Diamonds grown in the lab are shining brighter than natural stones by grabbing market share, but their kryptonite could be the low prices and large carats indicating they really are in a different category, analysts and companies surveyed by The Wall St. Journal say.

Post-pandemic demand for diamonds surged in 2021-2022, but then prices dropped by 8% compared with the first quarter of 2020 and lab-grown diamond (LGD) prices plunged by three quarters, the Journal reported Friday, citing industry analyst Paul Zimnisky.

LGD prices are falling because their manufacturing costs also keep dropping, while slow demand is pulling down natural diamond prices, New York-based Ziminsky said.

This downturn spurred diamond giant De Beers, owned by Anglo American (LSE: AAL), to cut its rough stone prices by 10% to 15% at its December sale, industry publication Rapaport News reported.

De Beers, for its part, is betting the widening price gap will spur consumers to see LGDs as a different category and not a substitute. Its LGD subsidiary, Lightbox, has at times offered lower-than-market prices, and the growing price difference is raising awareness that the two types of stones are distinct, De Beers brands CEO Sandrine Conseiller said.

Slump

In the wider world, the diamond sales slump could see the economy of top producer Botswana shrink by 1.7%, Reuters reports.

In the United States, the largest diamond market, consumers are increasingly buying larger and cheaper LGDs over natural stones. Natural diamond jewelry sales were down 0.7% until November compared with the previous year, while LGD jewelry sales gained 12.5%, industry analyst Edahn Golan said.

Meanwhile in China, usually the world’s second-biggest market, demand is also slow. Diamond-jewelry demand fell by about a quarter in 2024 compared with 2023, which was already a sluggish year, Golan said. That’s in line with Chinese spending on other luxury goods, as economic anxiety seems to be making gold more popular than diamonds.

About 77% of Chinese jewelry retailers’ sales were from gold investment products or gold jewelry as of July 2024, up from 71% two years earlier, the World Gold Council reported. Diamonds’ makeup of sales was down to 9% from 16% over the same period.

Incentives

For retailers, there’s high incentive to sell LGDs over natural stones, and for manufacturers the cost of growing LGDs is dropping faster than retail prices of jewelry made with those stones, Signet Jewelers said in a December earnings call.

The drop in manufacturing costs helps give both manufacturers and retailers better margins at lower prices. That in turn helps welcome new customers who might not have previously bought diamond engagement rings or who now want diamond-studded jewelry.

A 1.5-carat LGD was around 80% cheaper than an equivalent quality natural diamond as of last year’s first quarter. In 2018, that difference was 40%, The Journal said, citing a report from Boston Consulting Group (BCG) and De Beers.

Re-discovering nature

De Beers, which Anglo American plans to sell offas part of a restructuring plan following an unsuccessful $43 billion takeover bid by BHP (ASX: BHP), plans to re-orient its strategy towards marketing natural diamonds, CEO Al Cook said in June. It was going to wind down Lightbox and refocus synthetic production on industrial uses, he said.

But a key issue when it comes to natural diamonds is retailer incentives. Since most consumers choose LGDs at stores, retailers were wise to upgrade customers to larger LGD rings. In 2019, jewelers who upgraded a customer from a 1-to-1.49-carat natural stone to a 2-carat LGD made $1,500 more in gross profit, according to the BCG report.

That changed in 2023, when retail prices for LGDs fell. Retailers then had to trade customers up to a 3-carat LGD to get the same gross profit as a 1-to-1.49-carat natural stone, the report noted. Retailers might eventually hit a limit on upgrading consumers with carat size: It’s hard to imagine 4- or 5-carat engagement rings becoming the norm.

Peak margins?

There are hints that retailers’ margins on LGDs have peaked, after they touched a high of 90% for some loose LGDs in the current quarter, Zimnisky said. That’s far higher than the 30% to 40% margins for natural stones, though they’ve shrunk to about 80% recently.

Wholesale prices are bottoming out after years of fast declines, the analyst said, as the fact that Walmart is now selling LGDs shows how competitive that market is becoming.

If retail margins on LGDs drop to natural-stone levels, the price of a high-quality 1-carat LGD could retail for as low as $275, Zimnisky said. That compares with about $4,200 for an equivalent natural diamond.  

It appears the battle lines are drawn for natural diamond miners and retailers, who face a hard fight in the coming years.

Source: MINING.COM – Read More