In January lab-grown diamond producers saw their revenues dip for the first time since their creations exploded onto the scene a few years ago. Sales are still strong, but cynics say collapsing prices confirm that the lab-growns are ‘shiny trinkets’ far removed from the real deal. Staff Writer, MBONGENI MGUNI, reports
Too much of a good thing? Or from the perspective of some natural diamond producers, good riddance to bad rubbish?
The latest data coming out of the retail jewellery sector indicates that lab-grown diamonds are facing their moment of truth, a crash in prices so deep that their even soaring sales are unable to prevent a squeeze on revenue.
Diamond analyst, Edahn Golan, in a commentary earlier this week, explained the significance of the latest data. Golan’s website can be reached on https://www.edahngolan.com/
“For the first time, the total value of monthly lab-grown diamond sales in the US decreased year over year,” he said.
“The decline, down 3.3% in January compared to January 2023, is the next stage of a long trend of reduced revenue from loose lab-grown diamond sales.”
Loose diamonds are stones that have been cut and polished, ready to be set into an engagement ring or piece of jewellery or purchased as an investment. They represent a smaller section of the diamond retail market compared to engagement, bridal and fashion jewellery, but the latest trends are indicative.
Golan further explained the paradox in the trends around lab-growns.
“This does not mean that less lab-grown stones are sold; quite to the contrary.
“Consumer interest is evident, particularly in the US.
“However, while they are purchasing more units, their average expenditure per unit is decreasing.”
He added: “The issue is that the rise in the number of units sold is not making up for the constant drop in prices.
“Even the consumer movement to larger stones didn't help prevent this trend, which should be a major concern for the lab-grown market.”
For natural producers, such as Botswana, lab-growns have been the proverbial pain in the neck, with their ballooning popularity, particularly with the Gen Zs, especially bothersome in a period in which retail demand and prices have been on a sharp downturn.
De Beers is expected to announce a revenue drop of more than 30% for 2023, while the country’s revenue from mineral taxes, royalties and dividends is expected to have dropped by P7.36 billion when the final tally is made after the financial year ends on March 31. The drop is steeper than it could have been because the year 2022 had record diamond sales, but the nuances are largely immaterial for authorities eager to return to fiscal sustainability after years of budget deficits and rising public debt.
The major factors facing the natural industry last year were high inventory levels of polished diamonds in the midstream, which affected demand for rough diamonds and stemmed largely from global economic uncertainties, particularly in major markets such as the United States.
The US Federal Reserve raised interest rates to a 22-year high in 2023, further pressuring consumers.
While lower consumer appetites affect all classes of luxury products, the lab-grown producers largely coasted by. Thousands of synthetic laboratories have opened in India and China in recent years, flooding markets, particularly the US, with increasingly cheaper stones.
These products are consistently marketed as being more ethically and sustainably produced than natural diamonds, which plays well with the increasingly discerning American consumer, especially at a time when sanctioned Russian naturals continue to trade in the global market.
More critically, many labs are only too happy to market their products as the real deal, further muddying the waters and threatening the space occupied by natural diamonds.
Helped by rapidly improving technology and changing consumer tastes, lab-growns have carved out a space for themselves at the cheaper end of the retail market, selling for a fraction of the price of natural diamond jewellery.
However, increasingly, they have undercut more segments of the natural market, even breaking into the bridal jewellery market, the traditional stomping ground for natural producers and where they make their biggest profits.
The US market accounts for about 54% of diamond jewellery sales and by 2022, lab-grown jewellery was estimated to account for one-third of engagement diamond jewellery sales, a startling figure driven largely by Gen Zs who are sensitive about both prices and ethical sourcing.
Having held lab-growns at bay for years by successfully highlighting the store of value natural diamonds have, their enduring symbol as a bridal centrepiece and the real-world good they do for economies such as Botswana, natural producers have begrudgingly and increasingly ceded ground at certain sizes of stones to the cheaper lab-growns.
In fact, according to De Beers’ own data sets, the number of synthetic diamond labs in India is expected to jump to 9,000 in 2023 from 6,000.
But the explosion in the production of lab-growns has also meant a sharp drop in their price – more than 80% in recent years – turning some jewellers off from stocking them even as they have flown off shelves faster than the naturals.
As explained previously by Paul Rowley, De Beers’ executive vice president for diamond trading, lab-growns benefited from a particular trend in the market that actually “incentivised” jewellers to stock them.
“The price trajectory is very steeply down at Business to Business level, not so much or as steep as yet, at retail,” he told Mmegi last April.
“And so consequently, that definition says if your raw resource is getting a lot cheaper, but the retail price is remaining a little bit higher, then profitability is high.
“And that’s been one of the issues we have seen here is that retailers have been almost incentivised by that higher profit margin that they have been able to attain, to push lab-grown diamonds over this period.”
The latest data collated by Golan provides the first hint that lab-grown jewellery prices are hitting a ceiling in terms of how high retailers can hold the prices.
“Alongside the decline in revenue, retailers keep protecting their revenue by increasing their gross margins,” he said in a research note this week.
“In January, it already reached 67%, up 23% year over year.
“Retailers no longer double their cost to set price, they are already tripling their cost.
“One could just wonder how consumers will feel about it if they all knew that the low price they believe they’re getting is still relatively steep.”
The sour news for lab-growns, however, does not automatically mean great news for naturals. While De Beers did announce an uptick in its first sales event of the year recently, it’s still unclear when a rebound will occur and the infiltration of the lab-growns has created a structural challenge for the naturals going into the future.
In fact, in a recent webinar, global diamond industry veteran, Martin Rapaport, said demand and revenues for natural diamonds could fall by as much as 20% this year. He also estimated that lab-growns could take over about 40% of the US engagement ring and bridal market.
“Natural diamonds are in a dangerous serious time and I have been in the market for 45 years,” he said.
“This is not just a short-term perfect storm, but fundamental change and restructuring that will have a long-term effect on the industry.
“The challenges we face are not going away and we are going to have to fight to survive.”
On Thursday, Golan told Mmegi the natural diamond industry would have to carefully manage the trends around lab-growns.
“The ongoing price decline of lab-grown diamonds is a major concern for the lab-grown sector,” he said in an emailed response.
“It means that consumers understand that with enough pressure and shopping around will bring a further reduction in the price.
“This threatens to diminish the perception of lab-grown diamonds in the eyes of consumers.
“From the perspective of the natural diamond industry, this is both an opportunity and a potential warning sign.
“The positive is that the lab-grown diamond price drop will further enhance the bifurcation and increase the gap between natural and lab grown diamonds. This will also enhance natural's uniqueness.
“The concern is that the association between the two may lead to lab-grown dragging down the perception of naturals with it.
“This must be carefully managed by the natural diamond industry.”
Other players are more upbeat. Signet, the world’s largest diamond jewellery retailer, says its trend analysis points to an upswing in demand this year.
Signet estimates that it is responsible for selling about half of Botswana’s diamonds, through its retail stores. CEO, Gina Drosos, was recently in Botswana and said the retail market was due an uptick in demand, which is linked to the key bridal market and the COVID-19 slump.
“The average point of time from when a couple starts dating, when they meet, to when they decide to get engaged is 3.25 years,” she said.
“However, because people were in a lockdown from COVID, we predicted that 2023 would be a significant drop-off in the number of couples getting engaged.
“For the US market that was true and 25% fewer couples got engaged in 2023 than in a typical year pre-COVID.
“But the good news is that the trough of that COVID-induced decline in engagements has now passed and it passed at the end of October or early November.”
She added: “Now we are on a three-year upswing of the number of couples who will be getting engaged in the world’s largest diamond market and that’s a tailwind on the natural diamond business that we should all be excited by and encouraged by.”
The key question in 2024, is whether the expected upswing will benefit natural diamonds or continue to be channelled to the lab-growns, especially in terms of unit sales.
One of the questions is around the demographics driving diamond jewellery sales.
Golan said currently, the largest demographic for lab-grown diamond-set jewellery is 30-year-old couples who are buying engagement rings.
“The big question is how will they feel in a year when they see that their lab grown diamond ring sells for 15% less, or in five years when they see it’s priced 50% lower, especially when the price of a natural diamond ring is unchanged?
“If they feel cheated, then they will probably abandon lab grown.”
He added: “Another way of viewing this is to ask what marketing will the natural diamond industry have in place to promote the category? This is to say that the course will be determined by the diamond industry.”
Natural producers such as De Beers are stepping up their marketing activities, making an even clearer distinction between the value offered by the rare naturals and the real world good these are delivering in economies such as Botswana.
State-owned diamond trader, the Okavango Diamond Company (ODC), is this year moving into a new P370 million headquarters and has plans to boost its marketing. The ODC, with annual output of about six million carats, brings to market the most amount of Botswana-only stones, as De Beers’ production represents a mixture from Botswana, Canada, South Africa and Namibia.
The different players will be anchoring their campaigns on Botswana’s standing as the country most emblematic of the “diamonds for development” mantra and a leading proponent of ethical and sustainable production.
Golan said there were other ways in which natural diamond producers like Botswana, could better position themselves.
“The most effective approach is to support marketing initiatives, which can be done in many ways.
“For example: provide miners with incentives to invest in marketing.
“They can actively promote diamonds the same way they promote tourism.
“They can contribute to ongoing efforts, either financially, or by inviting celebrities to visit their countries and witness the benefits of diamonds to the local communities.
“The possibilities are only limited by creativity.”
