Synthetic diamond production is being driven by consumer demand for cheaper gemstones, not industrial applications. CVD diamond technology allows for lower prices which is appealing to buyers. - The natural diamond industry, led by companies like De Beers, will struggle to compete and eventually shrink as synthetic diamond production becomes even cheaper. Large natural diamond mining operations will likely close. - Within a decade, the De Beers group will disappear as a significant enterprise as their ability to control markets disappears. The catastrophic consequences of synthetics cannot be avoided for the natural diamond industry.

1. April 17, 2016
Mr. Martin Rapaport
Chairman
Dear Mr. Rapaport;
I read with interest your March 16, 2016 article titled “Synthetic Diamond Scam”, and I’d
like to respond.
I played a part in establishing the synthetic diamond industry decades ago when I co-
founded Crystallume in 1984, the world’s first manufacturer of CVD diamond-coated
cutting tools for industrial markets. That product choice was a good one, as the company
continues to thrive in Santa Clara, CA.
Although I was focused then on industrial applications for diamond made by chemical
vapor deposition (CVD), future markets for synthetic gems seemed inevitable, if
uncertain as to when they might appear. That time has come. Like so many other
industries, the gem diamond industry is about to be disrupted by technology.
I regard this disruption as completely unstoppable. I’ll lay out a few critical facts and then
make a few predictions. Perhaps in five years, we can revisit the matter and see how my
predictions turned out.
First, a few facts. I’ll talk about diamonds made by CVD as I think that technology will
dominate all diamond synthesis methods.
• CVD diamonds are taking an ever-increasing share of the gem market. This means that
buyers are voting with their cash in favor of CVD stones. The fundamental reason for this
is lower price. A buyer can: a) buy a stone for significantly less than its natural
equivalent; b) afford an unusual stone (e.g., a pink diamond) that would otherwise be
completely out of reach; c) buy a larger stone than they could afford from natural sources.
• CVD gem diamond technology is being driven by consumer demand, not industrial or
high-tech markets. You’re right to identify military and aerospace diamond applications
as early drivers for CVD diamond synthesis, but that era is long gone. The non-aesthetic
markets for gem-quality diamonds are miniscule compared to consumer demand for
diamonds. If one adds up all the known and probable applications for diamond quantum
computers, diamond lasers, GaN/diamond RF power transistors – the whole host of
remarkable non-aesthetic applications for gem diamonds – their highest revenue potential
is but a teacup beside the river of cash already generated by consumer demand for
aesthetic diamonds.

2. • CVD diamond synthesis has a lot of room to get even cheaper. When I see various types
of CVD diamond synthesis equipment, I see first-generation production gear that’s far
more expensive than need be. Companies currently making CVD gem diamonds are
nowhere near minimum production costs. This means that price wars are both possible
and inevitable as companies refine their equipment for lower capital and operating costs,
along with higher throughput. That has grave implications for diamond operations that
depend on mining, which in general has little potential for significant cost reduction.
• Barriers to entry in the CVD diamond business are few. The basic technology is in the
public domain and useful variants are available by license from patent holders. Startup
capital costs are modest and investors can be readily found. Distribution and sales
channels are freely accessible thanks to online markets. All of which is to say that we can
expect to see more startups in gem diamond synthesis as time passes. It’s simply not very
hard to get into the business.
• Buyer’s priorities are changing. While I take your points about the benign societal
impact of synthetic stones being sometimes oversold in comparison to mined stones, that
point of view is getting traction with buyers, who are the ultimate arbiters of which
business models go forward and which fade away. Millennials and other new buyers in
the market for diamonds now choose from provenance alternatives unavailable just a
decade ago. The “aura” of CVD synthetic stones is depicted as being clean and modern,
with hardly any environmental footprint compared to mining operations, which by their
nature present poorly when evaluated in that light. This provenance choice clearly
matters to a growing cohort of new buyers. I don’t think their attitude is a result of their
being hoodwinked by false representations. It is unlikely their attitude can be reversed by
bigger-budgeted, louder explications of an opposing viewpoint. This trend is here to stay.
• Buyers’ priorities are changing independent of the environmental issues surrounding
provenance, as well. The magic of “natural” must now justify its price. While this is a
new phenomenon in the gem diamond industry, it’s as old as commerce itself. “Natural”
has not been needed as a diamond selling point until recently, so it’s not surprising that it
has a weaker valence with buyers than, say, their feelings about diamond vs. cubic
zirconia. Simply stated, synthetic diamonds look as good as naturals to buyers, and
they’re cheaper. In every other industry, otherwise identical goods with a lower price tag
displace higher priced goods. It’s no different with diamonds.
• With respect to retention of value and the investment aspects of diamonds, I don’t think
that matters much. One doesn’t get significant investment utility from diamonds until one
buys stones that are bigger and of higher quality than are traded in the larger consumer
markets. The common smaller natural stones are often justly derided for the poor resale
prices they bring. Synthetic stones will be no different. Diamonds, whether natural or
synthetic, are not an investment vehicle for the many. This consideration plays little part
in their purchase decisions.

3. Those are the few basic facts driving rapid changes in the gem diamond industry. I’ll use
these facts to make a few predictions.
• The price gap between natural and synthetic gem diamonds will grow. This will result
from better diamond synthesis technology and from entry of new manufacturers into the
industry. Both will increase price pressure on synthetic stones. Producers will respond by
reducing prices and developing more efficient synthesis technology to preserve their
margins.
• Natural diamond markets will shrink in every respect. There will be fewer customers
buying fewer stones, leading to reduced market revenues. I also think natural diamond
markets will skew towards higher-priced stones on average. There will continue to be a
cohort of buyers who care about having stones with natural origins and who can afford to
pay an increasing premium for that provenance. That buyer cohort will diminish as they
age and will increase as wealth concentration effects operate. I think, however, that the
absolute number of such buyers will decrease over time. I doubt that wealth concentration
effects will fully compensate for that.
• Large producers of natural diamonds will attempt to counter these industry trends
unsuccessfully. I’ll use the De Beers Group as the exemplar of the few large natural
diamond producers.
• There is little the De Beers Group can do to slow the changes that have come to the
diamond industry. With respect to impeding the market expansion of synthetic diamonds,
they could attempt to employ their intellectual property through patent infringement suits.
My assessment of their IP is that it will not be an effective tool in slowing synthetics.
This is in part because most, probably all of the technology needed to enter the synthetic
diamond business lies beyond De Beers’ patents, and because patents offer only time-
limited protection. They expire, upon which event they cease to have value as a means of
industry control. Time, in the form of technology advancement and patent expiration, is
not on De Beers’ side.
• The days when the De Beers Group could effectively control worldwide diamond
markets have disappeared, most certainly with respect to synthetic gems. Large natural
gem diamond producers have little ability to shape development of synthetic diamond
markets. Similarly, it’s of no importance that some Bourses have banned trade in
synthetics. Makers of synthetic diamonds will certainly be able to sell their goods.
• The De Beers Group could enter the synthetic gem diamond markets either by creating
its own production capacity or by purchasing existing participants, or both. In my
opinion, if this occurs, it will happen too late for them to preserve a dominant position in
the market. I think the change in organizational behavior that would be required of the De
Beers Group is simply too far removed from their ingrained history and traditions to
happen in a timely way. If they could emulate a Silicon Valley company, perhaps they
could turn their ship with sufficient alacrity to become a force in the growing synthetic

4. markets. I doubt this outcome. I think we will witness the disappearance of the De Beers
Group as a significant enterprise within a decade.
• At the retail level, diamond retailers will accommodate the rise of synthetics as they
have when technology was developed to synthesize other precious stones. I expect the
natural segment of their business will decline, perhaps with the exception of retailers who
have easy access to local high net worth communities or who have special relationships
therewith. I’m sure changes in the diamond retail business will be profound.
• At other levels in the natural diamond production chain, changes will be profound to the
point of catastrophe. Individual miners such as those you wrote of will find it terribly
difficult to continue making a living recovering natural stones. I would guess that the
range of stones they recover are of the range in which synthetic material will be most
successful – the ordinary, about 1ct. stones that comprise the bulk of consumer demand.
• I expect the large diamond mining operations to shut down as the market for natural
diamonds declines. There may be exceptions in timing for those mines whose output is
uniquely saleable in shrinking natural markets. It might be that one or two mines will
continue to run, depending on economic specifics. Eventually I expect most mines to
close, with all the tragic effects on employment that will bring. I think the catastrophic
consequences that synthetics are bringing to the natural diamond industry cannot be
overstated. Neither can they be avoided.
In summary, what’s happening to the gem diamond industry is what’s happened to other
industries when technology development takes hold. Horse-drawn carriages, slide rules,
telephones, the Blackberry….there are many illustrative examples throughout history. It’s
diamond’s turn.
I appreciate the opportunity to voice my views on your earlier writing. Thank you.
Regards,
J. Michael Pinneo, Ph.D., J.D.