A little over a month ago, McKinsey released a pivotal report titled The Diamond Industry is at an Inflection Point. It highlights that the diamond industry is at a critical turning point, with diamond prices potentially stabilizing in the coming years. However, this will only be possible if key players across the entire value chain take proactive steps to correct their course. The pandemic’s unprecedented impact on the diamond market created a series of unsolvable challenges for both retailers and suppliers. McKinsey emphasized that historically, diamond demand and prices have been in balance with mining supply. However, during the COVID-19 pandemic, supply chain disruptions, along with the delay of many weddings and engagements, forced the entire supply chain to adapt its products to remain relevant in a market lacking wedding-related events.
At the same time, these supply chain disruptions, coupled with declining market demand, led to soaring rough diamond prices. While this created some value for upstream companies, it placed significant pressure on downstream businesses. After rough diamond prices dropped in February 2022, mining companies took action by stockpiling rough diamonds and canceling bids, artificially tightening supply to drive up prices in an attempt to trigger market recovery. Many companies restructured their product offerings, planning to develop more trendsetting investment-grade products to attract self-purchasing consumers (those who buy for themselves) and the mature Gen Z demographic. Lab-grown diamonds have become the most significant variable affecting market changes. For modern consumers, especially entry-level buyers in the diamond market, lab-grown diamonds offer a more affordable alternative, with prices up to 80% lower than natural diamonds. This gives consumers the opportunity to purchase larger, more brilliant diamonds at a fraction of the price.
Key Trends Impacting Diamond Prices
The McKinsey report identifies three main trends that have led to the continued decline in diamond prices, factors that are affecting the market in an environment of limited natural diamond supply, ongoing geopolitical tensions, and shifts in funding sources:
- The Success of Lab-Grown Diamonds (LGDs): Lab-grown diamonds have far exceeded expectations in their impact on the price of natural diamonds. This is largely because consumers are seeking more affordable options.
- Increased Demand for Traceability: With the growing focus on environmental, social, and governance (ESG) issues, consumers are demanding greater traceability of gemstone sources.
- Sanctions on Russian Diamonds: The industry is also grappling with product sanctions targeting Russia, a major diamond producer.
Notably, lab-grown diamonds align well with the second and third trends. They are produced in factories across countries like China, India, the U.S., Singapore, and Europe, making it easier to trace their origin. These diamonds also give downstream companies an opportunity to avoid buying Russian diamonds, responding to sanctions imposed by the G7 on Russia last year.
Key Industry Developments
McKinsey points out that the future of the diamond industry will hinge on how the market adapts to changes, particularly with the influence of Gen Z consumers and the growing demand for ESG principles. As more Gen Z consumers engage in luxury purchases, demand for high-end jewelry continues to grow. At the same time, this generation's increased focus on ESG issues is driving them to prefer ethical and sustainable choices. Lab-grown diamonds, with their ethical and environmental advantages, have become the top choice for younger consumers. Technological advancements, especially in blockchain and digital transparency tools, are improving the traceability of the diamond supply chain, allowing consumers to track the journey of diamonds from mine or lab to finished product. McKinsey highlights traceability as a key factor in attracting younger consumers, particularly those from Gen Z, who value transparency and ethical consumption.
Competition Between Lab-Grown and Natural Diamonds
Lab-grown diamonds are becoming increasingly popular due to their significantly lower prices and their ethical and environmental benefits. McKinsey stresses, however, that despite the growing focus on traceability, zero emissions, and ESG goals, lab-grown diamonds are not necessarily set to replace natural diamonds. The uniqueness of natural diamonds continues to be a major draw for certain consumers.
Brand and E-Commerce Trends
Gen Z is more inclined to purchase luxury goods online, making a strong online presence for brands essential. By building trust and offering convenient shopping experiences, brands can attract younger consumers. The report notes that trends such as “understated luxury” and “mob wife aesthetics” have opened new opportunities for luxury brands, making high-end jewelry more common in everyday life and encouraging consumers to make frequent purchases.
Challenges and Opportunities in the Diamond Supply Chain
As natural diamond reserves dwindle, it’s expected that production will decline by 2027. To extend the life of mines, some companies are investing in underground mining technology to improve mining efficiency. Additionally, geopolitical factors, such as sanctions on Russian diamonds, are disrupting the global diamond supply chain, and this trend is likely to intensify, leading to rising costs.
Financial and Regulatory Challenges
As financing regulations change, diamond companies face stricter financial transparency requirements when seeking loans. Large companies are adapting through partnerships and asset securitization, while smaller firms may face greater financial pressure. As a result, more companies are prioritizing liquidity, reducing inventory, and focusing on maintaining healthy cash flow.
Market Outlook
McKinsey predicts that as lab-grown diamond technology continues to improve, production costs will continue to decrease, further widening the price gap. Meanwhile, the scarcity of natural diamonds will lead to their positioning as high-end luxury products. With advancements in technology and shifts in consumer preferences, the diamond industry is likely to undergo a profound transformation. Mines and manufacturers will need to continually innovate to maintain their competitive edge.
Recent Market Performance: Diamond Prices Begin to Stabilize
Recent data suggests that diamond prices are showing signs of stabilization. According to the IDEX price report from January 1, diamond prices are stabilizing, particularly for larger diamonds. Despite ongoing challenges, the holiday season saw an increase in consumer demand, contributing to market stability. According to MasterCard’s Consumer Pulse report, U.S. jewelry spending from November 1 to December 24 grew by 4%, reflecting strong holiday demand. Round-cut diamonds continued to outperform fancy-cut diamonds, and diamonds across various price ranges showed small price increases.
However, despite these growth signs, the market's response to basic commodity diamonds remains uncertain. Experts warn that the full recovery of the diamond market will be gradual. The balance between limited supply, changing consumer preferences, and the competition from lab-grown diamonds will continue to impact price trends in the coming months.
The Future of the Diamond Industry
The diamond industry, deeply rooted in history and tradition, is accustomed to evolving to maintain its market relevance and ensure strong sales. Lab-grown diamonds have become one of the most discussed factors in the diamond market, and their potential is undeniable. McKinsey’s research suggests that lab-grown diamonds “are expected to become an important part of the diamond industry in the coming years.” Whether natural or lab-grown, diamonds offer unique value to the market, and industry participants who can leverage their distinctive features—whether rarity, price, or production volume—have the opportunity to benefit from shifting consumer demand. To ensure the long-term growth of the diamond industry, digital infrastructure, the implementation of traceability standards, and alignment between brand value and changing customer needs will be critical. High-end companies have the strength and resources to implement these new programs, and the entire industry can benefit as a result.
McKinsey also suggests that companies seeking to optimize their revenue may consider expanding into other markets, such as supercomputing, transistors, and scientific instruments, where diamonds’ high thermal conductivity and electrical insulation properties could aid in the development of new graphics and central processing unit (GPU and CPU) architectures. However, the report emphasizes that the transformation of the diamond industry will neither be quick nor simple: “Many unanswered questions remain, such as how diamond companies can develop strong business strategies amid fluctuating diamond prices, how the natural and lab-grown diamond industries will intersect, and who will own the diamond value chain in the future. Answering these questions and staying ahead of market changes may determine whether the industry stabilizes in the coming years or gets left behind by the market.”