Rapaport Magazine

The Economics of Lab-Grown

Prices for man-made diamonds are starting to stabilize after a period of precipitous drops. What are the market forces behind this change? And where do they lead from here?

By Joshua Freedman

On the surface, the price of lab-grown has fallen sharply in recent years. In 2021, the average retail price of a polished synthetic diamond was only 30% of the equivalent natural stone, down from 35% in 2020, according to Bain & Company’s latest annual report on the diamond sector. At the wholesale level, prices have slid to 14% of their natural counterparts, compared with 20% in 2020, the consulting firm estimates.

Jeweler Zulu Ghevriya confirms that today’s prices are lower than they were two years ago. The cofounder of New York-based brand Smiling Rocks, which specializes in synthetic-diamond jewelry, says he buys lab-grown at about an 85% to 90% discount to the Rapaport Price List for natural diamonds.

But while some lab-grown categories have plummeted in value, others are more stable or even increasing. Those with downward trends are seeing the declines flatten, and the prices that consumers pay are, by and large, holding up.

“The lab-grown diamond industry is performing at its own pace,” says Ghevriya. “I think [as] the industry [becomes more] mature, the prices are [stabilizing] in every sector, from small to big sizes.”

Generally speaking, the market is splitting into high-quality and lower-end goods. And these two distinct markets have very different selling structures that affect the way their pricing works.

The upper crust

The higher-quality goods come from the more technologically advanced producers around the world. Prices in this sector are relatively stable, as production has not increased at the rate many expected, says Marty Hurwitz, CEO of consultancy MVI Marketing and a board member at WD Lab Grown Diamonds.

The Covid-19 pandemic is partly responsible for the lag, as it caused a shortage of the necessary components for growing the rough, Hurwitz explains. But the main factor has been a shortage of scientists with enough knowledge and experience in the field, he says. “It’s actually really hard to grow these things consistently. This is not a race to capital; this is a race to [see] who can lock [in] the existing experienced human scientists on their team.”

Retail forces are also in play. Store chains are looking for consistent supply so they can meet consumer demand, and jewelry manufacturers want to offer repeat-supply contracts to their retail clients. To achieve this, both types of businesses are signing long-term deals with the more competent diamond growers and paying premiums to clinch the better goods, Hurwitz says. This, in turn, pushes up prices further down the pipeline.

At its current growth capacity, says Hurwitz, the synthetics sector “will not be able to meet the consumer and retail demand for the products…at scalable quantities” come the end of 2022, particularly in larger and better-quality goods.

How low can they go?

Meanwhile, in the Indian spot market — where sales are on demand rather than via recurring contracts — suppliers are offloading large volumes of lower-end chemical vapor deposition (CVD) inventory at discounts of up to 97% off the Rapaport Price List, traders say.

The Indian market needs cash flow, Hurwitz explains. Many of the CVD growers want to satisfy investors who have poured money into the segment. However, the midstream players that buy these goods — many of them traditional Indian dealers with decades of natural-diamond experience — are offering aggressively low prices to keep revenue coming in.

“Those wholesalers are shooting lists of that product every day all around the world at significant discount pricing,” Hurwitz says. “They’re trying to generate cash flow both [for] themselves and for the growers now. Sooner or later, the investors in those growers are going to become frustrated with that pricing. And I understand some of them are frustrated already because they’re not really getting the return on investment that they could be getting for their product.”

But prices are tailing off as producers get closer to cost levels; if they reduce rates any further, they’ll be selling at a loss, says one CVD grower on condition of anonymity. “The trend has pretty much been a decrease since…2016. But what we have noticed is that the level of decrease is starting to stabilize.”

Melee mania

Of course, comparing lab-grown prices with the Rapaport list — and therefore with the natural market — can be misleading. The factors influencing supply and demand are different for each category. Mined diamonds get rarer as the carat sizes go up, while the synthetics sector has idiosyncrasies that result in a less linear picture.

Prices for lab-created melee, for example, have ballooned in the past four months because retailers need lots of small stones to accompany center stones. People who buy synthetics often don’t want any naturals in their jewelry at all, explains Ben Hakman, a consultant on lab-grown at New York-based Diamond DNA Solutions. This is not necessarily a bad thing for the traditional industry, as these people were not major jewelry buyers before, he stresses.

“There’s a new consumer, and when they buy lab-grown, they want the entire thing to be lab-grown.”

Demand for lab-grown semi-mounts — finished engagement rings minus the center stone — has “gone up through the roof, because there’s a consumer that really wants the entire concept of lab-grown,” continues Hakman, who is also managing director of synthetics brand Fire Diamonds.

Alongside this demand trend is a shortage of the right rough. Most man-made melee is High Pressure-High Temperature (HPHT), as peculiarities in the CVD process make it hard to create small stones on a commercial scale.

But there’s a problem: Most HPHT is from China. Since the Russia-Ukraine war began, luxury brands have become more sensitive to geopolitical considerations and are introducing nonnegotiable sourcing requirements, according to the anonymous grower.

“The major buyers of HPHT are now understanding that buying from China may end up being a disadvantage at a certain point in time,” he says. “A lot of [luxury brands] are not willing to buy [goods] grown [in] China or Russia. They don’t want to touch that.”

This situation highlights how quirks in the supply chain can impact pricing.

“Some CVD players can do some [melee],” the grower says. “We have a little bit. I think we might end up selling [synthetic] melee diamonds [that are] more expensive than their mined counterparts.”

Value judgements

The 1-carat category has seen the opposite trend. It’s become easier to grow, making supply more readily available. At the same time, demand has stagnated because consumers realize they can get an even larger stone for a lot less than the equivalent natural, explains Leon Peres, CEO of Florida-based CVD producer Green Rocks.

“If [consumers] go in the lab-grown direction, they want to feel like they got great value, and that today means getting the bigger diamond that they always wanted,” he observes. As a result, prices of 1-caraters have fallen at a faster pace than 2-carat goods.

Other factors are relevant as well. Stones with transparent and sustainable origins command premiums, MVI’s Hurwitz points out. So do those with no evidence of color treatments — a category some in the trade call “as-grown.” These are difficult to produce consistently, he says.

A related issue is the extra price for goods carrying a grading report from the Gemological Institute of America (GIA), partly because the laboratory provides information on whether post-growth treatments took place, notes Peres.

Who gains?

Even in the lab-grown ranges with falling prices, consumers are not getting the discounts. Retailers have continued to sell at the same rates, enabling them to expand their profit margins, Hurwitz says.

Lab-grown retail margins are around 70%, compared with 35% to 50% for natural goods, according to Ghevriya at Smiling Rocks.

Of course, not all retailers are created equal in this respect. The majors are charging higher prices, while independents are generally listing their wares more cheaply and seeing more modest margins, reports Hurwitz.

“The big players, like Signet [Jewelers] and online retailers, are selling, and they’re selling expensive,” Hakman concurs. “Their pricing has not changed. What has changed is the profit margins. It’s just growing and growing and growing, because they can get the goods cheaper.”

The now factor
Why do consumers buy lab-grown diamonds over mined ones? Sometimes they think they’re more sustainable, though it’s unclear if they are. Sometimes it’s because the goods are more traceable, though the natural industry would dispute this, too. But the main driver is economics: You can buy a bigger stone for less money.

Two recent anecdotes underscore this. The first is a revelation that Helzberg Diamonds CEO Beryl Raff made at the Dubai Diamond Conference in February: The US retailer sold 50 times more 2-carat lab-grown diamonds than naturals of the same size in 2021, she told the audience.

Marty Hurwitz of MVI Marketing has another example: Companies that make engagement-ring settings are producing larger items on average than before.

“They’ve seen a dramatic shift from the traditional 1-carat standard head to a 1.25-carat standard head,” he says. “They believe, and I think this is accurate, that this is completely driven by the lab-grown space.”

This points to a potentially worrying trend in consumer demand: Shoppers are willing to splurge on a bigger product now, despite the likelihood that it will lose its value over time as technology improves and lab-grown production increases.

The value depreciation is hardly news. It’s why retailers like Brilliant Earth and many Signet Jewelers brands explicitly exclude lab-grown from their trade-in guarantees. But that may not matter to the jewelry-buying public.

“When consumers are opting to go for lab-grown, they are not necessarily thinking about future value,” acknowledges Leon Peres of Green Rocks. “They want to spend less now, especially as inflation is rocketing.”

As a purchasing factor, he believes, “value retention is off the table.”

Retailers do inform customers that lab-grown pieces might not hold their value, says Ben Hakman of Diamond DNA Solutions. “But you know what? The consumer doesn’t care. They care about now.”

Image: Wedding ring with lab-grown diamond. (WD Lab Grown Diamonds)

Article from the Rapaport Magazine - June 2022. To subscribe click here.

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