Lab-grown diamonds are a living contradiction. Demand is rising, but prices are falling. They are hot in the US, but not sweeping the rest of the world. Wholesalers accommodate price erosion. It’s a technological-driven product catering to a young crowd and striving to follow in the footsteps of a centuries-old product, while enthusiastically adopting many of its ills.
The Lab-Grown Diamond Contradiction: Position
The most surprising contradiction in the lab-grown diamond sector has to do with its most basic positioning. While bashing the old guard in the name of disruption, it’s clinging to natural diamonds for dear life.
At its core, the fundamental value of mother-nature’s made diamonds is that they are natural – ancient creations that will keep shining forever. That is the source of their symbolic value.
Simply stated, lab-grown diamonds need their own story – a fresh, genuine, unique, and independent story.For lab-grown to insist that “we are the same, but lab made,” is a marketing oxymoron.
The appeal of natural diamonds is strengthened by their being a luxury item. By definition, this means pricey. However, the lab-grown diamond message tops “not natural” with “low cost”.
This is a very contradictory marketing message. And one that won’t last.
Simply stated, lab-grown diamonds need their own story – a fresh, genuine, unique, and independent story. Most importantly, one that is free from a negative undertone, A tale that fits the times, the audience, and the product.
Without it, we are witnessing a massive disaster in slow motion. And it is one that can be avoided.
It’s not my goal to bash the lab-grown diamond sector. On the contrary, it has the makings of a successful opportunity. It just needs to rid itself of the harmful contradictions by shaking off the attachment to the same allure as natural diamonds and start to talk about its own values.
With that in mind, following are some figures and findings from the current market that support this view.
The Lab-Grown Diamond Contradiction in Pricing
Polished lab-grown diamond prices are falling continuously. And this is not solely at wholesale. Across the board, from lab-grown rough diamond prices to retail prices, the movement is south.
Wholesale lab-grown polished diamond prices declined 6-37% in the third quarter of the year. The rate of decline was tied directly to size, as well as to color/clarity combinations.
Prices of larger goods fell sharply in the wholesale diamond market. One-carat rounds declined 21.8%. Prices of two-carat goods dropped nearly 33%. This is a significant plunge.
A number of factors contributed to this large decline. One factor has to do with the improved technologies in producing lab-grown diamonds. It is easier now to produce larger rough, making them more prevalent.
With the greater availability, large polished lab-grown diamonds are following the same cost and price trajectory that smaller goods did in the past: as rarity declines, there is growing pressure to lower price.
With consumers now more willing to buy larger lab-grown – sales of two-carat stones doubled in Q3 2022 – following is a pressure to adjust prices downwards. As bigger goods become available, they are initially priced relatively high. But, over time, they become more prevalent, and their prices decline.
Price pressure has to do with one of the basic tenets of lab-grown positioning: we are cheaper. It follows that consumer expectation is that prices will be low, and window shopping will become a search for the lowest price.The reason for this has to do with one of the two fundamental tenets of lab-grown positioning: they are cheaper. It follows that consumer expectation is that prices will be low, and window shopping will become a search for the most reduced prices.
Retailers are sensitive to consumer price demand and react to it. That is where the pressure comes from.
Naturally, greater availability, lower cost of production, and inventory pressures play a role too. But I’ve yet to meet a diamond seller happily reducing asking prices without the buyer asking for it. Well, unless they are desperate for cash flow…
Smaller Goods Are More Price Resilient
During the third quarter, the price decline in smaller-size goods was much less noticeable, especially for half-carats and smaller. Some were in the lower single digits.
The mild decline for smaller goods follows deeper declines that already took place in the past – in late 2018 and late 2020.
Another element that is possibly supporting prices of smaller goods is a shortage in small natural diamonds. This is a result of US sanctions on ALROSA, the main supplier of these diamonds.
A Widening Diamond Price Gap
After a period of rising natural diamond prices, their prices are also now declining. While it is a far more moderate decline than those of the lab-grown, it is still clearly there.
Despite this recent decline, the natural/lab-grown diamond price gap is expanding.
In January 2020, the average difference in cost US retailers paid for one-carat diamonds was 51%. Last month, that cost gap was 76%.
In less than two years, the wholesale cost gap increased almost 50%. This contradictory pricing direction tells a tall story of the erosion in lab-grown diamond value and the current diamond market.
I’m intentionally comparing retailers’ costs, and not their selling prices, because they are far more homogeneous across the board. This eliminates variations caused by the retail markups associated with positioning and provides you with a sounder understanding of genuine changes.
The Lab-Grown Diamond Contradiction in Margins
Other than consumer demand, the only place in the lab-grown diamond market with a rise is in retailer margins. That is another odd contradiction in lab grown.
While retailers are lowering retail prices, it is not at the same rate as their decline in costs. Retailers, famous for their ability to protect margins at all costs, have succeeded in increasing their gross margins over the years.
They achieved this by pressuring their vendors to reduce prices, while not being as fast to pass on the benefits to consumers.
In 2020, specialty jewelers’ average gross margin on lab-grown diamond sales was 48.9%. A year later, it rose to 50.1%. In 2022 to date, specialty jewelers’ average gross margin was 52%, up 4.2% year over year. That is the lab-grown diamond sector trend, according to our own diamond market analytics.
Lab-Grown Diamond Memo Supply is Unreasonable
Providing goods on memo used to be a typical way to capture market share. When the diamond industry secured generous financing, it was also inexpensive to do, and profitable if you charged a handsome premium for the delayed payment.
However, with a decline in financing and the rise in its cost, the practice makes less sense. Natural diamonds are provided on memo to a considerably lesser degree.
But the lab-grown diamond contradiction is at play here too. Memo terms were provided for more than 40% of the goods supplied to retailers, and this is only growing. Today, it’s already nearing 50%. Seriously? In a market with constant price declines?
Lab-Grown Diamond Rough Declining Too
Lately, lab-grown rough diamond prices have been falling as well. The primary driver is not a lack of demand or a decrease in the cost of production. It is the result of the action of one large grower.
A few months ago, one of the lab-grown producers lowered rough prices significantly. It dragged down rough lab-grown prices for the entire market.
Rough lab-grown diamond prices won’t be restored. If you expect this move to further drag down polished prices, you’re not mistaken.
Just as wholesalers make their way into a store by lowering prices and undercutting the competition, it seems that some lab-grown growers are doing the same to appeal to manufacturers.
A few months ago, one of the lab-grown producers lowered rough prices significantly. It forced other producers to reduce prices, dragging down rough lab-grown prices for the entire market.
It’s unknown if this was done to capture market share or if the producer was in an urgent need for cash flow.
Whatever the reason, the impact on prices coupled with lab-grown diamond market dynamics, leads me to believe that rough lab-grown diamond prices won’t be restored.
If you expect this move to further drag down polished prices, you’re not mistaken.
The Bottom Line
The two most pressing issues the international lab-grown diamond market is facing are poor positioning and value erosion.
Without a story of its own, lab-grown diamonds will forever be hanging off natural diamonds – a product lab-grown proponents are constantly bashing. This is the largest lab-grown diamond contradiction.
The second is the constant decline in prices. With exceptionally generous margins, wholesalers are relatively flexible, but from an inventory management perspective, this is not good. The value of the goods in inventory is suffering from an erosion.
As one astute buyer recently said, inventory value loss is a trader’s most daunting challenge. A rise in lab-grown diamond supply will only exacerbate the situation.
Are you interested in detailed lab-grown diamond analytics? Would this data be invaluable in your decision making? We can answer these and many other questions related to the diamond and jewelry economy.
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About the Author:
Thank you Edahn for such a detailed and insightful article. As a small retail jeweller, based in the UK, we have seen a huge increase in demand for lab-grown diamonds. Without doubt, consumers are moved by the significant price difference for what appears to them to be an identical finished product. At the same time, we have many buyers who refuse to give any time or thought to man-made diamonds. It will be very interesting to see how this plays out in the next 12 months, but with prices falling, I would expect most retailers will purchase to order, rather than to hold inventories that could fall in value. We do, however, expect demand to increase over the next year as awareness increases and more retailers adopt lab-grown as an option incentivised by lower prices for consumers.
Dear Mark, thank you for taking the time to read and respond.
I fully agree with your assessment of the market and its future: a bifurcation, order against confirmed purchases, and rising demand. I find it interesting that after its initial success in the US, lab grown is mainly spreading to English-speaking countries. I haven’t figured that one out.
Hi Edahn, I feel you need to get back to the basics of why we buy diamonds.Jewellery is a feel good product it is worn to be adorned and handed down too the next generation as a sentimental piece.This is for the general public mostly which I supply.How many people come in and buy for an investment?Please at retail prices are any pieces really going to be a real investment .Couples don’t buy to sell there engagement ring and that is where most single larger pieces are sold.Lab look the same lustre is the same and most people 97% choose a lab for brilliance over a mined.People have many other things to do with there money these days mortgages babies which all take money.I am sorry but labs have a huge place in the market,the greed this year in mined putting up prices week after week telling us don’t miss out etc played into the lab marketeers who jumped onto an opening in the market.Greed has always been a telling factor in the diamond business a business I really love ,Like the world there is a place for all of us to survive and share .
Greg, I agree with you that jewelry is purchased for many reasons, with resale value being low on the list of reasons. When considering the cost of an item, a number of things come to play: cultural inclinations, desire to demonstrate financial ability, and more. But at the end of the day, a successful product possesses certain qualities. Those of natural diamonds are largely reliant on them being created by natural many hundreds of millions of years ago.
From a marketing perspective, I don’t think you can promote a product by stating something along the lines of “like me because I possess the same qualities as the competing product”, while criticizing the other product for its source of those qualities.
Not only that it’s self-defeating (because if those qualities are so terrible, then why are you proud of possessing them?), but you are also positioning yourself as number 2.
I’m all for everyone succeeding, and indeed there is room for everyone. That is why I’m encouraging LGD to step out of the nest and spread its own wings.
Edahn: Good to read your commentary again.
Maybe it’s the other way around. Should the mined diamond business deliver the message that they are different? They are clearly on the defensive and under attack from lab diamond with few new mined diamond resources and inflation to boot plus the effect of lab diamond pricing limiting prices on mined diamond in a big way … think tens of billions $. The lab business has a long way to grow no matter what the mined business does. The newest player in any business has the advantage of developing their business with the latest and greatest tools rather than being stuck as legacy businesses with old models and culture. This is why the lab business is more fluid than the mined business so comparing the two in how pricing behaves … is a bit cloudy? Growers, wholesalers and retailers will have to live with and profit from different dynamics in the lab business. Such as the way India and China are very much different today in the upstream and downstream flow of lab rough. The Indians are quite adept at downstream development for many decades from cutting and polishing to polished distribution, jewelry manufacturing and jewelry retail while the Chinese are not nearly as experienced (from a rough perspective). This is why Indian lab buyers have been are increasingly opening lab rough buying offices in China today so they have access to rough resources and don’t have to produce lab rough themselves. This puts most Chinese growers in a tough spot as they only participate in rough profit. The Chinese will find a way downstream into the US then future markets. When you imagine large multi-nationals having their way think of many small Chinese companies banded together as one. In many cases this band of brothers devastated [large] foreign competitors. In positive ways, doing what they have to do too survive, Chinese manufacturers are on the move … they are relentless.
The natural diamond business speaks about itself in its messaging, as it should. Especially true for the more established voices, like NDC. When natural diamond traders and retailers talk about the lower value of LG, they are doing themselves and the industry a disservice.
Agree with you , Mark.
I think they have intersections and differences,
Obviously, the current bridal market of Natual is being eroded by Lab.
What you said about the growers, it can be seen that you are a person who understands the truth, at least in part.
I have read a lot of reports about lab grow diamonds, but none of them understand what the Chinese growers are doing and what they will do.
Chinese manufacturers are on the move. :)
It will be interesting to see how the growth process evolves in China and how they adapt to changes in the consumer market. Another point to pay attention too is where they will go in terms of focusing on jewelry or prefer technological applications.
Hi Edahn, Thank you for your detailed input. What do you think about the future of lab grown and natural diamonds in India?
Growth! Continued growth.
Edahn, your observations about the contradiction in the LGD industry are thought provoking and on point. There will likely be a blood bath in the LGD business and free market forces will clean house. However you suggested that this accident can be avoided. For many reasons the LGD industry is chaotic. However, many of the bigger players in LGD have historical roots in minded diamonds so it is not so easy for them to crates a story for LGD which is not tied at the unblocks cord to their roots. As a management consultant to the jewellery business in Hong Kong, many are family owned business with a very strong patriarchal founder. Change does not come easy. The same may be true for other countries. I personally believe that a formation of a LGD Roundtable to start which can evolve into a LGD Council is necessary to chart a course for the LGD industry in the next decade. You have identified many of the dilemmas but what is needed is for the industry to come up with some solutions.
I agree with your assessment, and pointing out that LGD folks came into the business from the natural side, bringing their regular practices from there. It would be interesting to see how this evolves and how such a council comes to life.
Let’s be frank. What is the message of the [failed] Kimberly Process? … that it insures conflict diamonds do not enter the mined diamond pipeline and wind up on an unsuspecting consumers body? How about the horrific legacy of slavery and theft of many countries resources [that still goes on today] …it never happened? Belgium worries about losing jobs while incredible suffering in Ukraine is financed in part by it’s refusal not buy Russian diamonds? Remember the investment lies that led investors to believe one carat mined diamonds were worth $60K as investments? To boot-the story of mined diamonds are somehow rare while [just] IDEX boosts one million mined diamonds listed [available today] is impossible to believe … that’s a hum-dinger of a mined diamond industry message.
This will go the way of created rubies, emeralds, sapphires, even cubic zirconia. Prices started high and end up at pennies per carat because of the unlimited supply. Creation of boards and councils and such for a synthetic product is curious. There will be a ton of this sold, but in the end, it will be like every other simulated product. Dress it up with as many qualifiers as you want and put fancy “lab-grown” in front of it, but nothing beats a “diamond”… no qualifier needed.
Great assessment Edahn, The fact is a CVD reactor needs to go only twice as long to produce rough for 8.00ct as 1.00 carat. 4mm thick vs 8mm thick. I doubt that two carat will be the new one carat. Think 4 and five carat as the sweet spots for growers and cutters!
Garry, great to hear from you. It has been awhile.
You raise an interesting point. Considering both the changing prices and changes in availability (driven by the improved technology), the sweet spot will keep moving.
Yes, today 2 craters and tomorrow a very different size range. I wonder if LG will evolve to the point where demand will follow a different characteristic/feature.