Industry Analysis

Diamond Market Forecast: Declining Credit, Soft Prices and Lab-Grown Diamonds


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Lab-grown diamonds have become a competitive force to natural diamonds, according to a report, and competition will continue to increase.

Despite the generally strong year for jewelry retail, the diamond industry continues to face problems with ever-tightening credit, spotty demand and softening prices from continued over-production of some types of goods.

Trading sites report that prices for polished natural diamonds declined 2% to 5% since the second half of 2018 due to overproduction and a slowdown in Chinese demand. This caused inventories to climb more than 20% during the year, according to Rapaport estimates. Some analysts speculate that demand for lab-grown diamonds has begun to erode the market for lower-quality natural stones.

In India, local press reports say that available bank credit is half of what it was five years ago and that the decline of the rupee against the U.S. dollar has raised borrowing costs.

De Beers began the year with cautious cycle sales of $505 million, which is down 25% from the same period in 2018 and well below the December cycle, normally the smallest of the year. De Beers will likely follow with a cautious February/March allocation. The company held the line on prices after reducing rates on small, lower-quality goods in the fall, and is likely to continue hold prices, despite the high probability that some clients will leave some allocations on the table.

De Beers sold $5.39 billion worth of rough in 2018, an increase of $8 million from the previous year according to the company, and will release volume data later this year.

Alrosa, the world’s largest diamond miner by quantity, sold $4.412 billion worth of rough in 2018, an increase of 6%. By quantity, sales were down 8% to 36.6 million carats. Alrosa held back selling small, lower-quality diamonds that are in over-supply.

A report from ABN-Amro Bank predicts that this year will see increased pressure on natural diamonds from lab-grown diamonds. The bank says lab-grown diamonds are a game changer in the industry that will ultimately reduce demand for natural diamonds – even larger, better quality stones. The game, according to the report, was changed by De Beers’ low prices ($800 per carat) for Lightbox lab-grown diamonds, coupled with improving technology to grow larger, better quality diamonds. These lab-grown diamonds will enter the market in ever-increasing numbers.

The bank report states that this pressure may expand to larger natural diamonds with more attractive margins and notes that, while De Beers has been careful to position lab-grown diamonds as a different product, consumers are likely not to see them as such.

RETAIL

Analysists are looking at a mixed year for retail sales, including jewelry.

In the U.S., the National Retail Federation (NRF) predicts that retail sales will continue to grow through 2019, though at a slightly slower pace. The retail association says the U.S. economy will remain strong and sales will increase 3.8% to 4.4% for the year, compared to 4.6% last year.

The NRF’s total includes all sales channels, but excludes gasoline, restaurants and autos. Non-store sales, which includes online, grew $10.4% last year. The NRF is predicting a similar increase this year.

The organization noted that consumer confidence remains high and that any problems in the economy are likely to be “self-inflicted,” such as trade wars and government shutdowns.

In China, the results from the top retailers quantify the economic slowdown there. The largest jewelry retailer, Chow Tai Fook, saw its sales fall 7% (gem-set pieces were down 5%), while Luk Fook’s revenues took a 10% hit for the final quarter of 2018. Retailers blame the trade war between the U.S. and China – and no one is predicting an upturn.

Russell Shor is a senior industry analyst at GIA in Carlsbad.