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Diamond is Forever? More like Diamond is for Everyone

06 february 2023

Let's face it: lab-grown diamonds are gaining a wider acceptance on the market each year, and the trend is here to stay. With manufacturers ramping up production despite some signs of an oversupply, there is no slowing down for lab-grown diamond (LGD) consumption, and the bridal category, previously dominated by natural stones, is now being gradually overtaken by man-made diamonds.

As a millenial, I have been (conveniently for this topic) searching for a perfect engagement ring and looking at this issue not only as an analyst, but as a consumer, too. And, unsurprisingly, there is a dilemma: should I choose a natural diamond or a lab-grown one? This is a trickier question than it might seem with the current state of the diamond market and the world economy in general especially taking into account the vast improvements in synthetic diamond manufacturing over the past few years.

In recent couple of months or so, a few analysts from the diamond market have been warning about lab-grown diamond production oversupply. Still, recent reports show that synthetics demand is not slowing down and on the contrary, is on the rise. This creates an interesting situation with a few possible outcomes for both natural and lab-grown diamonds. It seems as if diamonds are slowly but inevitably turning into a more affordable and more readily available type of gemstones than they used to be.

However, first we will have to take a look at the current state of events and the underlying trends to better understand the future prospects of both natural and lab-grown markets.


Historical context

It is a good idea to first look into the recent history of the diamond market in general and see how market trends manifested in natural and lab-grown sectors, specifically.

Diamond prices have mostly been stable throughout 2019 but going into 2020 as the Covid-19 pandemic struck, they slumped as consumer fears skyrocketed, jewellery stores closed and the world economy experienced a rapid disruption. In the aftermath of this crisis however, prices not only recovered but surged to new highs in the first half of 2022 as spending increased and consumers' buying appetite lifted after more than a year of forced tightened spending. Alas, this trend turned out to be rather short-lived. As of January 2023, diamond prices index dropped to late-2021 levels.

Although this can surely be attributed to a seasonal nature of the diamond market, there are probably a few other factors at work here. Economic uncertainty and a looming recession coupled with fears of a new wave of coronavirus cases in China to hinder its economic growth as well as rampant inflation have been instrumental in the diamond market's downturn. Take these problems and combine them with a growing threat of lab-grown diamonds – and the picture becomes rather gloom for natural gems all of a sudden, which already resulted in massive job cuts in Surat's manufacturing sector.

Coincidentally, the performance of LGDs has seen diverging trends but overall seems to be quite spectacular. On the one hand, there are clear signs of an over-saturated market with stones trading at least 90%-95% below RapNet prices for natural stones. A notable example is a recent 'marketing promotion' with a 100% discount on lab diamonds during a Las Vegas gem show. On the other hand, figures show that manmade diamonds are surging in both consumer acceptance and popularity.

Some industry experts believe that lab-grown diamonds are gaining traction and can potentially constitute a sizeable portion of the diamond jewellery market, eventually.

There are a few reasons for that.


Made cheap

It's no wonder lab-grown diamonds are everywhere as the entry threshold in the manufacturing business seems to be exceedingly low. For example, a quick web search leads to a certain Chinese wholesale website offering a 'Hot sale professional man made synthetic CVD diamond making machine' for just $130 000. A similar machine in Surat, India, would cost even less, around $86 000 (7 million rupees). China leads the LGD business with a market share of over 50% while India is a close second, and ramping up production swiftly.

One of the sellers on the Chinese marketplace offers IGI-certified 1.5-ct VVS clarity, D color HPHT polished diamonds for $650 apiece, stating the production capacity of 500 stones a month. This is just one example of many, many more lab-grown manufacturers in the Wuzhou province alone, which is known for its sizeable synthetic gemstones industry.

India's diamond polishing capacity makes it possible to capitalize on LGD manufacturing growth in the country. Its exports of polished man-made diamonds more than doubled (+105.63%) to $1.3 billion from April 2021 to March 2022 compared to $636.25 million during the same period of the previous year. Despite the fact that next financial year's results may be disappointing due to cutting and polishing units operating at lower capacity, the trend is still crystal clear: there are going to be more lab-grown diamonds on the market. According to the recent estimate, the number of diamond-growing machines in India is now 4500, up from 3000 just six months ago.

It's true that profit margins in synthetic diamond manufacturing are being squeezed and competition is fierce but at the same time, who cares? Diamond making machines are cheap, operational costs are going to fall further as growers' technology and expertise improve over time, and natural diamond production continues to decrease, freeing up the market share. Those lab diamond makers who survive in the current conditions are up for a juicy long-term profit. And it seems like the diamond pipeline's downstream segment is going to provide just that.


Jewellery retail-iation

Jewellery retailers have recently started to not only acknowledge but actively market LGD to customers. A recent study conducted by a research consultancy TheMVEye and commissioned by the International Grown Diamond Association (IGDA) shows that 72% of retailers in North America, Europe and Australia are selling lab-grown diamond jewellery, at the same time citing that 87% of them expressed some degree of "satisfaction" by that decision.

Although it's not statistically possible to determine where this feeling of "satisfaction" comes from exactly in any given respondent, it would be safe to assume that profit margins are at play here. Various industry sources report that retail margins for LGDs are 16% - 40% higher than for comparable natural diamonds. While jewelers enjoy higher returns, consumers can get LGD pieces either substantially cheaper, or opt for larger stones – a win-win situation in a nutshell. And there's marketing on top of that.

Many LGD retailers promote their products as 'conflict-free', 'ethical' and 'sustainable' in contrast to 'mined' diamonds that, by the nature of this comparison, seemingly possess quite the opposite characteristics. When a millenial buyer goes into a jewellery store and is given a choice between a cheaper (or larger), 'sustainable' diamond of good quality and color, and a more expensive but visually identical stone associated with a notorious 'Blood Diamond' movie, which one do you think they will pick?

It is unsurprising that LGDs are increasing their market share. Even bridal category, previously dominated by natural stones, is being rapidly overtaken by LGDs, and for a good reason. It is easier (and more economical for manufacturers) to produce large high-quality stones with the current diamond growing technology than melee ranges. Engagement rings are usually supposed to have a large central stone and this hits the nail for LGD business. According to the recent data, jewellery with lab-grown diamonds has comprised around 10% of U.S. diamond engagement ring sales so far in 2022, up from 6% a year earlier.

The U.S. is the largest market for bridal lab-grown diamonds but definitely not the only one. When I, as a consumer, looked for engagement ring options in one of the Balkan countries, I was surprised to see a nearby LGD jewellery retailer that is a subsidiary of one of the local natural diamond jewelers. It sells lab-grown stones for almost 40% less than comparable natural diamonds locally, while its website proudly notes that "diamonds grown in the laboratory are not associated with the unethical practices that are characteristic of diamonds from mines".


Lab-grown on the offensive

LGD manufacturers and, to a certain extent, retailers do their best to educate consumers on immense horrors of diamond mining. One notable example is Clean Origin which is among top-five man-made diamond companies in the world. Its website features the following passage among others: "…the majority of diamonds on the market are mined at an incredible cost to the communities and environments that harbor them" and "while all forms of mining can have negative consequences, diamond mining has proven especially brutal". It continues with an extensive list of brutalities, casualties, conflicts and tops it off with graphic descriptions of 'ecological devastation' caused by, in the company's language, the 'so-called natural' diamonds.

This is a crystallized, most extreme form of message that LGD producers carry towards natural diamonds to win over consumers. They humbly omit the fact that not only diamond pipeline changed drastically over the past couple of decades effectively eliminating all but a fraction of conflict gems, but it also provides livelihood to tens of millions of people, directly benefitting local communities in developing countries. The environmental effect of diamond mining however is hard to dismiss. According to Clean Origin's estimate (probably one the highest, as data ranges wildly in numerous sources), it takes a staggering 57 kg of CO2 emissions to mine one carat of natural diamonds. But here's a comparison: the carbon footprint of your smartphone is estimated at the same 57 kg! You probably won't be throwing your diamond away after 2-3 years of use however.

To be fair, LGD manufacturers had to compete with bad publicity that traditional diamond producers and market personalities tried to impose on a then-nascent market with the term 'synthetic' and overall message of 'not real' diamonds. Naturally, they chose the easiest marketing strategy of retaliation, striking at one of the weakest points of diamond industry – its closed nature and obscurity to outsiders. Due to this obscurity, it was fairly easy to capitalize on any public media covering the diamond business in a negative light, which in this case involved popular movies and common misconceptions. As long as this strategy works, LGD companies will have little to no incentive to invent their own story, contrary to what some diamond market analysts suggest they do. In a consumer's mind, a lab-grown diamond is still a diamond. And lab-grown will continue to cannibalize on the natural diamond market as long as it lets it happen.

"This research study confirms that the lab-grown diamond disruption has gone far beyond the borders of the USA and is now seeing increasing consumer demand in markets across the globe," said Liz Chatelain, president and co-founder of TheMVEye in the recent report published by the consultancy. "And there is certainly clear evidence that the mined diamond business is now being cannibalized."


Tough fight ahead

Natural diamond producers had no other choice but to put up defenses against this young and powerful enemy. Natural Diamond Council (NDC) was created specifically for this purpose as well as to educate consumers on sustainability efforts in the diamond industry. The organization is somewhat well-funded and its initiatives are commendable, although the recent departure of ALROSA from its list of members may put a pressure on NDC's effort. But this effort alone is not enough.

You see, as a consumer, I want to know what I'm paying for. If there are two identical gemstones and one of them is 40% cheaper, why should I choose a more expensive one? In a typical setting of a jewellery store, a consultant will speak to me about the usual: the caratage, the price, the 4Cs, and the country of origin of the diamond at most. This is just not enough to justify a 40% price hike. For modern consumers in search of an engagement ring, they need to learn about a specific community in Botswana or Nunawut that they've helped by purchasing this specific diamond, and better still if they know how well these funds were used to help those people. And every single diamond retailer must be ready to provide this information to a consumer in the best possible way. If millenials are not educated on those things, they will buy an LGD and either pocket the savings, or spend them on charity programs that are open about their end goals.

Rising interest rates in the U.S. and a looming recession also put a pressure on jewelers and consumers alike. With money getting more expensive, it makes more sense to save on luxury goods, as the recent Mastercard SpendingPulse data shows. Jewellery sales fell 5.4% during the 2022 holiday season, while spending on experiences (like restaurants) increased. The holiday season was marked by heavy discounting, as concerns about inflation led consumers to seek out deals. This means that consumers are going to prefer cheaper goods, conveniently provided by LGD companies.

As an analyst, I consider it hardly surprising that LGDs are gaining traction. Natural diamond market did a poor job of incorporating the new LGD trend as an instrument and instead created a powerful, uncompromising enemy. Lower prices coupled with better public image of man-made diamonds make them a serious contender to natural stones, and the more time goes by, the harder it is going to be for the natural diamond industry to resist the cannibalization of its market share. The only way to coexist with LDGs in a highly competitive market is to put even more effort into disclosure, openness and detailed story of every single diamond to truly capture its unique and one-of-a-kind nature. This is what lab-grown diamonds lack. Until then, a "Diamond is Forever" is slowly but surely becoming a "Diamond is for Everyone".

And in case you're wondering, I've bought a lab-grown diamond engagement ring. It's cheaper, and a lab-grown diamond is still a diamond.

Theodor Lisovoy for Rough&Polished