Will Sarine Technologies Ltd Be Affected By This Huge New Threat In The Diamond Industry?

There seems to be trouble brewing within the diamond industry: The world’s largest diamond producers had met recently to plan the creation of the industry’s first industry-association to fight off the threat of synthetic diamonds.

With large diamond producers seemingly worried about the threat of synthetic diamonds, should Sarine Technologies Ltd  (SGX: U77) – a mere supplier and service provider of tools and technologies used in the diamond manufacturing process – be even more worried?

Shining a light on synthetic diamonds

Synthetic diamonds are not exactly “fake” diamonds for their composition is actually no different from that of a real mined-diamond. In fact, it is extremely difficult – even for an industry expert – to differentiate between a mined and a synthetic diamond.

The only difference is that synthetic diamonds are man-made – they are produced in a laboratory. This lowers the costs of production for synthetic diamonds when compared with mined-diamonds. As a result, the value of the diamond industry may be diluted if the producers of cheaper synthetic diamonds start selling their wares into the diamond supply chain. This can precipitate into a drastic fall in the global prices for diamonds.

Shining some light on Sarine

Although Sarine Technologies is not directly involved in the business of producing diamonds – it merely sells the tools and technologies needed in the process of converting a rough stone into a polished diamond – the company’s business still depends heavily on the demand for and prices of diamonds.

If synthetic diamonds are able to flood the market, the price of the stone might tank globally, as mentioned earlier. That’s just a natural consequence of the supply-and-demand dynamic.

Moreover, diamonds are generally bought as jewellery because of its exclusivity. If there are too many diamonds in the market, the exclusivity factor may no longer be there, thus negatively affecting the demand for the stones.

If such a scenario does come to pass, the profit margins for participants within the entire value chain of the diamond industry will likely see a sharp decrease, including that of Sarine Technologies.

It should be noted too that the possible decline in the diamond industry I described above is not within Sarine Technologies’ ability to control. This is a sign that the strong competitive advantage enjoyed by the company currently (it has a market share of around 70% in its niche market of the diamond planning & grading products space) is not indestructible.

Possible endings

So, do all these point toward Sarine Technologies heading for the slaughterhouse? The verdict isn’t out yet.

Sarine Technologies has already started to diversify its business away from just the production of diamonds with a  new product that is used to process non-diamond gemstones.

Furthermore, there really isn’t much incentive for synthetic diamonds producers to break the diamond market and force it to become a commodity-like business. It’s likely that the synthetic diamond producers would prefer for diamonds to keep their high prices so that they can earn high profit margins on their man-made stones.

Lastly, as mentioned at the start of this article, big diamond producers are already banding together to fight off the threat of synthetic diamonds and to ensure a healthy balance between supply and demand in the industry. But that said, the formation of a strong association within an industry need not necessarily mean great things for the industry. (Remember OPEC?)

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.