The demand for one of the world’s most sought-after types of rough diamonds has plummeted, leading to a significant price decline, as a growing number of Americans opt for engagement rings featuring lab-grown stones. While diamond demand has generally weakened across the board following the pandemic, consumers have redirected their spending toward travel and experiences. Economic challenges have also impacted luxury spending. However, the most affected stones are those used in the popular one- or two-carat solitaire bridal rings commonly found in the US.

This price drop has been primarily attributed to the surging demand for lab-grown diamonds. The synthetic diamond industry has strategically targeted this category, where consumers are particularly price-sensitive, and these efforts are now paying off in the world’s largest diamond market.

It’s important to note that this shift does not imply a sudden reduction in engagement ring prices; instead, its impact is confined to the rough diamond market, a complex world involving miners, merchants, and traders that operates several steps away from retail jewelry prices.

Nonetheless, the sudden and substantial price decline of one of the diamond industry’s critical products has sent shockwaves through the market. The key question now is whether this declining demand for natural diamonds in this category signifies a permanent shift and whether lab-grown gems will eventually encroach on the more expensive diamond segment, typically dominated by Asian buyers.

Industry leader De Beers attributes the current weakness to a natural dip in demand following a pandemic-induced surge in prices, with cheaper engagement rings being particularly vulnerable. While the company acknowledges some penetration by synthetic stones into this category, it does not view it as a structural shift.

Paul Rowley, the head of De Beers’ diamond trading business, stated, “There has been a little bit of cannibalization. That has happened, I don’t think we should deny that. We see the real issue as a macroeconomic issue.”

Lab-grown diamonds, identical to natural diamonds but produced in a matter of weeks in a controlled environment, have long been considered a potential threat to the natural mining industry. Advocates argue that they offer a more affordable alternative without many of the environmental or social concerns associated with mined diamonds.

For much of the past decade, the impact of synthetic diamonds was limited to lower-cost gift segments. However, the situation is evolving, with lab-grown products gaining a significant share of the crucial US bridal market.

In response to weakening demand, De Beers has aggressively reduced prices for “select makeables,” rough diamonds ranging from 2 to 4 carats, which can be cut into smaller stones suitable for high-quality bridal rings. Prices in this category have dropped by over 40% in the past year, including a more than 15% reduction in July.

De Beers maintains significant influence in the rough diamond market, conducting ten annual sales events where buyers, known as sightholders, typically accept offered prices and quantities. Aggressive price cuts are generally reserved as a last resort, and the extent of the recent price reductions for a benchmark product is unprecedented, according to industry experts.

In June 2022, De Beers charged approximately $1,400 per carat for select makeable diamonds. By July this year, the price had decreased to around $850 per carat. There may still be room for further declines, as these diamonds remain 10% more expensive than in the secondary market, where traders and manufacturers transact among themselves.

Lab-grown diamonds now constitute about 9% of diamond exports from India, which accounts for around 90% of global diamond cutting and polishing. This represents a significant increase from the 1% share recorded five years ago. Given their lower prices, lab-grown diamonds now make up roughly 25% to 35% of the total volume, as reported by Liberum Capital Markets.

De Beers felt the impact of this trend in its first-half results, with profits plummeting by over 60% to just $347 million. The average selling price also declined from $213 per carat to $163 per carat. De Beers’ August sale was the smallest of the year to date.

To address this situation, De Beers has offered its buyers more flexibility, allowing them to defer up to 50% of contracted purchases for diamonds larger than 1 carat for the remainder of the year.

Although lab-grown diamonds are currently affecting demand for natural stones, the lab-grown industry is also facing challenges. The price of synthetic diamonds has dropped even more steeply than that of natural stones, and they are now selling at a greater discount than ever before.

Around five years ago, lab-grown diamonds were priced at roughly a 20% discount compared to natural diamonds. However, this discount has now expanded to approximately 80% as retailers aggressively lower prices, and the cost of production continues to decline. The price of polished synthetic stones in the wholesale market has fallen by over half this year alone.

De Beers began selling its own lab-grown diamonds in 2018 at a substantial discount to market prices, aiming to distinguish between the two categories. The company anticipates that lab-grown prices will continue to decrease as more supply enters the market.

By Impact Lab