Diamond Sector Watch. De Beers launch Lightbox: disruption. Group Economics Financial Markets Research. Insights.abnamro.nl/en.

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Diamond Sector Watch Group Economics Financial Markets Research 11 June 2018 De Beers launch Lightbox: disruption Georgette Boele Senior Precious Metals & Diamond Analyst Tel: +31 20 629 7789

1 Diamond Sector Watch Group Economics Financial Markets Research 11 June 2018 De Beers launch Lightbox: disruption Georgette Boele Senior Precious Metals & Diamond Analyst Tel: De Beers have launched their own laboratory grown diamond jewellery brand, Lightbox Gem-quality laboratory grown diamonds threaten the business case of miners, now even more so than before This creates a lot of uncertainty in the diamond industry Now it is up to the other laboratory diamond producers to react and other companies in the business to re-think their strategies Companies with exposure to both natural and laboratory grown diamond industries are least vulnerable in our view and the consumers are the winner Introduction On 29 May De Beers launched a laboratory grown diamond jewellery brand, Lightbox Jewellery. This was a shock to the industry. In this publication we focus on the consequences. Gem-quality laboratory grown diamonds threaten the business case of miners For most diamond miners and producers gem-quality laboratory grown diamonds have been a threat for several reasons. For a start, undisclosed mixing of laboratory grown diamonds with natural diamonds had a serious impact on confidence in the industry. However, since the introduction of the detection machines the fear of mixing laboratory grown diamonds with natural diamonds has eased. Moreover, the miners have not only been confronted with a substitution product but also the entrance of a large number of new market participants who threaten to end the oligopolic industry structure. Furthermore, the marketing campaign of the miners to defend their turf has not been particularly successful up to now. In fact, there are signs that the laboratory grown diamond producers have the upper hand. So it was time to take action. De Beers is known for being proactive, the industry's leader in many ways. First, it used the knowledge of its laboratory grown diamond production unit (Element 6) to build machines that can early detect laboratory grown diamonds in parcels of natural diamonds. Moreover its diamond grading service International Institute of Diamond Grading & Research or IIDGR has the knowledge to detect laboratory grown diamonds. Second, it announced in January 2018 that it aims to launch the first industry-wide blockchain this Insights.abnamro.nl/en

2 2 Diamond Sector Watch - De Beers launch Lightbox: disruption 11 June 2018 year to track gems each time they change hands starting from the moment they are dug from the ground. And now De Beers directly takes on the laboratory grown diamonds challenge by its latest announcement to launch a laboratory grown diamond jewellery brand Lightbox. launch a laboratory grown diamond jewellery brand. What is the strategy behind this move? We have not been present in De Beers' boardroom but we think that the most likely strategies behind the announcement of De Beers are as follows. First, De Beers would like to create clear segmentation of the two different industries: a natural diamond industry and a laboratory grown diamond industry. If successful it could protect the revenues from the mined diamond business. It is possible to create two different industries. However, it remains to be seen if this will happen. Markets will only remain separated if the products in the two different markets are sufficiently different. Second, both industries have different industry structures: oligopoly for the natural diamond industry where the strategy of supply limitation is important. Meanwhile full competition will characterise the laboratory grown diamond industry. Third, there is a new set of generic strategies. For the natural diamond industry the strategy seems to be differentiation and focus, while for the laboratory grown diamond industry the strategy is economies of scale and focus. De Beers has priced the laboratory grown diamonds based on the production costs rather than as a discount on the natural diamonds, like the other laboratory grown diamond producers have done. This pricing strategy should help create the perception that the two products are different enough to have separate markets. The other laboratory grown diamond producers are being challenged to follow with De Beers low pricing strategy (not pricing off the natural diamonds) and the perception that laboratory grown diamonds are not special and rare. Fourth, by having two completely different products, different pricing strategies and marketing campaigns De Beers hopes that these will become and stay two different industries. For example: for laboratory grown diamond jewellery setting De Beers uses silver or 10 karat gold (with natural diamonds the standard is a higher purity gold or platinum). By introducing silver and lower purity gold as a possible setting De Beers would like to show that it is less valuable. Less valuable gemstones and simulants are often set in silver or lower purity gold. Indeed, they would like to create the feeling that it is just a cheap mass product. Now it is up the other laboratory grown diamond producers De Beers is known to be ahead of the game and brilliant in its marketing campaigns. This strategic move shows how serious the laboratory grown diamonds threat is to the natural diamond industry. It is now up to the other laboratory grown diamond producers to react. Possible reactions are as follows. First, laboratory grown diamond producers may start an advertisement campaign that laboratory grown diamonds are not just a cheap alternative but in fact man-made precious diamonds. We think that this will be an uphill struggle as De Beers are a step ahead.

3 3 Diamond Sector Watch - De Beers launch Lightbox: disruption 11 June 2018 Moreover, it is likely that other laboratory grown diamond producers are able to match or even improve the price for laboratory grown diamonds. Energy costs are the most important cost component for laboratory grown diamonds. The producer with the lowest energy bill and the best technology will be able to win this price war. De Beers may have started this price-war to protect its goose with the golden eggs (natural diamond business) but this doesn t mean that it will win it. The ultimate goal seems to be that laboratory grown diamonds will be sufficiently separated from the natural diamond industry to leave the characteristics of that market in tact as much as possible. Furthermore, other laboratory grown diamond producers could decide not to differentiate the products offered under this lower price. They may decide to offer laboratory grown diamonds for wedding rings, larger stones with higher purity gold settings. These producers may seek alliances with gold producers to bring down the costs. And the winner is All in all this development shows once again that De Beers is ahead of the game. They are trying to kill the business case of many laboratory grown diamond producers and they are trying to change the public's perception of these laboratory grown diamonds. Laboratory diamonds have been promoted as highly innovative and sustainable. Time will tell if this assertive move by De Beers has shielded the natural diamond industry. It could well be that consumers completely embrace laboratory grown diamonds and that demand for natural diamonds will drop. In the end the consumer is the winner because there will be affordable laboratory grown diamonds on the market, which have the same beauty as a natural diamond. The main question is if a consumer will in the end go for the beautiful affordable and the more sustainable option or the beautiful, rare, less affordable, less sustainable (see True Price report on diamonds) option. This will be a personal decision. One thing is for sure, changes were coming in the diamond industry. This move by De Beers is an irreversible move. Whether or not this strategy is enough to save its goose with golden eggs (natural diamond business) will remain the question. De Beers shows that it is ready for the huge challenge and ready to fight. There are not a lot of miners in the luxury position to compete in the natural diamond industry and in the laboratory grown diamond industry. Therefore, De Beers will likely survive in one or both industries but its role could be different in the long term. With regard to the other mines, most of them are behind the curve. They need to rethink their strategies if they also want to be part of the laboratory grown diamond industry. They can, for example, team up with laboratory grown diamond producers. Diamond miners (that decide not to get involved in laboratory grown diamonds) and diamond producing countries can only hope that the move by De Beers will protect the natural diamond business. By hoping, you are not in charge of your own destiny anymore. Diamond buyers (traders, manufacturers and retail houses) need to make up their minds what strategy they will follow. Traders will only be present in the natural diamond industry while manufacturers could polish and have been polishing natural and laboratory grown diamonds. In the laboratory grown diamond industry jewellery manufacturers could order the diamonds they need. There is certainty of supply (more producers and stones can be made on demand) and more attractive prices. But the uncertainty remains whether or not consumers will fully embrace laboratory grown diamonds.

4 4 Diamond Sector Watch - De Beers launch Lightbox: disruption 11 June 2018 Find out more about Group Economics at: DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box EA Amsterdam The Netherlands This material has been generated and produced by a Precious Metals Strategist ( Strategists ). Strategists prepare and produce trade commentary, trade ideas, and other analysis to support the sales and trading desks. The information in these reports has been obtained or derived from public available sources; ABN AMRO Bank NV makes no representations as to its accuracy or completeness. The analysis of the Strategists is subject to change and subsequent analysis may be inconsistent with information previously provided to you. Strategists are not part of any department conducting Investment Research and do not have a direct reporting line to the Head Trading or the Head of Sales. 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5 5 Diamond Sector Watch - De Beers launch Lightbox: disruption 11 June 2018

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