The diamond industry is out of balance. The rough diamonds produced at mines only partially fit current consumer demand. This may explain why price movement is restrained. Meanwhile, among lab-grown goods, matters are a little more lively.
Although prices of smaller lab-grown goods have been mostly stable, the prices of larger goods sank in the first quarter of 2019. A combination of oversupply and technological developments contributed to the price decline. These two causes are also the biggest issues related to lab-grown.
Inventories of round-shaped polished natural diamonds held by wholesalers and manufacturers increased by more than 6% in the first quarter of 2019, as compared to the fourth quarter of 2018. The bulk of the increase was among quarter- and half-carats.
The overall rise in inventory levels adds to an already ongoing buildup in polished diamond stocks. On a year-over-year basis, inventory levels rose nearly 40%, the highest increase in three years, according to our research. This does not spell good news for the diamond industry on any level – production, manufacturing or financing.
Polished Diamond Midstream Inventories – Indexed
Demands are Specific and Limited
The inventory buildup is not surprising in light of weakening demand. Although demand for natural diamonds expanded to a wider range of goods, the overall quantity in demand has declined both quarter-over-quarter and year-over-year.
An unenthusiastic trade show in Hong Kong and the very limited activity at Basel are two of the glaring examples of the level of demand in the market.
Another aspect of the change in demand for polished diamonds is the cautious approach taken by market participants: Retailers are holding as minimal a stock as possible, there is a rise in wholesalers’ willingness to offer goods on memo, manufacturers in India have reduced their polishing activity by an estimated 30% and De Beers has decided to reduce production.
At the same time, market consolidating is ongoing. The number of specialty retailers continues to decrease, large chains are decreasing store count and firing staff, diamond trading companies are closing while not being fully replaced by new traders, and diamond mines are slowly shutting down as they deplete. Marketing is spotty at best and ineffective.
Inventory and Demand Out of Sync
The imbalance between demand and availability is quite glaring. Inventories are out of tune with demand. The only areas where inventories declined against demand were in the 0.18–0.22-carat, 2-carat and 4-carat size ranges. Among quarters, demand and inventory were balanced. In every other size range, supply grew faster than demand.
This means that manufacturers are churning out goods that retailers are less interested in. At the same time, traders are pointing out to long-term shortages in certain goods.
Effectively, manufacturers are tying up capital in goods that will need to be discounted (and at times heavily discounted) to move them, while struggling to secure rough diamonds for desired items.
This is partially a result of narrow consumer demand versus the wide run-of-mine production and limited flexibility in buying rough diamonds. But it is also an issue of figuring out where demand is going and lining up goods accordingly.
Prices of Lab-Grown
One of the outcomes of the fast paced growth in downstream demand in the past year was the quick rise in LGD production. Typical of a new market with a lot of buzz, there are many new players: both producers and traders. While their emergence has led to a quick jump in supply, there were fewer actual purchases of smaller goods than expected in the first quarter.
Lab-Grown Price Index
Prices of Smaller Lab-Grown Stable in Q1Wholesale transaction prices of smaller goods, 0.23–0.89 carats, were stable in the first quarter of 2019, according to our LGD Price List. The price stability is a balance between weaker than expected demand and firm pricing by Chinese HPHT producers. The one outstanding exception was among the lower end, J-M color/SI1-I clarity goods. Their prices fell 6–11% in the first quarter compared to Q4 2018.
The drive to grow larger HPHT goods with the aim of providing lower-priced goods is ongoing. In the first quarter of the year, that led to a growing supply of 0.90–0.99-carat HPHT goods at the expense of CVD-produced ones. Subsequently, it brought a 7.4% decline in the overall average wholesale prices of the 0.90–0.99-carat size range.
This has become a repeated pattern in the past year. HPHT technology continues to improve, and producers are growing larger rough HPHT. Then those lab-grown size ranges show a price reduction. These technology and price trends are expected to continue in the near- to midterm and to impact larger sizes.
Oversupply Leads to Sinking Prices
The combination of rising supplies and weaker than expected demand has left traders with large inventories, especially of 1-carat and above. For those goods, still mainly CVD produced, oversupply has had a strong influence on prices. Overall, prices of 1-carat LGD dropped 20.3% on average quarter-over-quarter. The wholesale prices of 1.5-carat goods fell 15.8% during the period, and 2-carats declined by 9%.
Lab-Grown Wholesale Transaction Prices % Change:
Q1 2019 vs Q4 2018
An emerging trend worth paying attention to is a growing demand for top items. One outcome is that more traders are offering triple excellent LGD. Another outcome is that the very top color/clarity goods had higher prices in Q1 compared to Q4 2018. On the other hand, prices of the lowest color/quality goods were slashed in half.
Finally, compared to wholesale transaction prices of natural diamonds, prices of LGD are on average 65–84% lower, depending on size, color and clarity.