The lab-grown diamond market is in turmoil, facing significant challenges despite its rapid rise in popularity. With plummeting prices and shrinking margins, many producers and traders are struggling to stay afloat. Yet, amidst the financial strain, a path forward remains, offering hope for those willing to adapt and innovate, writes diamond industry analyst Edahn Golan.
Something bad is happening to the lab-grown diamond market, and it shows no signs of changing for the better any time soon.
A superficial look will portray a fantastic story: A new product taking the US jewellery market by storm, unit sales rise weekly, a growing adoption rate, a common discussion topic, and above all – a growing preference for the most coveted jewellery item, diamond engagement rings.
But scratch the surface, and a very different picture emerges. Price declines are a daily occurrence, oversupply is a long-standing issue, producers and traders’ margins are eroding to the point that many are no longer profitable. In fact, there are those who already fear major financial losses.
On the production side, some bankruptcies already happened and a few more are displaying worrying signs regarding their financial viability. They indicate that the standalone grower business model is likely not sustainable.
Traders, who made triple digit margins just a few years ago, are currently down to low double digits or less, leading a sizable number of them to leave LG trading because they don’t see a future in it.
All along, wholesale prices are sinking fast. Wholesale prices of one carat rounds are down more than 40% year over year and two carats are down 45%.
That leaves us with retail activity. There, margins are enormous, 67% for loose and 49% for finished jewellery. However, prices are falling too, and gross profits are impacted.
In terms of real earnings, a triple-digit year-over-year gross profit increase in the first five months of 2021 shrank to just 11% in the January to May period of 2024.
At this rate, where will gross profits be this time next year? I’ll be cautious: they will experience a year-over-year decline, likely falling 5-10% below this year’s gross profits. A basic trend analysis puts it at a much deeper decline.
It’s Not A Surprise
The LGD market got here for a reason. When LGDs were first offered, they were priced a little below natural diamonds, creating an immense gap from costs. Additionally, they were offered as a low-cost alternative, and they still are. We all saw the offer at JCK for $99 per carat. That is just one of many examples. Look at the two images from the show and an online jewellery retailer. Both shout out, “we are cheap.”
JCK Booth Sign
Jewellery Retailer Homepage
These policies result in price declines. The LGD market shot itself in the foot. Add to that some manic tantrum rants from certain quarters of the LGD market that natural diamonds kill children, and you are fully setup for deep and ongoing depreciation.
Not All is Lost
I am not against LGDs. In fact, I find the sector fascinating. I share data that reflects what is happening in the market, not to put it down but because that is the reality of the market.
The downward price trajectory means that LGD is about to see a series of market consolidations. The remaining stand-alone growers will have to partner with manufacturers and getting equity will be involved. If not, they’ll need to find financing until they reach their holy grail – tech applications.
Some US retailers will reduce their LGD offerings to the bare minimum, which means that goods will only be held on memo. They are already advising their customers that LGD, unlike natural diamonds, are not accepted back for trade-ins.
LGD price consolidation is in full swing. If the difference in price is just $10-30 per carat, then we are near the point of a flat $80-90 per carat for an E/VVS lab grown.
At that point, LGD can go in three directions. One is as a low-cost component in moderately priced, well-made branded jewellery, aka the Pandora model. This offers handsome margins to the jewellery company. The second is very low-cost jewellery. Call it the Walmart model, where margins are small and fairly fixed.
The third model is moderate to high-priced branded jewellery, very well made, and takes full advantage of the diamond front and centre. This could take advantage of the low cost of rough LGD and do something very surprising with it. Not luxury like Tiffany, but still doing very well. The downside: a scarce few will achieve it after a massive investment in design and marketing.
If you don’t like this scenario, keep in mind that there is only one way around it: Without digging very deep into their pockets to promote the category in an impactful way, LGD…
Read More: LGD is Hurting, But There Is A Path – Solitaire International Magazine – India’s